Cabinet approves ordinance to give homebuyers creditor status under IBC

The Union Cabinet approved, via an Ordinance, amendments to the Insolvency and Bankruptcy Code (IBC), giving homebuyers the status of creditors in the insolvency process. 

Also in the Ordinance, it appears (Law Minister Ravi Shankar Prasad would not give details) are provisions for micro, small and medium scale enterprises (MSMEs), easing some conditions for the segment.

Assent of the President is required for the Ordinance to take effect.

These changes were part of the recommendations of a committee to review and suggest changes in the IBC . Earlier, on the panel’s suggestion, the government got amended Section 29A clause of the IBC - it lists entities barred from bidding for companies under insolvency. The changes were to ensure wilful defaulters and those whose accounts had been classified as non-performing assets for more than a year, among others, were barred from bidding for stressed assets. This was to ensure promoters of companies undergoing insolvency resolution did not regain control. 

As for MSMEs, around 70 per cent of all companies are in this category.

One suggestion of the committee, yet to find acceptance, was to withdraw the fast-track insolvency provision in the IBC. It had said this did not serve the purpose of simplification of the process for small debtors. Fast-track resolution reduces by half the number of days allowed for a resolution plan.

Also, the panel had recommended that the committee of creditors for a company decide whether an application for insolvency resolution could be withdrawn after being admitted by the National Company Law Tribunal.

India Ratings and Research says the change to treat homebuyers as financial rather than operational creditors could affect the credit rating of lenders top realty developers, while boosting protection for the end-customer.

Punit Dutt Tyagi, executive partner at Lakshmikumaran & Sridharan Attorneys, says: “Homebuyers, who largely belong to the middle income group, will most definitely view this amendment with a sense of relief. They now have a hope of recovering some, if not all, of their investment in failed development projects in the housing sector.”


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