The committee had tabled its report on the Bill in Lok Sabha last week and the ministry of corporate affairs is expected to move a revised Bill in the budget session of Parliament for passage.
Panda said the concept of project-specific insolvency resolution in the case of real estate sector goes against the grain of IBC, which entails displacing the defaulting management and disqualifying them from bidding again for the company, unless they make good the defaulted amount.
Panda’s view is significant because the Supreme Court had proposed to the government to consider project-specific insolvency resolution in the real estate sector in its judgement on the Mansi Brar Fernandes vs Shubha Sharma & ANR case in September.
The ministry of corporate affairs and rule maker Insolvency and Bankruptcy Board of India (IBBI) are looking into this suggestion, but it is not part of the current IBC (Amendments) Bill since the apex court decision came after the Bill was tabled in the House during the monsoon session.
Panda said that the financial distress faced by specific real estate projects of a developer should be addressed by the Real Estate Regulatory Authorities (Rera), which should ensure that home buyers get completed houses.
Rera has the authority to try and make promoters complete projects. “And if promoters cannot either give refund or give buyers their flats, then some other investor will take over that company under the IBC and they will deliver," he said. “The basic concept of IBC is that defaulting companies’ management will change and the promoter will change. In fact, the promoter is not allowed to bid in the IBC process directly or indirectly."
“Project-specific resolution means that the company will not go into insolvency, which means the promoter will continue, while only one project will go into the resolution process. There is a fundamental problem here," Panda said referring to real estate developers wilfully defaulting on specific projects while a vast majority of their projects run well.
“Sending such specific projects for insolvency resolution, while allowing the promoter to continue to run the entire company goes against the grain of IBC. Insolvency is about the company, not about a project," Panda said.
The question of project-wise insolvency resolution is a complex issue, said Anoop Rawat, partner (insolvency and bankruptcy) at law firm Shardul Amarchand Mangaldas & Co.
“At present, courts take a call on this question on a case-to-case basis depending on the nature of the case, but project-wise insolvency resolution is not a norm. For executing a project-wise insolvency resolution, there has to be a tailored rescue plan for that project," said Rawat. "Although construction of real estate projects could be independent of other projects, several other aspects, for example, land lease, would often transcend individual projects. It is a complex issue with no fixed formula and handling it on a case to case by the courts may be a more flexible approach than spelling it out in the law."
Panda explained that one of the recommendations of the committee was to lower the voting threshold for small businesses to enter into a tailored debt resolution scheme, while remaining in control of the affairs of the business.
Micro or small enterprise can now access a pre-packaged resolution framework with a lower approval threshold: 51% of the committee of creditors (CoC), compared with 66% under the regular process, making the entry easier, explained Panda.
“Under this model, the owner remains in charge while the committee of creditors oversees the resolution, which is better suited to the limited resources of small businesses," he said. In the case of regular bankruptcy proceedings, lenders take over management control of the defaulting enterprise.
Panda called the IBC (Amendments) Bill transformative.
“Lakhs of crores of rupees have been recovered under the IBC, many tens of thousands of jobs have been saved and companies have been rehabilitated, and some unviable ones have been liquidated. Banks' NPAs have gone down dramatically," he said. "But it is time for a reboot. These 68 amendments are a game-changer."
“I expect that the time taken will be cut short by 50%, the backlog will reduce and I expect that recoveries will go up dramatically from ₹50,000-60,000 crores a year to much more," the lawmaker said. “All of us in the committee were very happy to learn that in the last few years, ₹50,000-60,000 crore per year of sunk investments have been brought back into the economy, invoking IBC."
Panda said the Bill’s primary objective is improving compliance with timelines, because currently, debt resolutions are taking more than two years even though the stipulated timeframe is 330 days.
Panda explained that the under the IBC, the language of legal provisions dealing with admission of cases is framed using the word “may". The revised bill replaces this with “shall", making compliance with timelines obligatory.
Also, only a winning bidder for a company will require approval from the Competition Commission of India (CCI); not all bidders need to secure the same before placing their bids. This is expected to save time in debt resolution, said Panda.
In addition, the amendments introduce, for the first time, provisions for group insolvency and cross-border insolvency, addressing major gaps in the framework."
Separately, and not as part of the legislative exercise, the government has moved a proposal to increase the number of National Company Law Tribunal benches, Panda said.