Buyers say in Insolvency Proceedings Against Builders- Law Changes as Seasons Amrapali ( part -2 )

Exactly three years from the time IBC was legislated the Insolvency and Bankruptcy Code has made material progress in addressing a number of bottlenecks to speed up the recovery of stressed assets and in achieving quicker resolution plans. 

Supreme Court’s verdict in the recent Amrapali Group Case has brought in a new insight and the said verdict will serve as a deterrent to the defaulting builders across the country .

The verdict has come to the rescue of thousands of stranded homebuyers and has entrusted state-run NBCC, with the responsibility of completing the embattled developer’s stuck projects.

Below mentioned is the actionable arising out of the SC `s verdict:

• Registration under RERA of Amrapali Group stands cancelled . 
• Noida and Greater Noida Authorities have no right to sell flats of homebuyers or the land leased out for realisation of dues. 
• Lease Deeds granted in favour of the group Companies by Noida and Greater Noida Authorities for projects in question also cancelled and all Rights vests with Court Receiver. 
• NBCC has been appointed to complete the projects and hand over the possession to the buyers 
• Homebuyers have been instructed to deposit outstanding amounts within 3 months . The amount would be deposited as FD and would be disbursed on phase wise completion of the project work by NBCC. 
• Concerned Ministry of Central and State Government and the Secretary of Housing Urban Development are directed to ensure appropriate action is taken against lease holders concerning such similar projects in Noida and Greater Noida and are directed to complete the projects so that the buyers are not defrauded. 
• ICAI to take disciplinary action against the CA- proceeding to be completed within 6 months and report be submitted to the Court. 
• Companies / Directors in whose hands money of homebuyers is available as per Forensic Audit to deposit the same in the Court within a month. 
• Concerned Ministry of Central and State Government and the secretary of Housing Urban Development are directed to ensure appropriate action is taken against leaseholders concerning such similar projects at Noida and Greater Noida and directed to complete the project as per RERA so that homebuyers are not defrauded. 
• Court Receiver has been appointed to execute the tripartite agreement and issue Completion Certificate to homebuyers already residing in the projects concerned. 

While the said order was pronounced in the month of July, another set of amendments in Insolvency and Bankruptcy Code via Insolvency & Bankruptcy (Amendment) Bill , 2019 were introduced in both Houses of the Parliament which received the Presidents assent on 5th August ,2019 . 

The Amendment, Act 2019 has conferred Financial Creditors status to Homebuyers and has entitled them to be a part of the Committee of Creditors to safeguard their interest. As financial Creditors, Homebuyers will have a say in the resolution process of cash strapped realtors. This will involve larger role of the homebuyers in the resolution plan. In short, it can be said that the legislature is changing to provide a balance of power and amendments are introduced every now and then for clarity and for prevention of its misuse.

Requirement of Debenture Redemption Reserve (DRR)

MCA vide notification dated 16^th August, 2019 amended Companies (Share Capital and debenture) Rules, 2014.

Pursuant to amendment in abovementioned rules, new conditions for creation of DRR and investment or deposit of sum in respect of debenture maturing during the year ending on 31^st march of next year are as follows:

Type of Company	Type of issue	DRR requirement pursuant to amendment	Remarks
All India Financial Institutions  (AIF) i.e. EXIM Bank, NABARD, NHB and SIDBI regulated by RBI	Public as well as privately placed debentures	Not required (Rule 18(7)(b)(i))	No Change
Banking Companies	Public as well as privately placed debentures	Not required (Rule 18(7)(b)(i)	No Change
Public Financial Institutions (Sec. 2(72) of Co.’s Act, 2013	Public as well as privately placed debentures	Not required – (DRR as applicable to NBFCs regd. With RBI (Rule 18(7)(b)(ii))	No Change
Listed Companies (Other AIF and Banking companies)
NBFCs regd. With RBI	Public Issue of debentures	Not required (Rule 18(7)(b)(iii)(A))	Earlier it was 25% of value of outstanding debentures as per SEBI regulations*
NBFCs regd. With RBI	privately placed debentures	Not required (Rule 18(7)(b)(iii)(B))	No Change
Housing Finance Co’s regd. With National Housing Bank	Public Issue of debentures	Not required (Rule 18(7)(b)(iii)(A))	Earlier it was 25% of value of outstanding debentures as per SEBI regulations*
Housing Finance Co’s regd. With National Housing Bank	privately placed debentures	Not required (Rule 18(7)(b)(iii)(B))	No Change
Other listed companies	Public issue of debentures	Not required (Rule 18(7)(b)(iii)(A))	No Change
Other listed companies	privately placed debentures	Not required (Rule 18(7)(b)(iii)(B))	Earlier it was 25% of value of outstanding debentures as per SEBI regulations*
Unlisted Companies other than AIF and Banking Companies
NBFCs regd. With RBI	Privately Placed debentures	Not required (Rule 18(7)(b)(iv)(A))	No Change
Housing Finance Co’s regd. With National Housing Bank	Privately Placed debentures	Not required (Rule 18(7)(b)(iv)(A))	No Change
Other unlisted Companies	Privately Placed debentures	10% of value of outstanding debentures (Rule 18(7)(b)(iv)(B))	Earlier it was 25% of the value of outstanding debentures

* SEBI (Issue and Listing of Debt Securities), Regulations 2008 – as referred in earlier Rule 18(7) of Companies (Share Capital and Debentures) Rules, 2014 

Requirement to invest in liquid instruments in case of issue of debentures:

Further, the  following companies shall on or before 30^th day of April  in each year in respect of issue of debentures by the company invest or deposit as the case may be  a Sum not less than 15%  of amount maturing during year ending on 31^st March of next year in any method as prescribed in rules.

• NBFCs and HFCs (Listed and Unlisted both)

• Other Listed companies other than AIF and banking Companies

• Unlisted companies having adequacy of DRR

MCA stiffens the IEPF norms by amending IEPF Rules

Ministry of Corporate Affairs (MCA) vide Notification dated 14 August, 2019 has amended Investor Education Protection Fund (“IEPF”) (Accounting, Audit, Transfer and Refund) Rules, 2016. Pursuant to this amendment, MCA has stiffened the IEPF norms and requires the historic data of funds transferred to IEPF. It also further clarifies that all shares in respect of which dividend has been transferred to IEPF on or before the 7th September 2016, shall also be transferred by the company in the name of IEPF. 

The key highlights of the amendment are as follows: 

1. Nodal Officer – The IEPF rules mandates the company which are required to credit amounts or shares or has already deposited or credited the shares to the IEPF Fund to nominate and appoint nodal officer. The key role of nodal officer is verification of claims and coordination with IEPF Authority. 

• The Nodal officer so nominated shall be either Director or CFO or Company Secretary of the Company

• Company may appoint one or more officers as Deputy nodal officer to assist the nodal officer for the purpose of verification of claim and for coordination with IEPF authority

• Details of such nodal officer or deputy nodal officers required to be filed with IEPF authority in Form IEPF-2 within 15 days from the date of publication of these rules

• In case, Company fails to appoint nodal officer, every director shall be deemed to be nodal officer and liable for any failure to comply with this rules

• Change in nodal officer or his details shall be communicated within 7 days from such change in Form IEPF-2

[Effective from 20 August, 2019] 

2. Transfer of Shares to IEPF – The shares in respect of which dividend has been transferred to IEPF on or before the 7 September 2016, are also required to be transferred to IEPF. 

[Effective from 20 August, 2019] 

3. Online Remittance into IEPF Account alongwith e- Form IEPF -1 : The amount which is to be credited to the IEPF account as provided in clause (a) to (n) of Section 125(2) of Companies Act, 2013 shall now be remitted through online mode only while filing e-form IEPF-1. Thereby, discarded the requirement of depositing the amount through offline mode. 

[Effective from 20 August, 2019] 

4. Requirement of filing of e-Form IEPF-1A - Companies which have transferred amount to IEPF u/s 205C of Companies Act, 1956 or Central Government but failed to file statement or have filed statement in format other than excel template are required to submit details in e-Form IEPF-1A alongwith excel template within 60 days of notification of this rule. 

[Effective from 20 August, 2019] 

5. Filing of IEPF- 2: The time period for furnishing the details of the unclaimed amount as referred in Section 125(2) which are required to be filed in e-Form IEPF-2 is reduced to 60 days after the date of AGM (earlier 90 days). 

[Effective from 20 August, 2019] 

6. Filing of e- Form IEPF-4 for corporate actions: The details of shares which are transferred to DEMAT account of IEPF pursuant to corporate actions are required to be submitted within 30 days in e-form IEPF -4 from the date of corporate action containing details of such transfer. 

[Effective from 20 August, 2019] 

7. Form IEPF-5– Claims from IEPF authority, shall be transmitted online to Company’s nodal officer in Form no. 5 for verification of claim. Thereafter the company will send an online verification report to IEPF Authority within 30 days. 

[Effective from 20 September, 2019] 

8. Fraudulent claim: Fraudulent claim by claimant shall be deemed to be fraud u/s 447 of the Companies Act, 2013 

[Effective from 20 August, 2019] 

9. E-Form IEPF-6 – The statement furnishing amounts due to be transferred to the Fund in next financial year in e-form IEPF 6 has been removed. 

[Effective from 20 August, 2019] 

10. Power to inspect the records: The Company shall maintain record of details filed in IEPF -1 and IEPF -5 along with all supporting documents and the authority shall have the powers to inspect such records. 

[Effective from 20 August, 2019] 

11. Schedule inserted – Schedules has been inserted for listing down documents to be submitted to IEPF Authority to register transmission of securities held in physical as well as DEMAT mode, and outlining the procedure to be followed while disposing the claims from the IEPF. 

[Effective from 20 August, 2019]

Fate of Provident Fund ,Pension and Gratuity Fund under IBC

The question for consideration before NCLAT was whether the Provident Fund , Pension Fund and Gratuity Fund come within the meaning of Assets of the Corporate Debtor for distribution under section 53 of the I & B Code?.

The said question arose when an application was filed on behalf of the workmen of the Moser Baer India Limited which was under liquidation. As per the liquidator explanation section 53 of IBC defines “workmen dues” as having the same meaning as that assigned under section 326 of the Companies Act, 2013 and hence as per the liquidator  gratuity was to  be included in the liquidation estate assets thus making it an asset of the corporate debtor.

However, NCLAT was of the view that there has been a flaw in the reasoning provided by the liquidator and quoted that under section 36(4) (a)(iii) the expression liquidation estate is defined and  it is clarified  that all sums due to any workman or employee from the provident fund, pension fund and gratuity fund were not to constitute and included in the expression  ‘Liquidation Estate Assets ’.

The Tribunal further expressed that since a sum due to workmen or employee from provident fund pension fund gratuity fund does not constitute a part of liquidation estate assets the Tribunal fails to understand how section 53 can be invoked along with its explanation .( Section 53 states the manner of distribution of the proceeds from sale of liquidation assets ). Hence all sums due to any workman employee from the Provident Fund, the Pension Fund and the Gratuity Fund are excluded from the Liquidation Estate .

The Tribunal also cited example of NCLT Mumbai Bench in Asset Reconstruction Company ( India ) Limited Vs Precision Fateners Limited wherein a similar view was taken and it was  clarified that where there would be any deficiency in  the Provident Fund , Pension Fund and Gratuity Fund then the liquidator must ensure that the fund is made available in the aforesaid accounts even if their employer has not diverted the said amount .

Submission of forms under IBC for Monitoring the process of CIRP

The Insolvency and Bankruptcy Code (“IBC”) casts obligations on insolvency professionals (“IP”) to forward/submit the information and records to the Insolvency and Bankruptcy Board of India (“IBBI”). These forms are required to be submitted for the purpose of monitoring corporate insolvency resolution processes (CIRP) and performance of insolvency professionals under the Insolvency and Bankruptcy Code, 2016

In order to facilitate submission of records and information by IPs to the IBBI as well as for monitoring of the processes and performance of IPs, a set of forms as tabled below were devised in consultation with stakeholders and the Insolvency Professional Agency (“IPA”), in pursuance of the mandate and in synchronisation with the provisions in the Code.

Form No.	Period Covered	To be Filed by	Timeline
IP 1	Pre-Assignment This includes consent to accept assignment of an IP as IRP / RP / Liquidator / Bankruptcy Trustee	IP	Within 3 days of the relevant date.
CIRP 1	From Commencement of CIRP till Issue of Public Announcement	IRP	Within 7 days of making Public Announcement under section 13
CIRP 2	From Public Announcement till replacement of IRP	IRP	Within 7 days of replacement of IRP.
CIRP 3	From Appointment of RP till issue of Information Memorandum (IM) to Members of COC	RP	Within 7 days of issue of IM to members of COC.
CIRP 4	From Issue of IM till issue of Request for Resolution Plans (RFRP)	RP	Within 7 days of the issue of RFRP.
CIRP 5	From Issue of RFRP till completion of CIRP initiation of liquidation: Reason for liquidation of the CD (No value in the assets/ company was a shell company/Non receipt of resolution plan/Rejection of resolution plan by COC/ Rejection of resolution plan by AA/others	RP	Within 7 days of the approval or rejection of the resolution plan or issue of order for liquidation, as the case may be, by the AA.
CIRP 6	Event Specific Request for liquidation before completion of CIRP	IRP or RP, as the case may be	Within 7 days of the occurrence of event

The above mentioned forms are required to be filed by IPS’ on an electronic platform which will be open from 16 September, 2019.

IP shall file electronically:-

a.     the Forms along with relevant information and records, which have become due on or before 15 September, 2019 in respect of all CIRPs which are closed and on going, conducted by him and shall be submitted on or before 30 September, 2019; and

b.    the Forms shall become due on or after 16 September, 2019 in respect of CIRPs conducted by him,

Responsibility of IP: IP is solely responsible for filling of the forms and shall be liable to action permissible under IBC for failure to file a form with complete information or filing the form with inaccurate and incomplete information.

Certain provisions of Companies (Amendment) Act, 2019 - Notified

Ministry of Corporate Affairs has notified certain provisions of Companies (Amendment) Act, 2019 from 15 August, 2019. Insights of the provisions which are notified and made effective are as follows: 

1. Registration of Prospectus with ROC –Now, instead of registration of prospectus with ROC at the time of IPO, prospectus is to be filed with ROC [Section no.26 and 35] 

2. Demat of shares – The Central Government has been power to prescribe the unlisted class of companies for issuance, holding or transferring of securities in dematerialised format. Private Company may come under purview of the same [Section no. 29] 

3. Obligation on the Company to identify SBO - Obligation is casted on the Company to take necessary steps to identify Significant Beneficial Owner (SBO) and require him to disclose. Failure to take necessary steps will lead to penal action u/s 90(11) which include imprisonment. [Section no.90(4A)] 

4. NFRA - In case of professional or other misconduct – NFRA may debar Member or firm For a minimum period of 6 months or such higher period not exceeding 10 years from: 

(a) being appointed as auditor/internal auditor 

(b) undertaking audit in respect of financial statements of company or body corporate 

(c) undertaking internal audit of the functions or activities of company or body corporate 

(d) performing any valuation as provided u/s 247 [Section no.132] 

5. Disgorgement of properties of Director/KMP: If the investigation report submitted by SFIO, states that a fraud has taken place and any director, KMP or officer has taken undue advantage or benefit, then the Central Government may file an application before Tribunal with regard to disgorgement and such director, KMP or officer may be held personally liable without any limitation of liability [Section 212] 

6. A case for deciding whether a person is a fit and proper person to hold the office of director: 

o Empowered Central Govt. to request the tribunal to inquire into the case, whether a person is a fit and proper person to hold the office of director or any other office connected with the conduct and management of the company 

o If tribunal found that the person is not a fit and proper at the conclusion of the hearing, the tribunal may pass the order to prohibit the person for holding the office of director or other offices by recording the reasons of the same. [Section 241 to 243] 

7. Petition for winding up– Registrar empowered to present a petition of winding up on the ground of just and equitable to do so.[Section 272]

Govt. relaxes norms for issue of Shares with DVR

Ministry of Corporate Affairs vide notification dated 16 August, 2019 has amended the Companies (Share Capital and debenture) Rules, 2014. The key changes are as follows:

1. Issue of shares with Differential Voting Rights:

The requirement of track record of distributable profit for last three years for issuing shares with DVR is omitted; 

Company will now be able to issue shares with differential voting rights upto 74% of their paid up capital against 26% which is in line with amendments made by SEBI in LODR and other regulations

2. Signing of Share certificate:

Pursuant to the amendment, now Company Secretary (CS) can have facsimile signature on the share certificate

3. Issue of Employee Stock option Scheme (ESOP):

The time period within which ESOPs can be issued by Start-ups recognized by DPIIT to Promoters/Directors holding more than 10% of equity shares has been enhanced from 5 years to 10 years from the date of their incorporation 

4. Debenture Redemption Reserve (DRR):

The DRR is not required to be maintained in case of public issue of debentures by listed NBFCs, HFCs and by other listed Companies

The unlisted companies (other than All India Financial Institutions and Banking Companies) are required to maintain 10% DRR of the value of the outstanding debentures;

From voluntary spending to forced spending on CSR

Corporate Social Responsibility (CSR) provisions in the Companies Act, 2013 (“the Act”) mandates every companies with a net worth of Rs. 500 crores or more, turnover of Rs. 1,000 crores or more, or net profit of Rs. 5 crores or more to constitute CSR Committee and to spend 2 % of their average profit of the previous three years on CSR activities every year.

In case, if the company fails to spend the prescribed amount, the companies were required to give reasons in the Board Report.  

Pursuant to the Companies (Amendment) Act, 2019 (“the Amendment Act”), the Companies which are not able to spend their full amount for CSR activities in on-going projects within a particular financial year, the money can be transferred to an Unspent CSR account. The amount in the unspent CSR account has to be spent within the next three financial years. Any amount remaining unutilised in unspent CSR account would be transferred to any fund specified in Schedule VII of the Companies Act, 2013, which includes the PM’s Relief Fund, the Clean Ganga Fund and others set up by the government in furtherance of its social development policies.

In case, if the Company is not having any  on-going project in hand to spend for CSR, the unspent amount is required to be transferred to any fund specified in Schedule VII of the Act within a period of 6 months of the expiry of the financial year.

If the company violates the CSR provisions as mentioned above, stringent penal provisions are imposed on company which includes fine in between from Rs. 50,000 to Rs. 25 lakhs and for officers in default fine from Rs. 50,000 which may extend to Rs. 5 lakh or even imprisonment of up to three years for or with both.

The interesting point to be noted here is that although Companies (Amendment) Act, 2019 is passed; the provisions of Section 135 are not yet made effective.

Laws changes as the seasons

Amrapali and Insolvency - Part 1

• The three-year-old legislature pertaining to Insolvency has undergone lot of challenges / changes owing to the varied variety of cases that jurisdiction is being exposed to. Homebuyers have used all their might in urging the apex Court to reframe the laws for their greater rights and security . One such reportable case is of the Amrapali Group of builders wherein the homebuyers filed a writ petition with the honourable Supreme Court challenging the validity of the provisions of Insolvency Bankruptcy Code 2016. On the builder failing to repay the debts of a particular project, homebuyers approached the doors of the Supreme Court to protect the interest of all the homebuyers in all the other projects of the defaulting builder group. Let us now proceed with the sections that have been challenged by the homebuyers in the said case.
• The first section is with regards to distribution of assets i.e. section 53 of IBC where the plea of the home buyers is that this section does not treat home buyers and secured creditors at par. Their request was to treat the home buyers with financial creditors and they ought to be declared as secured creditors under the code .Also they  should be among the first claimants to be given the proceeds in the event of Company`s assets being sold.
• Followed by Section 53, they also want to take away the protection provided in section 14 for the Builders i.e. Moratorium which is in fact is of an advantage for the builders as it prohibits the institution of suits or continuation of pending suits or proceedings against the Corporate Debtor(Builder) including execution of any decree ,order in any court law, tribunal , arbitration panel or any other authority. Hence proceedings against the builder before National Consumer Disputes Redressal Commission to enforce their paramount claim of either possession of flats or refund of sale consideration should not be denied by imposing a moratorium. Hence Section 14 should not be applied to the proceedings which are in the benefit of the Corporate Debtor.
• Further the overriding effect section 238 was also questioned as IBC prevails over any other law. This becomes as hindrance in the implementation of other laws and provides a rescue ground for the defaulters.
• Honourable SC has very recently pronounced part judgement cancelling RERA registration of Amrapali Group of Companies.
• As time moves forward, it will be very interesting to follow the lead and see whether justice to the home buyers is served and whether provisions of IBC are amended yet again for betterment of its stakeholders.

Changes in Insolvency and Bankruptcy Code for easier resolutions

The Rajya Sabha on 29^th July ,2019 approved the amendments to the three year old Insolvency and Bankruptcy Code. These amendments are aimed at filling critical gaps in the Corporate Insolvency Resolution Framework while at the same time maximizing value from resolution.

These changes are brought in response to the events that eroded the legislative intent of the IBC

Salient features of Amendments include

• Restricting the resolution process to 330 days including time for litigation and other judicial proceedings. Currently the time line of 270 days has been extended in a number of cases with lawyers seeking to exclude the time taken for litigation. Litigation in NCLAT or Supreme Court should not extend beyond 60 days.
• Ensuring the primacy of financial creditors over operational creditors in case of recovery.
• Homebuyers have been given stringer voice in resolution plans of developers that have not delivered projects –With the new provision that seeks to change the voting pattern to “present and voting “and allows for almost all resolutions to go through if they are backed by over 50 % votes.However this would run the risk of monopolising control of process with one or two financial creditors in the CoC            (Committee of Creditors).
• Currently several decisions were held up as 66 % votes were required for a resolution to be passed.
• Committee of Creditors to decide on distribution – Operational Creditors and Unsecured Financial Creditors need not be treated at par with Secured Financial Creditors.          
• Faster Resolution Plans –Bill proposes to provide more flexibility by allowing Corporate Restructuring Schemes as a part of resolution plan. Resolution plan would be binding on all stakeholders including Centre, State Governments and local Authority to which dues may be owed.
• Recovery of dues of operational creditors and Financial Creditors (in case of negative voting) is proposed to be amended. Minimum recovery assurance is provided.
• NCLT to record reasons before rejecting application for CIRP.
• COC can resolve to Liquidate the Company, before Information Memorandum is prepared. Earlier, COC had right to Liquidate Company before Resolution Plan was confirmed.

These are most welcomed amendments and re-emphasize the significance of timely resolution of cases with greater certainty.