SC : Home buyers plea against the Ordinance

A group of home buyers have challenged the additions made to Section 7 of the Insolvency and Bankruptcy (Amendment) Ordinance, 2019. The amendment stated that to initiate insolvency against a builder/developer an application to initiate insolvency must be moved by at least 100 or 10 of the total allottees from the same project.

The main ground for filing the said writ petition was that the ordinance discriminated against the home buyers, as no such pre-conditions were imposed on other financial creditors under IBC.

The writ petition further stated "The Ordinance is completely against the fundamental rights guaranteed to the home buyers (Financial Creditors) under Article 14 and 21 of the Constitution of India. The Union of India has brought in the Ordinance with absolute discrimination by putting a precondition/threshold in the form of minimum number of allottees of a particular project required for filing an application for triggering the code under Section 7 of the IBC, which is not applicable to other financial creditors under IBC,".

"Because the Ordinance runs in complete contradiction to IBC and imposing such a pre-condition on the filing of the application under Section 7 of the IBC is completely against the objective of the IBC, as the pre-condition for any financial creditor to approach the adjudicating authority is quantum of the debt and not the number of financial creditors,"

Insolvency and Bankruptcy Board of India (Liquidation Process) (Amendment) Regulations, 2020

The Insolvency and Bankruptcy Board of India has introduced the below mentioned amendments to The Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 and notified the same as the Insolvency and Bankruptcy Board of India (Liquidation Process) (Amendment) Regulations, 2020 on January 6.

• Bar ineligible persons from being a party to the Scheme- A person, who is not eligible under Insolvency and Bankruptcy Code, 2016 (IBC) to submit a resolution plan for insolvency resolution of a corporate debtor, shall not be a party in any manner to a compromise or arrangement of the corporate debtor under section 230 of the Companies Act, 2013.
• A secured creditor cannot sell or transfer an asset, which is subject to security interest, to any person, who is not eligible under IBC to submit a resolution plan for insolvency resolution of the corporate debtor.
• Secured Creditors Subject to Time lines- A secured creditor, who proceeds to realise its security interest, shall contribute its share of the insolvency resolution process cost, liquidation process cost and workmen’s dues, within 90 days of the liquidation commencement date. Such a creditor shall also pay excess of realised value of the asset, which is subject to security interest, over the amount of its claims admitted, within 180 days of the liquidation commencement date. Where the secured creditor fails to pay such amounts to the Liquidator within 90 days or 180 days, as the case may be, the asset shall become part of Liquidation Estate.
• Creation of Corporate Liquidation Account- The Amendment Regulation substitutes regulation 46 to provide for creation of a Corporate Liquidation Account, to be maintained and operated by IBBI in the Public Accounts of India. The Amendment provides that a liquidator shall deposit the amount of unclaimed dividends, if any, and undistributed proceeds, if any, in a liquidation process along with any income earned thereon till the date of deposit into the Corporate Liquidation Account before making an application for dissolution
• The Amendment also lays down a process for a stakeholder to seek withdrawal from the Corporate Liquidation Account.

Amendment in Secretarial Audit applicability and mandatory appointment of Whole Time Company Secretary

The Ministry of Corporate Affairs (MCA) has vide an amendment dated 3rd January 2020 to the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 amended the thresholds for applicability of Secretarial Audit and the thresholds for mandatory appointment of Whole Time Company Secretary. This amendment is applicable in respect of financial years commencing on or after 1st April 2020.

A. Applicability of Secretarial Audit

1. Thresholds:- 

Before this amendment, Secretarial Audit was applicable to all types of companies (public or private) having any securities listed and such public companies having paid up capital of Rs. 50 crores or more, OR such public companies having turnover of Rs. 250 crores or more. 

Now vide this amendment, with effect from the financial years commencing on or after 1st April 2020, Secretarial Audit has been made applicable to all types of companies (public or private) having outstanding loans or borrowings from banks or public financial institutions of Rs. 100 crores or more. Hence, now secretarial audit is applicable to even private companies which are heavily leveraged as mentioned above (irrespective of whether it is long term or short term borrowing). 

2. From which year Secretarial Audit is applicable?

a. Companies which have already crossed the new threshold:-

Since this Amendment is applicable in respect of financial years commencing on or after 1st April 2020, in case of companies (private or public) which already have outstanding loans or borrowings from banks or public financial institutions of Rs. 100 crores or more, Secretarial Audit will be applicable for the financial year 2020-21 onwards. 

b. Companies which cross the new threshold after 1st April 2020:-

In the above Rules, an Explanation has been inserted to the effect that the paid up share capital, turnover, or outstanding loans or borrowings as the case may be, existing on the last date of latest audited financial statement shall be taken into account.

The governing section, i.e., Section 204 states about annexing the Secretarial Audit Report to the Board’s report, i.e., an event which happens post the audit of financial statements of a particular year. Hence it can be said that if Secretarial Audit is newly applicable to any Company for a particular financial year, then Secretarial Audit must be undertaken for that particular financial year only, and not beginning from the next financial year. For example: if Secretarial Audit is applicable to any Company as per the financial statements of the financial year 2020-21, then Secretarial Audit is applicable with effect from financial year 2020-21 only.

B. Thresholds for the appointment of Whole Time Company Secretary

In the above Rules, the thresholds for the appointment of Whole Time Company Secretary has been increased from paid-up capital of Rs. 5 crores to Rs. 10 Crores. It is to be noted that even if a private company has paid-up capital of less than Rs. 10 crores but has its equity shares or any other securities listed, then this exemption is not available to such listed companies.