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You may have heard the term, ‘bankruptcy’ tossed around by financial institutions and media outlets to describe the poor state of affairs of an organization. In the simplest of terms, bankruptcy refers to the legal status of a person or organization, in which they are unable to repay debts to creditors. Bankruptcy is declared by the person/company in question, it is then ratified by a judicial body before being accepted as final. As is the case with any financial activity, there are a defined set of corporate laws that determine whether a company can be declared bankrupt.

Insolvency and Bankruptcy Code (IBC), 2016

Initially, the process of declaring bankruptcy in India was long and convoluted, involving many different agencies and laws. The introduction of the Insolvency and Bankruptcy Code (IBC) by finance minister Arun Jaitley efficiently solved issues of legal compliance, by consolidating the entire process of reorganisation and insolvency into a single act.

The code was passed by the Rajya Sabha on 11th May, 2016.

2018 Amendments to IBC

On 10th Aug, 2018 there was an amendment to the IBC, which affects corporate compliances in the following ways:

• The Bill amends the Insolvency and Bankruptcy Code, 2016 to clarify that allottees under a real estate project should be treated as financial creditors.
• The voting threshold for routine decisions taken by the committee of creditors has been reduced from 75% to 51%. For certain key decisions, this threshold has been reduced to 66%.
• The Bill allows the withdrawal of a resolution application submitted to the NCLT under the Code. This decision can be taken with the approval of 90% of the committee of creditors.

Real Estate Allottees

A creditor is any person or institute that has extended a line of credit or a loan to the debtor (the person/institute filing for bankruptcy). The new amendment to this corporate law, clearly states that allottees will now also be considered creditors. Any buyer of a property under-construction are referred to as allottees.

This change was made when the Insolvency Law Committee (set up in 2017 to review the IBC) noticed that allottees directly contribute to real estate project finance and in some cases, provide even more capital than banks do!

Lower Threshold

Previously, all decisions regarding the debtor company were taken by 75% majority of financial creditors. This has now been reduced to a 51% majority.

While, in cases of resolution of bankruptcy and structural changes to the organization, voting majority has been reduced to 66%.

Resolution Withdrawal

The National Company Law Tribunal (NCLT) is a partly judicial body responsible for adjudicating corporate law relating to Indian companies. The resolution process of a debtor organisation is submitted to the NCLT for review.

Under the new amendment, withdrawal of any such resolution application will have to be approved by a 90% of creditors.

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