The Insolvency And Bankruptcy Code, 2016 - Key Highlights

The Insolvency and Bankruptcy Code passed by the Parliament is a welcome overhaul of the existing framework dealing with insolvency of corporates, individuals, partnerships and other entities. It paves the way for much needed reforms while focussing on creditor driven insolvency resolution. BACKGROUND

At present, there are multiple overlapping laws and adjudicating forums dealing with financial failure and insolvency of companies and individuals in India. The current legal and institutional framework does not aid lenders in effective and timely recovery or restructuring of defaulted assets and causes undue strain on the Indian credit system. Recognising that reforms in the bankruptcy and insolvency regime are critical for improving the business environment and alleviating distressed credit markets, the Government introduced the Insolvency and Bankruptcy Code Bill in November 2015, drafted by a specially constituted 'Bankruptcy Law Reforms Committee' (BLRC) under the Ministry of Finance. Trilegal worked with the BLRC to assist with the drafting of the bill.

After a public consultation process and recommendations from a joint committee of Parliament, both houses of Parliament have now passed the Insolvency and Bankruptcy Code, 2016 (Code). While the legislation of the Code is a historical development for economic reforms in India, its effect will be seen in due course when the institutional infrastructure and implementing rules as envisaged under the Code are formed. THE CODE

The Code offers a uniform, comprehensive insolvency legislation encompassing all companies, partnerships and individuals (other than financial firms). The Government is proposing a separate framework for bankruptcy resolution in failing banks and financial sector entities.

One of the fundamental features of the Code is that it allows creditors to assess the viability of a debtor as a business decision, and agree upon a plan for its revival or a speedy liquidation. The Code creates a new institutional framework, consisting of a regulator, insolvency professionals, information utilities and adjudicatory mechanisms, that will facilitate a formal and time bound insolvency resolution process and liquidation.


1. Corporate Debtors: Two-Stage Process

To initiate an insolvency process for corporate debtors, the default should be at least INR 100,000 (USD 1495) (which limit may be increased up to INR 10,000,000 (USD 149,500) by the Government). The Code proposes two independent stages:

Insolvency Resolution Process, during which financial creditors assess whether the debtor's business is viable to continue and the options for its rescue and revival; and

Liquidation, if the insolvency resolution process fails or financial creditors decide to wind down and distribute the assets of the debtor. (a) The Insolvency Resolution Process (IRP)

The IRP provides a collective mechanism to lenders to deal with the overall distressed position of a corporate debtor. This is a significant departure from the existing legal framework under which the primary onus to initiate a reorganisation process lies with the debtor, and lenders may pursue distinct actions for recovery, security enforcement and debt restructuring.

The Code envisages the following steps in the IRP:

(i) Commencement of the IRP

A financial creditor (for a defaulted financial debt) or an operational creditor (for an unpaid operational debt) can initiate an IRP against a corporate debtor at the National Company Law Tribunal (NCLT).

The defaulting corporate debtor, its shareholders or employees, may also initiate voluntary insolvency proceedings.

(ii) Moratorium

The NCLT orders a moratorium on the debtor's operations for the period of the IRP. This operates as a 'calm period' during which no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can take place against the debtor.

(iii) Appointment of Resolution Professional

The NCLT appoints an insolvency professional or 'Resolution Professional' to administer the IRP. The Resolution Professional's primary function is to take over the management of the corporate borrower and operate its business as a going concern under the broad directions of a committee of creditors. This is similar to the approach under the UK insolvency laws, but distinct from the "debtor in possession" approach under Chapter 11 of the US bankruptcy code. Under the US bankruptcy code, the debtor's management retains control while the bankruptcy professional only oversees the business in order to prevent asset stripping on the part of the promoters.

Therefore, the thrust of the Code is to allow a shift of control from the defaulting debtor's management to its creditors, where the creditors drive the business of the debtor with the Resolution Professional acting as their agent.

(iv) Creditors Committee and Revival Plan

The Resolution Professional identifies the financial creditors and constitutes a creditors committee. Operational creditors above a certain threshold are allowed to attend meetings of the committee but do not have voting power. Each decision of the creditors committee requires a 75% majority vote. Decisions of the creditors committee are binding on the corporate debtor and all its creditors.

The creditors committee considers proposals for the revival of the debtor and must decide whether to proceed with a revival plan or liquidation within a period of 180 days (subject to a one-time extension by 90 days). Anyone can submit a revival proposal, but it must necessarily provide for payment of operational debts to the extent of the liquidation waterfall.

The Code does not elaborate on the types of revival plans that may be adopted, which may include fresh finance, sale of assets, haircuts, change of management etc. (b) Liquidation

Under the Code, a corporate debtor may be put into liquidation in the following scenarios:

(i) A 75% majority of the creditor's committee resolves to liquidate the corporate debtor at any time during the insolvency resolution process;

(ii) The creditor's committee does not approve a resolution plan within 180 days (or within the extended 90 days);

(iii) The NCLT rejects the resolution plan submitted to it on technical grounds; or

(iv) The debtor contravenes the agreed resolution plan and an affected person makes an application to the NCLT to liquidate the corporate debtor.

Once the NCLT passes an order of liquidation, a moratorium is imposed on the pending legal proceedings against the corporate debtor, and the assets of the debtor (including the proceeds of liquidation) vest in the liquidation estate.

Priority of Claims

The Code significantly changes the priority waterfall for distribution of liquidation proceeds.

After the costs of insolvency resolution (including any interim finance), secured debt together with workmen dues for the preceding 24 months rank highest in priority. Central and state Government dues stand below the claims of secured creditors, workmen dues, employee dues and other unsecured financial creditors. Under the earlier regime, Government dues were immediately below the claims of secured creditors and workmen in order of priority.

Upon liquidation, a secured creditor may choose to realise his security and receive proceeds from the sale of the secured assets in first priority. If the secured creditor enforces his claims outside the liquidation, he must contribute any excess proceeds to the liquidation trust. Further, in case of any shortfall in recovery, the secured creditors will be junior to the unsecured creditors to the extent of the shortfall. 2. Insolvency Resolution Process for Individuals/Unlimited Partnerships

For individuals and unlimited partnerships, the Code applies in all cases where the minimum default amount is INR 1000 (USD 15) and above (the Government may later revise the minimum amount of default to a higher threshold). The Code envisages two distinct processes in case of insolvencies: automatic fresh start and insolvency resolution.

Under the automatic fresh start process, eligible debtors (basis gross income) can apply to the Debt Recovery Tribunal (DRT) for discharge from certain debts not exceeding a specified threshold, allowing them to start afresh.

The insolvency resolution process consists of preparation of a repayment plan by the debtor, for approval of creditors. If approved, the DRT passes an order binding the debtor and creditors to the repayment plan. If the plan is rejected or fails, the debtor or creditors may apply for a bankruptcy order. 3. Institutional Infrastructure

(a) The Insolvency Regulator

The Code provides for the constitution of a new insolvency regulator i.e., the Insolvency and Bankruptcy Board of India (Board). Its role includes: (i) overseeing the functioning of insolvency intermediaries i.e., insolvency professionals, insolvency professional agencies and information utilities; and (ii) regulating the insolvency process. (b) Insolvency Resolution Professionals

The Code provides for insolvency professionals as intermediaries who would play a key role in the efficient working of the bankruptcy process. The Code contemplates insolvency professionals as a class of regulated but private professionals having minimum standards of professional and ethical conduct.

In the resolution process, the insolvency professional verifies the claims of the creditors, constitutes a creditors committee, runs the debtor's business during the moratorium period and helps the creditors in reaching a consensus for a revival plan. In liquidation, the insolvency professional acts as a liquidator and bankruptcy trustee. (c) Information Utilities

A notable feature of the Code is the creation of information utilities to collect, collate, authenticate and disseminate financial information of debtors in centralised electronic databases. The Code requires creditors to provide financial information of debtors to multiple utilities on an ongoing basis. Such information would be available to creditors, resolution professionals, liquidators and other stakeholders in insolvency and bankruptcy proceedings. The purpose of this is to remove information asymmetry and dependency on the debtor's management for critical information that is needed to swiftly resolve insolvency. (d) Adjudicatory authorities

The adjudicating authority for corporate insolvency and liquidation is the NCLT. Appeals from NCLT orders lie to the National Company Law Appellate Tribunal and thereafter to the Supreme Court of India. For individuals and other persons, the adjudicating authority is the DRT, appeals lie to the Debt Recovery Appellate Tribunal and thereafter to the Supreme Court.

In keeping with the broad philosophy that insolvency resolution must be commercially and professionally driven (rather than court driven), the role of adjudicating authorities is limited to ensuring due process rather than adjudicating on the merits of the insolvency resolution. CONCLUSION

India currently ranks 136 out of 189 countries in the World Bank's index on the ease of resolving insolvencies. India's weak insolvency regime, its significant inefficiencies and systematic abuse are some of the reasons for the distressed state of credit markets in India today. The Code promises to bring about far-reaching reforms with a thrust on creditor driven insolvency resolution. It aims at early identification of financial failure and maximising the asset value of insolvent firms. The Code also has provisions to address cross border insolvency through bilateral agreements and reciprocal arrangements with other countries.

The unified regime envisages a structured and time-bound process for insolvency resolution and liquidation, which should significantly improve debt recovery rates and revitalise the ailing Indian corporate bond markets.

Not just banks, your unpaid supplier of goods or services can now initiate bankruptcy proceedings

Pranbihanga Borpuzari
Updated: Jul 29, 2017, 12.16 PM IST
Indian banks are saddled with bad debt and as the banking industry goes about recovering about Rs 8 lakh crore in doubtful loans, the new Insolvency and Bankruptcy Code is expected to provide the much needed teeth to the financial institutions. Aspects like a time bound recovery period for corporates, simpler ways for creditors to initiate bankruptcy proceedings means there would noticeable impact on companies, including startups. In a conversation with, Manoj K Singh the Founding Partner of Singh & Associates, talks about the impact of the Code and what it means for creditors and businesses.

Economic Times (ET): It has been in the works for some time now, but what is the amended Insolvency and Bankruptcy Code, 2016?
Manoj K Singh (MS): The main object of the Insolvency and Bankruptcy Code 2016 is to reorganize/revive the corporates, partnership firms and individual who are on the verge of becoming insolvent in a time bound manner in order to maximize the value of assets of such persons or firm.

ET: What are the major factors which predict whether the Insolvency and Bankruptcy Code, 2016 will help the Indian Banking system?
MS: It is only been seven months and the major companies who owed more than Rs 10,000 crore individually have faced insolvency resolution process against them. The time period prescribed under the Code is fixed which means that the Banks can release their debt in a time bound manner.

Further, the Committee of Creditor who will approve the resolution plan consist of financial creditors who will take into account every aspect of the business before formulating the resolution plan. If they feel that the resolution plan is not workable, they can even before the expiry of the time period, request the Adjudicating Authority for liquidation. One is hopeful that banks will revive their confidence in lending as earlier in some cases they have to even shed major part of their lending in OTS or consider the loan as bad debt when they are not able to recover the same after long litigation battle. Now, banks can immediately resort to the code if there is a default in payment and the borrower despite been given the chance, is not able to regularize its payment obligation.

ET: The Insolvency and Bankruptcy Board of India (IBC) 2016 has made the ease of doing business less complex than earlier, in what way has this become simpler for creditors to retrieve loans on a quicker basis?
MS: The World Bank has ranked India at 136th position in resolving insolvency and the reason for it was no time bound process to deal with bad loans. The Code have given a time frame within which either the corporate person/individual/partnership etc will revive or will face liquidation. The code is meant not only for the financial creditor, but also for operational creditor, that is the supplier of goods or services, to make an application to initiate the corporate insolvency resolution process against the corporate debtor. Further, the procedure to make the application under the Code is also simple and the Adjudicating Authority (NCLT) needs to either admit or reject the application within 14 days of its submission. The creditors need not to wait for years to get their claim decided. In some cases, there is a probability that immediately on filing of the application against a business; they would like to settle the matter with the creditor.

ET: With IBC implemented, should RBI ease the norms on commercial banks?
RBI will not ease any norms for commercial banks for the reason that IBC has not been made mandatory to be followed by Commercial Banks. There are still some banks who instead of proceeding towards IBC are contesting their claim before DRT or using SARFEASI to protect the assets secured with them.

ET: How will the amended law impact companies, startups or the entrepreneurial community?
IBC can impact companies, startups for the reason that the creditor who owes more than Rs 1 lakh can approach Adjudicating Authority (NCLT) for initiating Corporate Insolvency Resolution Process (CIRP) against a business. Initially the business can avoid the same by entering into settlement whether at the time of receipt of demand notice or when the application is filed, however, to what extent will it be possible for the business to settle its debt out of the court is the question. In case of a startup that requires liquidity, it will cause hardship because it will not be easy to settle their creditors out of court when you do not have money and at some point of time they have to face CIRP.

ET: With the implementation of the new Insolvency process, how does it benefit the lending institutions?
The robust insolvency-resolution mechanism can help the lending institution recover the money they lend out faster and when the money is recovered they can reinvest it further. They do not have to wait for years to recover their loans or enter into voluminous litigation or shed out major part of the lending in case of One Time Settlement.

ET: The Code has led to a new career option for some- that of a independent insolvency professional. What is the role of an Insolvency Professional (IP) within a company?
The insolvency professional plays a pivotal role during the Moratorium Period of 180 days or 270 days as the case may be. As the Board of the business is suspended, it is the Insolvency Professional (IP) along with the assistance of the officers of the company who will run the company. Further, under the Code he is duty bound to keep the company as a going concern. He takes the custody of the assets and monitors the assets. He has to prepare the information memorandum and share it with the Committee of Creditors as and when required by them. He has to substantiate the claim made by the creditors once the public announcement has been made. IP needs to submit the resolution plan before the Committee of Creditor within one month from the maximum time allowed for a resolution plan.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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  • Bankruptcy Law


    The Insolvancy and Bankruptcy Board of India (IBBI) on Friday notified the Final norms for Fast track Insolvancy resolution for Small Companies and Start-ups.

    Below is some highlights of the Rules :

    1) The resolution process for small firms will be completed within 90 days, against 180 days for large firms, and the timeline will be extendable by 45 days if Company Law Tribunal approves it.

    2) The rules notified by the insolvency regulator explain the procedures and timelines to be followed to help in resolution of insolvency within 90 days such as announcement of the appointment of interim resolution professionals (IRPs) and submission of claims of financial dues.

    3) The fast-track mechanism, in line with the draft norms released on 24 April, is applicable to start-ups, small firms with a share capital of less than Rs50 lakh, annual revenue below Rs2 crore and with total borrowings less than Rs2 crore. Additionally, the fast-track mechanism would be considered for firms that fit the Companies Act 2013 definition of small companies and unlisted firms with total assets, as reported in the preceding fiscal, not exceeding Rs1 crore.

    4)A committee of the 18 largest operational creditors will be appointed if all creditors are related to the debtor and in case there is lack of clarity on financial dues.

    5) A creditor or a debtor company will be required to file an application, along with the proof of existence of default, to the NCLT for initiating the fast-track resolution process.

    6) After the application is admitted and the IRP is appointed, if the IRP thinks the fast-track process is not applicable, he can move an application within 21 days with the NCLT to pass an order to convert the fast-track process into a normal corporate insolvency resolution process.

    7) The IRP, within seven days of his appointment, will appoint a registered valuer to determine the liquidation value of the debtor.Liquidation value would be computed in accordance with internationally accepted valuation standards, after physical verification of the inventory and fixed assets of the corporate debtor.

    Key Highlights of the Insolvency and Bankruptcy Code (Second Amendment Bill), 2019

    Bar & Bench

    Swaroop George

    The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019 (hereinafter referred to as the ‘Bill’) has been introduced in the Parliament to resolve and clarify certain issues which have arisen and to further strengthen the framework of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the ‘Code’). The present article does not seek to analyse the scope and impact of the proposed amendments in detail but aims to encapsulate the major changes proposed to the Code. The various proposed changes have been categorized into the following categories:

    Insolvency commencement date and date of appointment if Interim Resolution Professional

    Proviso to clause 12 of section 5 of the Code is proposed to be deleted by Section 2 of the Bill. The proviso stipulated that where the interim resolution professional (hereinafter referred to as the ‘IRP’) is not appointed in the order admitting application under section 7, 9 or section 10, the insolvency commencement date would be the date on which such IRP is appointed by the Adjudicating Authority. Thereby, the bill proposes that the insolvency commencement date must, in all cases, be the date on which the order admitting the application for initiation of corporate insolvency resolution process (hereinafter referred to as the ‘CIRP’) is passed. In line with the aforesaid, Section 6 of the Bill seeks to amend Section 16 of the Code to the effect that the Adjudicating Authority shall appoint the IRP on the insolvency commencement date.

    Minimum threshold for certain classes of Financial Creditors

    Section 3 of the Bill proposes certain minimum thresholds for filing of applications seeking initiation of CIRP by certain classes of creditors. The financial creditors referred to in Clause a or b of sub-section 6A of Section 21 of the Code i.e. where the financial debt is in the form of securities or deposits and the terms of the financial debt provide for appointment of a trustee or agent to act as authorised representative for

    all the financial creditors or where the financial debt is owed to a class of creditors exceeding the number as may be specified, other than the creditors covered under clause (a) or sub-section (6) of Section 21 of the Code; are only allowed to file an application seeking initiation of CIRP if the application is filed jointly by not less than one hundred of such creditors in the same class or not less than ten percent of the total number of such creditors in the same class, whichever is less.

    Similarly, for financial creditors who are allottees under a real estate

    project, an application for initiating CIRP will have to be filed jointly by not less than one hundred of such allottees under the same real estate project or not less than ten percent of the total number of such allottees under the same real estate project, whichever is less.

    Effect on Pending Proceedings

    In a significant move, these threshold limits are proposed to be applied on pending applications seeking initiation of CIRP by the aforesaid classes of creditors which have not been admitted by the Adjudicating Authority before the commencement of the Insolvency and Bankruptcy

    Code (Second Amendment) Act, 2019 (hereinafter referred to as the ‘Amendment Act’). In such cases, the application shall have to be modified to comply with the requirements as stipulated in the preceding paragraph within thirty days of the commencement of the Amendment Act, failing which the application will be deemed to be withdrawn before its admission. The imposition of such a deadline should see real estate allottees pressing for disposal of their cases before the Amendment Act commences whereas the developers are likely to attempt the opposite. The retrospective imposition of such additional conditions on such classes of creditors is likely to be tested in the courts.

    Clarification with regard to corporate debtors which are not entitled to initiate CIRP

    Section 4 of the Bill adds an explanation to Section 11 clarifying that the corporate debtor hit by any of the disqualifications in clauses a to d of Section 11 shall not be prevented from initiating CIRP against another corporate debtor.

    Status of certain rights granted to Corporate Debtor during the Moratorium Period

    Section 5 of the Bill proposes to add an explanation to Section 14 (1) of the Code clarifying that notwithstanding anything contained in any other law for the time being in force, a license, permit, registration, quota, concession, clearances or a similar grant or right given by the Central Government, State Government, local authority, sectoral regulator or any other authority constituted under any other law for the time being in force, will not be suspended or terminated on the grounds of insolvency, subject to the condition that there is no default in payment of current dues arising for the use or continuation of such rights during the moratorium period.

    Provision of Critical Goods and Services during Moratorium Period

    Section 5 of the Bill also seeks to add Section 2A to Section 14 of the Code. Section 2A seeks to empower the IRP or Resolution Professional (hereinafter referred to as the ‘RP’) to determine which supply of goods and services are critical to protect and preserve the value of the corporate debtor and manage the operations of such corporate debtor as a going concern and the section further provides that such supply of goods and services shall not be terminated, suspended or interrupted during the period of moratorium, except if such corporate debtor has not paid dues arising from such supply during the moratorium period or in such circumstances as may be specified.

    Extension of Resolution Professional's Role after Expiry of CIRP

    Section 8 of the Bill seeks to amend Section 23 of the Code to ensure the RP continues to manage the affairs of the corporate debtor after expiry of CIRP period until an order approving the resolution plan under sub-section (1) of section 31 or appointing a liquidator under section 34 is passed by the Adjudicating Authority.

    Liability of Corporate Debtor for offence committed prior to the commencement of the CIRP

    Section 10 of the bill seeks to introduce Section 32A to the Code which will provide immunity from prosecution to the corporate debtor for any offence committed prior to the commencement of the CIRP from the date, the resolution plan is approved by the Adjudicating Authority. However, such immunity shallonly apply if the resolution plan results in the change in the management or control of the corporate debtor to a person who was not a promoter or in the management or control of the corporate debtor or a related party of such a person; or a person with regard to whom the relevant investigating authority has, on the basis of material in its possession, reason to believe that he had abetted or conspired for the commission of the offence, and has submitted or filed a report or a complaint to the relevant statutory authority or court. Subject to the aforesaid conditions, if a prosecution had been instituted during the CIRP against such corporate debtor, it shall stand discharged from the date of approval of the resolution plan.

    However, the persons in the management of the corporate debtor who are in any manner in charge of, or responsible to the corporate debtor for the conduct of its business or associated with the corporate debtor in any manner and who were directly or indirectly involved in the commission of such offence as per the report submitted or complaint filed by the investigating authority, shall continue to be liable to be prosecuted and punished for such an offence committed by the corporate debtor.

    Similarly, no action such as seizure, attachment etc. of the property of the corporate debtor in relation to an offence committed prior to the commencement of the CIRP of the corporate debtor, shall be taken where such property is covered under a resolution plan approved by the Adjudicating Authority, which results in the change in control of the corporate debtor to a person, or sale of liquidation assets under the provisions of Chapter III of Part II of this Code to a person who was not in the management of the Corporate Debtor or who has not abetted or conspired in the offence as stated in the preceding paragraph.

    Notwithstanding the above, the corporate debtor will still have to provide assistance and co-operation to any authority investigating an offence committed prior to the initiation of CIRP.

    Swaroop George is an advocate practicing at New Delhi

    The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019


  • To enable online auction by banks of attached assets transparently and cleanly for the improved realization of value, eBक्रय, a common e-auction platform was launched today by Union Minister for Finance Smt. nsitharaman

    Link to Website:

    ​​​​if your builder is declared insolvent?

    Farozan Akhtar
    With the recent spate of builders filing for bankruptcy in the National Capital Region, buyers have been left in a turmoil about the status of their under-construction homes. It becomes crucial to know the recourses real estate buyers have access to if their builder becomes insolvent.

    A buyer’s worst nightmare is having his builder go bankrupt. Such an event can bring the construction of his property to a standstill, putting his investment at significant risk. What is scarier is that as per the provisions of the Insolvency and Bankruptcy Code, 2016, buyers may be at the losing end in such a scenario, especially if the builder owes massive debts to creditors such as banks and other financial institutions.

    What does the Insolvency and Bankruptcy Code (IBC) state?

    If a builder is declared insolvent, IBC provides two options – resolution or liquidation. The resolution process will involve an analysis of the builder’s financial position to see if the business can be rescued or revived. If the first option is not viable, the builder’s assets will be liquidated and the proceeds will be used to clear the creditors’ claims.

    It should be noted that IBC is aimed at protecting the rights of operational and financial creditors, and buyers are considered neither. The legislation does not have any clauses pertaining specifically to the rights of homebuyers when a developer becomes bankrupt. Rohit Poddar, Managing Director, Poddar Housing and Development Ltd, states that it is not likely that customers would be able to recover their full dues in such a situation and, hence, it is always advisable to buy from a reputed developer.

    What happens once a builder files for insolvency?

    Gunjan Goel, Director, Goel Ganga Developments explains that once a builder files for insolvency, the National Company Law Tribunal (NCLT) will appoint an insolvency resolution professional who will attempt to resolve the builder’s financial situation. If a revival is not possible, he will verify the claims of creditors, and oversee the liquidation and settlement process.

    Buyers may use Form F issued by the Insolvency and Bankruptcy Board of India (IBBI) to raise their claims, which can be for the refund of the amount they had invested in the builder’s project, the damages suffered by them due to the non-execution of their purchase agreement, or for receiving possession of the property they had paid for. However, primary creditors such as banks are likely to get the first right to receive payments if the builder’s assets are liquidated. Often, this might not leave enough funds for the homebuyers, states Goel.

    Possession after insolvency

    Since IBC does not state the recourse available to homebuilders, experts anticipate the following scenarios:

      Some of the funds raised by selling off the builder’s assets may be used to complete the project and hand over the units to the buyers
      Buyers may be asked to pay the balance pending for their units, which will be used to complete the project
      Buyers may form a resident welfare association, acquire the under-construction project, and oversee its completion through personal contributions
      Creditors may take over and attempt to revive the project in order to earn value appreciation
      The solution would differ case by case and would largely depend on the insolvency resolution professional hired for a particular builder’s insolvency request.

      What can buyers do?

      Experts are of the opinion that buyers may stand a chance to be treated as creditors if they terminate their purchase agreement and file for a refund. However, this means they will not be able to demand possession in case the project is rescued and completed. Thus, this option is not advised for all buyers.

      Let us consider a property that is 75 percent complete. If a buyer in such a project claims for refund by giving up his right to possession, he may receive only 50 percent of his investment as part of the liquidation settlement decided by creditors. It is important to note that a buyer’s share in such a scenario would depend on the value of the builder’s assets as compared to his debts.

      Claiming a monetary refund would be suited to those buyers whose projects are still in early stages, assert experts. Meanwhile, buyers of projects which were close to completion when the builder filed for insolvency are better off filing a claim for possession. This is especially applicable if the project was registered under the Real Estate (Regulation and Development) Act (RERA) since RERA entitles homebuyers to claim possession of their property.

      Quick tips for buyers

        Do not stop paying EMIs for your home loans even after your builder becomes insolvent
        File your claims within the timelines announced by the insolvency resolution professional
        It would be wiser for homebuyers to work collectively as a team to compel the authorities to ensure that either the delivery of the project is seen through, or the invested money is returned
        Experts have been urging the government to amend the IBC and place the rights of genuine homebuyers, who have made partial or complete payments for the project, ahead of the institutional creditors. The IBC is a new law and is likely to undergo changes in the future to incorporate homebuyers’ rights. Until this happens, buyers should stay aware of their options in order to make the best of the situation in case their builder is declared insolvent.

        Frequently Asked Questions

        What is insolvency?

        Insolvency refers to a situation when a company or an individual cannot meet its financial obligations to its creditors or lenders. A builder may file for insolvency when he is unable to clear his debts once they become due. In order to be declared insolvent, he would have to file an application for the same, after which his financial status will be analysed by an insolvency professional. Creditors may also ask for an individual or business to be declared insolvent if he is unable to service his debt when it becomes due.

        What is the Insolvency and Bankruptcy Code?

        The Insolvency and Bankruptcy Code (IBC) 2016 replaces three existing laws on bankruptcy and insolvency. It specifies guidelines for dealing with insolvency proceedings against individuals, companies, and partnership firms.

        Who has the first right to get their dues cleared if a builder becomes insolvent?

        Secured creditors will get the first priority when a builder’s dues are being settled. However, as per existing norms, homebuyers are not specifically stated to be secured creditors. Generally, banks and other financial institutions get the first right to get their dues cleared when the builder’s assets are liquidated.

        Can a buyer go to court to claim refund or possession of his property?

        The Insolvency and Bankruptcy Board of India has been charged with the responsibility of overseeing insolvency proceedings. Two tribunals, National Company Law Tribunal for companies and Debt Recovery Tribunal for individuals, have also been formed to resolve such matters and pronounce judgement on them. In case of a builder becoming insolvent, homebuyers may apply to these authorities for redressal. Buyers may also approach the court to intervene in cases where massive amounts are involved.

        What to do if you can’t pay your home loan EMI

        25 Mar, 2013, 09.22AM IST,

        Buying a house is the most expensive purchase you are likely to make, so you may need help in funding it in the form of a loan. What if you take a home loan, but after some time, find yourself unable to pay the EMIs? There could be several reasons for this, from losing your job to depleting your savings for a medical exigency. Will the bank seize your property if you miss 2-3 mortgage payments? No, not immediately, but if you continue to default for six months, the bank will take over your house.

        Lenders are willing to negotiate

        Attaching a property is the last thing a lender wants to do. Though banks have the power to enforce the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (SARFAESI) to recover non-performing assets without the intervention of a court of law, this is the last step they prefer to take. A bank usually lets one mortgage payment default slip by, but for the next one, it will mail you a reminder to inform you that your payments are late. After three defaults, the bank will send a demand notice, asking you to pay your dues as soon as possible.

        "If the borrower doesn't respond to any of the mails, the bank sends a legal notice through its legal department," says VN Kulkarni, chief counsellor at Abhay Credit Counselling Centre, which is sponsored by the Bank of India. A bank waits for three months before declaring an asset a non-performing one. "After the end of this period, the bank can officially term the home loan an NPA and start the process of recovering the property through the SARFAESI Act," says Kulkarni. Even after invoking the Act, the bank gives the borrower a 2-month notice period to repay the dues.

        "Finally, five months after the first default, the bank sends a notice, stating that it has valued the property for a certain sum and that it will auction the house on a particular date. This is usually set for a month from the date that the bank mails you the auction notice," adds Kulkarni.

        Says Pankaaj Maalde, head, financial planning, "Banks and financial institutions are more interested in recovering the money than in starting legal proceedings as the procedure of attaching and auctioning a house is lengthy and takes time. So, they will pursue the matter for at least six months before taking legal action."

        The last stage is usually when a borrower gets a notice from the Debt Recovery Tribunal (for loan amounts of more than Rs 10 lakh).

        It is compulsory for you to attend the hearing that is set by the tribunal, where you can reach an agreement with the bank. If you are serious about paying your dues and have a good repayment track record, the bank will be willing to offer a leeway.

        The first step that the bank takes is to understand the reason for the default since a home loan is a secured one, with the bank having more control over the asset.

        "If a bank is satisfied that the problem is genuine and that the borrower will start paying the EMI soon, it will be willing to wait for some more time. However, banks take such decisions on a case-to-case basis," says Maalde.

        Adds Rajiv Raj, director of CreditVidya: "Most lenders take a practical view of the situation and understand how critical the house is for the individual. So they will closely interact with the borrower to understand the reason for the financial hardship."

        In fact, a bank will allow you to reclaim your property even after it has seized it, though this has to be done before the auction takes place. Says Kulkarni: "Even if the auction date has been announced, the borrower can come in at any stage and pay the dues to save his property. However, if the bank has incurred any charges for announcing the auction, the borrower will have to pay these."

        What are your options?

        If you've lost your job, but are confident of getting a new one within six months, you can ask the bank to offer you a moratorium for this period. However, if your finances are strained due to some other reason, such as the EMI going up because of a hike in interest rates or increase in personal expenses, ask the bank to restructure your loan. To either reduce the EMI or keep it at the same level despite a higher interest rate, you could increase the loan tenure.

        If you have taken an insurance product, which also provides a cover for loss of job, the insurance company will take care of the EMIs for three months from the date that you lost your job. For instance, ICICI Lombard's Secure Mind Health plan provides a cover for nine major medical illnesses and procedures, death and permanent total disability due to accident and loss of job.

        Under the plan, the insurer will pay three EMIs on any loan that you have taken if you lose your job. The hitch is that the job loss should be due to retrenchment, layoff or health reasons, and not because you were fired. Also, though you can take a cover equivalent to your outstanding loan amount, the policy tenure is only five years. The main reason you need to start paying the EMI again, other than avoiding possession of your home by the bank, is to ensure that your credit score is not adversely affected.

        About 30% of your credit score is based on repayment history and a significant part of this usually depends on how regularly you repay your home loan, if you have taken one. Even one or two missed payments can negatively impact your credit score, and a continuous default will dent it severely, making it difficult to get loans or credit cards in the future. Since this is a dire circumstance, you could dip into your savings and retirement kitty and redeem your investments to pay the EMIs. However, if it seems that the situation may not improve even after six months, a better idea may be to sell the property.

        You can talk to the bank about this and use the sale proceeds to prepay the loan. However, ensure that while the sale negotiations are on, you continue paying the EMIs. This will prove to the bank that you aren't taking it for a ride and will ensure that your credit score doesn't dip.

        Source: What to do if you can’t pay your home loan EMI - The Economic Times
  • Advantages of buying property through bank auctions

    HYDERABAD: Under The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act), lenders like banks and financial institutions are empowered to recover mortgaged properties, without intervention of court, in case of default by the borrower. The properties so recovered are subsequently sold by the bank through Auction to recover their dues. The excess of sales proceeds, if any, are handed over to the defaulter (original property owner).

    How it works
    An auction is one of the common methods adopted by banks to dispose-off such properties. The bank will appoint an authorised officer to conduct the auction. A public notice of auction will be given in the newspaper and on the bank's website.

    The notice will contain information like the details of the property, reserve price (minimum price at which bidding will start), Earnest Money Deposit (EMD), date of inspection, time and place of auction, time and place for collecting the 'tender form', last date for submission of tender form, etc.

    The auction will be conducted in the conventional way, usually at the bank's premises. However, nowadays, online auctions (e-auctions ) are also gaining popularity.

    How to participate in the auction
    Any person desirous of buying acquired property from the bank can participate in the auction. The following are the various steps involved. Get information about properties being auctioned from the notice given in the newspaper or the bank's website.

    Identify the property you would like to bid for and inspect the same in the notice.

    Submit your bid form (tender) by the time given in the notice along with the EMD which is usually 10% of the reserve price. Participate in the auction at the time given in the notice and bid for the property.
    If you are the highest bidder, the property will be allotted to you.

    You will have to deposit 25% of the property price (less EMD) the same day. The balance money will have to be deposited within 15 to 30 days as specified in the notice. Thereafter, you can register the property in your name.

    If you fail to deposit the balance money within the prescribed time, you will not be entitled to get the property and the money deposited earlier will be forfeited.

    If you are not the highest bidder, the EMD will be refunded to you (usually immediately after the auction).

    Perceptions regarding bank auctioned properties
    One of the main attractions of buying a bank auctioned property is that there is a possibility of getting it at a substantial discount to the prevailing market price. This is because the banks are interested in selling of the property at the earliest and are primarily concerned with recovery of their dues which is usually lower that the value of the property. While on paper this may look attractive, in reality it may not be so. This is because, while the reserve price may be low, there could be many bidders competing at the auction (especially in case of e-auctions ) and the highest bid could be close to the market price.

    Secondly, the original owner of the property (defaulter) is entitled to get the surplus from the sales proceeds after the settlement of bank dues. Hence, it is in his interest that the property is sold at higher price. An aggrieved defaulter has the right to approach the Debt Tribunal, challenging the action taken by the bank.

    In such a case, the matter could get stuck in long legal dispute which can go right up to Supreme Court. If the action taken by the bank is found to be wrong, the sale may also be cancelled. The bank needs to keep the original owner (defaulter's ) interest in mind while auctioning the property.

    Another myth regarding bank auctioned properties is that since one is buying the property directly from the bank, the title would be absolutely clear. It should be noted that the properties are sold in auction on 'As is where is basis' and 'As is what is basis'. Hence, such properties are not different from the other properties being financed by the bank and the buyer will get the same title as the original owner (defaulter).

    There is generally a perception that participation in an auction is a cumbersome process and only people with expertise and deep pockets can participate.

    This is not true, especially now, with online auction, even a common man can bid for such properties. Also the ticket size for properties could be as low as ten lakh or even less.

    Another point to be kept in mind is that many times due to financial constraints, the property may not have been properly maintained by the defaulter. Hence the buyer may have to incur substantial expense on repairs and restoration of such property..

    Why such auctions are not very popular with property buyers
    There are some of the other reasons why there is not much participation in such auctions by home buyers. '
    There is limited awareness among retail home buyers.

    Also, through current means of notice in the newspaper (and now on websites) banks are not able to reach out a larger target audience.
    Generally it is seen that there are more of commercial properties/industrial properties and land being auctioned.
    Due to legal and other hassles involved, many banks are reluctant to give loan for purchase of such auctioned properties.
    Bank auctions could be a good avenue for acquiring a property relatively safely and at a good price. However, one needs to put in efforts in thoroughly studying and investigating the various points discussed above and take a well informed decision.

    One of the main attractions of buying a bank auctioned property is getting it at a substantial discount to the prevailing market price remember that there are cases were, due to financial constraints, the property may not have been property maintained by the defaulter, so the buyer might incur substantial expense on repairs and restoration.
  • E Auction of Residential and Commercial by Banks

    Banks have started E-Auction of Residential and commercial due to non-performing assets (NPA) i.e bad loan.
    Let us understand in this thread what is E-Auction properties.

    what are the rules of E-Auctions.
    Are Properties sold by banks through e-auctions are generally offered at a 10 to 15 per cent discount

    Properties sold by banks through e-auctions are generally offered at a 10 to 15 per cent discount

    The intention of organising e-auctions by various banks is to recover the amount due from the borrower

    Ramesh Luhani had been house-hunting for over a year. He had met over a dozen brokers and negotiated with several builders but was not able to strike a good deal until he chanced upon an advertisement by a bank inviting bids for an e-auction. He won the bid and even managed to get a 10% to 15% discount on the property, but there were crucial details that he had overlooked. A month after moving in, he was horrified to find that the previous owner owed the housing society Rs. 5 lakh in dues and that the house had been sub-let, which meant he could not resell the property.

    Luhani’s case cleary proves that properties bought in e-auctions are sold at an ‘as is where is basis’ and most of them are offered at a discounted price of 10% to 15%. Banks are most likely to offer a discount because of the problems associated with non-performing assets (NPA). Though they do their own due-diligence, often the property might have some liabilities which have gone unnoticed.

    At a recent e-auction, the State Bank of India (SBI) was able to sell 124 (out of a total of 350) properties seized in 26 cities worth Rs. 90 to Rs. 100 crore, says Parveen Kumar Malhotra, deputy managing director, Stressed Asset Management Group, SBI. Most of these properties were residential and were bought for end use. The total value of the 350 residential and commercial assets up for sale ranged between Rs. 1,000 and Rs. 1,200 crore.

    These properties were pledged as collateral for housing and other business loans and were taken over by the bank under the Security and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act due to non-payment of pending dues by the borrowers, he explains. The defaulters were given a notice period of 60 days under the Sarfaesi Act, after which the properties were seized and auctioned.

    “If the borrower fails to honour the loan, we start the legal process and repossess the property and later sell it at an e-auction. We have empanelled valuers who keep the construction, location and the area in mind before valuing the property. The plausible value given by them helps us set the reserve price which is disclosed to the bidder beforehand. Those interested in the bid have to deposit an initial amount of 10%to 15% of the value of the property. After verification of their know your customer (KYC) documents, a digital signature is given to them to allow them to participate in the e-auction,” he says.

    But do banks make a profit from e-auctions? The intention of organising an e-auction is to recover the amount due from the borrower and in case the bid amount is more than the outstanding amount, the margin is returned to the borrower.

    Buyers can even avail of a loan for such properties. “While no loan can be availed for the initial deposit, the remaining amount can be taken as a loan from a bank and is like any other housing loan,” he adds.
    “The recent e-auction only goes to prove that there are enough buyers in the market who are waiting to buy ready-to-move-in properties available at the right price. Most of these units have minimal development and approval risks associated with them. Banks generally do the due-diligence for these properties themselves through their asset reconstruction departments or sell the ‘bad loans’ to asset reconstruction companies who derive monetary value out of these ‘dead’ assets. However, they do not give any warranty and the buyer has to bear any unknown risks associated with it,” says Anckur Srivasttava of GenReal Advisers.

    What explains the discounts that are offered in e-auction? Discount is a function of problems associated with such assets. There could be some liabilities associated with the property that is being auctioned. These could include society dues and other liabilities unknown to the lenders. There is always a deficit in information and the discount on offer is due to that. On an average such properties sell at a discount of 15%, says Siby Anthony (CEO- ARC) Edelweiss Financial Services.

    Banks get the premises vacated before they are auctioned and have to get possession of the house through a collector or a district magistrate to avoid any law and order issues.

    Since those bidding for the property in an e-auction are allowed to inspect the property, they should check from the society if there are any dues pending against the property in question. There could be cases of subletting that may not be known to the bank. If that is the case, the buyer who purchases such a property will not be in a position to sell without the tenant’s approval. Sub-tenancy can create its own share of problems. No buyer will know that until he actually goes and resides in that property, he adds.

    Recovery of bank dues
    If the borrower defaults on his loan for six continuous months, he is given a 60-day notice period but if he still fails to repay, banks issue another 30-day notice period. In case the borrower does not pay even during this period, his loan is declared part of the bank’s non-performing asset (NPA). These properties are auctioned to recover losses under the Sarfaesi Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002).

    Properties are valued by a professional valuer before the auction. The valuation is generally conservative as banks only try to recover the amount that is outstanding.

    Banks are not allowed to pocket gains from a distress sale except to recover their dues and if the bid amount is higher than the amount of the loan default, the remaining amount will have to be paid back to the defaulting borrower.

    It is generally a distress sale because the aim behind holding the bid is primarily to recover the partial amount of the property. The market price of the property in the area will always be higher than the value at which the bank had loaned the property.

    Those interested in a property, submit their bid to a bank along with a minimum deposit which is a certain percentage of the reserve price. This amount is refundable in case the bidder decides to withdraw or does not win.

    If the bidder wins, he pays the 25% of the bid amount to confirm the purchase and the remaining amount in the next 10 to 15 days. He can avail a loan for such a property.

    First SBI E-Auctions

    SBI E- Auctions is back Second.
  • Dream home a virtual realty at Rs 1cr and more
  • In the 2nd post above, the article states buyer could not sell as flat was sub-let. How did the bank auction/sell the flat when it was sub-let then?
  • Hi all,

    Please can you guide me , I want to buy auction flat . My agent told me home loan can be possible on auction flat. Is it true.
    Is interest rate are higher for this ? what type of detailing should be done while buying auction flat . please give me check list while buying auction flat.
  • Originally Posted by nitz352
    Hi all,

    Please can you guide me , I want to buy auction flat . My agent told me home loan can be possible on auction flat. Is it true.
    Is interest rate are higher for this ? what type of detailing should be done while buying auction flat . please give me check list while buying auction flat.

    Pl check the society first to see how they react and how the complex is - that is most important, no point running to save few lacs and ending up struggling with the society
  • I had visited the property. Society is good. I had asked watchman regarding that property he told me it is closed last 6 months. Many people come to see it but the door is sealed.
    It also has socirty due upto 5 lacs rupees. Any online site to check the main owner of that flat. & any hidden dues or liabilities.
  • Originally Posted by nitz352
    I had visited the property. Society is good. I had asked watchman regarding that property he told me it is closed last 6 months. Many people come to see it but the door is sealed.
    It also has socirty due upto 5 lacs rupees. Any online site to check the main owner of that flat. & any hidden dues or liabilities.

    One can google and try; atternatively try to get the owner's contact from the society, they normally would have as part of their register or the neighbours. The main question is how much low is it at market rate and is it worth the stress with all the hard earned money
  • It is better to stay away from auction properties as banks/ institutions do not take any responsibility in case any legal dispute happens post sales. In case one is looking at benefit of 10-15% discount available on such properties compared to market rate, today I am pretty sure one can find out properties in open market at these prices only. Then why unnecessarily go for auction property
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  • Did anybody here purchase a property from auction? Would be great if they can share the experience.