Reverse Bankruptcy Framework By the Ministry of Corporate Affairs

GS Paper III Indian Economy

Context:

Reverse bankruptcy framework was first proposed by the Ministry of Corporate Affairs (MCA) in a discussion paper in January. However, even after several industry consultations, MCA has yet to notify the final rules.

The framework Proposed that the insolvency provisions would be applied only on such real estate projects where default has occurred.

Benefits: This would ensure minimum disruption of other projects that are doing well in the same company.
Current Practice: Currently, the Insolvency and Bankruptcy Code (IBC) requires insolvency resolution of a company as a whole and there are situations where because of the default in one project, the Corporate Insolvency Resolution Process (CIRP) is initiated against the entire company.
Challenges in the existing mechanism: This is counterproductive as other solvent projects are also stalled post-commencement. In real estate cases, the default often pertains to specific projects (while other projects continue to do well).
- As per IBBI (Insolvency and Bankruptcy Board of India) data, real estate debtors constitute a major chunk, 21% of all IBC cases. In effect over 1200 real estate cases have been admitted under IBC, which would involve lakhs of home buyers.

In Reverse CIRP, the promoter itself is responsible for infusing the funds into the project and acts as a lender to the concerned project/real estate company (Contrary to CIRP).
Reverse insolvency is a promoter-driven process as it requires the promoters to fund the project to complete the construction and development of projects.
This may lead to conflicts if promoters are disqualified under Section 29A or if a proceeding is initiated against the promoters for related parties or fraudulent transactions.
This contrasts with the normal Insolvency and Bankruptcy Code (IBC) procedure where any default triggers insolvency against the whole company.

The Insolvency and Bankruptcy Code, 2016

Insolvency is a state of financial distress in which a person or business is unable to pay their debts.
A bankruptcy, on the other hand, is an actual court order that depicts how an insolvent person or business will pay off their creditors, or how they will sell their assets in order to make the payments.
The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy.
The CIRP is a redressal mechanism for creditors as per the provisions of the IBC, 2016.
If a corporate entity (debtor) becomes insolvent and commits a default, a financial creditor, an operational creditor or the corporate debtor itself may approach the National Company Law Tribunal (NCLT) – the Adjudicating Authority for insolvency resolution of corporate persons.