The Rajya Sabha on Monday cleared the amendments to the Insolvency and Bankruptcy Code (IBC), offering clarity about preference to secured financial creditors over operational ones and giving lenders explicit power over distribution of resolution proceeds of stressed companies.
Referring to the Essar Steel case (where the financial and operational creditors were treated at par by the NCLAT), finance minister Nirmala Sitharaman said the latest amendments are in response to events that eroded legislative intent of the IBC. The appellate tribunal had trimmed lenders’ share of the recovery from 90% to 60%. The government is amending IBC as “very serious interpretative problems were coming”, Sitharaman said while replying to a debate on the IBC (Amendment) Bill 2019.
To reduce delay, the amendments also fix a firm timeline of 330 days for resolving cases. Currently, while the IBC allows a maximum of 270 days for resolution to be over, it doesn’t set any timeframe to complete the litigation process, resulting in several high-profile cases, including Essar Steel, dragging on for months together.
According to another amendment approved by the Cabinet, financial creditors who have not voted for a resolution plan that is approved by a 66% majority and operational creditors will get the resolution proceeds or the liquidation value, whichever is higher. “This will have retrospective effect where the resolution plan has not attained finality or has been appealed against,” the government had said earlier. This means the Essar case would be covered under it.
At the time of its constitution, the CoC will also be empowered to decide on the liquidation of a stressed company (if there is no case for a revival of it), instead of waiting for months to entertain resolution plans for it. Analysts say as per the amendments, votes of financial creditors like homebuyers will be cast “in accordance with the decision approved by the highest voting share (over 50%) of such financial creditors”.
She quoted a Supreme Court judgment to say that defaulters’ paradise is lost through IBC.
Amendments are clarificatory in nature and the “intent of the government is maximisation of value while simultaneously adhering to strict timelines,” the minister said in the Rajya Sabha.
Financial creditors are on average getting 43% of dues as against getting nothing if defaulting companies were never taken up under IBC, she said.