Insolvency and Bankruptcy Code passes Supreme Court test; setback to defaulters

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Published: January 25, 2019 5:40:23 PM

Supreme Court on Friday upheld the Insolvency & Bankruptcy Code’s constitutional validity in its ‘entirety’, and rejected petitions challenging the bankruptcy laws, in a major setback to defaulting promoters hoping for a chance to remain in control of their firms.

Upper caste reservationSupreme Court on Friday upheld the Insolvency & Bankruptcy Code’s constitutional validity in its ‘entirety.’

Supreme Court on Friday upheld the Insolvency & Bankruptcy Code’s constitutional validity in its ‘entirety’, and rejected petitions challenging the bankruptcy laws, in a major setback to defaulting promoters hoping for a chance to remain in control of their firms.

According to lawyers, the latest ruling is expected to aid banks in recovering dues from bankrupt firms mired in litigation. “Supreme Court’s upholding of IBC will add necessary certainty by way of long term clarity for all stakeholders,” Cyril Shroff, managing partner at the law firm Cyril Amarchand Mangaldas told Reuters. The move would significantly boost investor confidence and effectively enhance participation, he said.

The ruling, made by a two-judge bench, is seen as a major blow for promoters of debt-ridden companies such as Essar Steel, which owes about Rs 50,800 crores to lenders. The National Company Law Tribunal — the bankruptcy tribunal — is expected to give its decision on the Essar Steel case by 31 January, Reuters reported citing lawyers.

IBC has proved to be a masterstroke, as the average recovery by banks based on the amount filed through the Insolvency and Bankruptcy Code was 41.3% in FY18 against 12.4% through other mechanisms such as SARFAESI Act, Debt Recovery Tribunals and Lok Adalats, a recent Reserve Bank of India noted.

Banks and other financial creditors managed to recover around Rs 4,900 crore from 21 accounts for which resolution plans were approved under IBC in FY18. As a percentage of their claims that were finally admitted by NCLTs, the recovery was even higher — 49.6% of Rs 9,900 crore.

“Recovery of stressed assets improved during 2017-18 through the IBC, 2016 and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act, 2002, RBI said in the report. Apart from efforts undertaken by the banks for speedier recovery, amending the SARFAESI Act to bring in a provision of three months’ imprisonment in case the borrower does not provide asset details and for the lender to get possession of mortgaged property within 30 days, may have contributed to better recovery, noted the report.

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