More clarity on financial creditors, at long last

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July 19, 2019 3:16 AM

It is unfortunate it took so long to clarify something as basic as the rights of financial creditors; up to courts now

IBC recovery, Financial creditor, NCLAT, industry news, NCLT, IBC, Supreme Court, Insolvency and Bankruptcy CodeAlso, the recent NCLT decision to allow provident funds to recover their dues from IL&FS ahead of others violates the IBC.

The government has done extremely well to come up with amendments to the IBC (Insolvency and Bankruptcy Code) in quick time. The changes are a response to the NCLAT which ruled, in the Essar Steel case, that the Committee of Creditors (CoC) doesn’t have the last word when it comes to distributing the recoveries between themselves and operational creditors. It pruned the financial creditors’ share of the recoveries to 60% from 90%. The key change ratified by the Cabinet will give the CoC the final say on how the spoils would be shared after the resolution of a stressed asset; the CoC will keep in mind commercial considerations while weighing in on the quantum of funds to be given to operational creditors. Moreover, if the CoC believes a company cannot be revived, it can opt for liquidation immediately rather than wait out the entire resolution process.

Operational creditors will, at the very least, get an amount based on the liquidation value. This time around, the government must ensure the necessary safeguards are built in and that there is no room whatsoever for any ambiguity. This newspaper has argued, financial creditors must get top billing when it comes to sharing the recoveries, else the sanctity of secured debt would be seriously eroded. This is not to say the operational creditors should be done out of a fair share, but they can, by no means, get an equal share. Already, equating home buyers with financial creditors is likely to result in disagreements on various issues, thwarting the resolution process altogether.

Also, the recent NCLT decision to allow provident funds to recover their dues from IL&FS ahead of others violates the IBC. It is true the money belongs to small savers, but that cannot be a reason to dislodge secured lenders from their top position. Rulings cannot be coloured by socialist thinking, these are business and commercial decisions. After all, it can be argued, the health and strength of banks is crucial for the economy which, in turn, is important for the common man. Indeed, how badly the large loan losses of lenders have impacted credit flow these last few years is now well documented. If secured lenders are not sure of their ability to recover their dues, despite having the necessary collateral, they will be compelled to price loans irrationally by building in huge risk premia. That will make loans expensive and out of reach of borrowers large and small; indeed, businesses will become unviable. The world over, secured creditors rank ahead of unsecured creditors in the repayment hierarchy.

Hopefully, the Supreme Court will buy into the clarification on the status of lenders offered by the government and not insist the changes become law before they are applied. Should the apex court not rule in favour of the banks, when hearings in the Essar Steel case kick off early next week, it would be a big blow to the lenders—not just to their finances but also to their stature. Legal experts have pointed out the court can take cognisance of the clarifications and allow the financial creditors the bigger share of the recoveries, acknowledging the intent of the legislature. NCLAT’s interpretation of the law has been somewhat socialist and whatever the compulsions of a developing economy, this view must not prevail. Else, it will deal a big blow to commerce and industry.The courts have been slow in disposing of cases which is why the 330-day deadline for closure of the process, inclusive of litigation, is a necessary rule.

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