Operational creditors should get a say, vote in insolvency process: SC

Apex court's observations came during a hearing challenging validity of IBC

Operational creditors of companies undergoing the corporate insolvency resolution process should have a say in the committee of creditors (CoC) and get voting rights proportional to the debt owed to them, the Supreme Court observed on Thursday. 

A two-judge Bench of Justice Rohinton Fali Nariman and Justice Navin Sinha asked the government to mull on the issues raised by operational creditors and get back to the court with an answer by the first week of January 2019, when it will next hear the matter. The two-judge Bench is hearing a bunch of petitions of nearly 40 companies and individuals challenging the validity of the Insolvency and Bankruptcy Code of 2016 (IBC).

Companies such as Swiss Ribbons, Shivam Water Treaters, and Ganesh Prasad Pandey, an individual petitioner, have challenged various provisions of the IBC such as Sections 7, 12 and 29. The petitioners have listed discriminatory treatment given to a certain class of operational creditors and alleged that the IBC was unfair as it was protecting the rights of only financial creditors.

Section 7 of the IBC deals with the initiation of corporate insolvency resolution process of a company based on a petition moved by the financial creditor. It mandates that the adjudicating authority shall, within 14 days of the receipt of such an application moved by the financial creditor, ascertain the existence of default, either from publicly available data or from evidence furnished by the petitioner. Section 12 of the IBC prescribes a time limit for completion of insolvency process and mandates that the insolvency process of a company shall be completed within 180 days from the date of admission of application to initiate the process. 

Section 29, which defines related persons and companies, is perhaps the biggest bone of contention for the petitioners. This provision of the IBC, brought in by the government via an amendment made in January this year, defines persons not eligible to be resolution applicant. Among other things, the provision says that a resolution applicant shall be eligible to bid for a company or person undergoing insolvency only if the person is an undischarged insolvent, a wilful defaulter under the Reserve Bank of India guidelines, is a promoter, or a party related to the promoter and has been convicted by a court of law for any offence punishable with imprisonment of two years or more. 

Responding to allegations of unfair treatment meted to operational creditors, the government said that the aim of the IBC was not to only help financial creditors but to also arrive at a speedy resolution of the debt. 

Though the government, in its submissions on Thursday, accepted the need to fine-tune certain provisions of IBC, it has voiced its concern about the petitioners seeking to remove the Bill overall. In its arguments, led by Attorney General K K Venugopal, the government has said that removing the Bill entirely will place defaulting companies completely out of the purview of the law, which was not desirable.

"The speed at which resolution can be brought by the help of IBC is excellent. Else, the case can go on for years," Venugopal told the court, adding that non-performing assets worth Rs 12 trillion were under the purview of IBC.

The government has otherwise also maintained that it was due to the fear of IBC that public sector banks were expecting to recover loans worth Rs 1.8 trillion in the current financial year, compared to Rs 745 billion in the previous financial year.