IBC process: Resolution and distribution of funds may be separated

IBC amendments likely in the Budget Session, MCA also rethinking priority given to govt dues in the waterfall mechanism

The government is considering an amendment to the Insolvency and Bankruptcy Code (IBC) to separate the process of resolution of a bankrupt firm from the distribution of funds received from the successful bidder to enable a faster takeover of the distressed company, a senior government official told Business Standard.

“In many cases the successful bidder is unable to take over the company because of disputes regarding the distribution of funds. Right now the whole plan goes as one but it is being suggested that we look at it in two parts,” the official said.

The corporate affairs ministry is rethinking the lower priority currently given to government dues in the IBC under the waterfall mechanism. The IBC places secured lenders at the top of the waterfall mechanism, followed by employees and operational creditors. Fourth come government dues.

“There is a suggestion that the government should also get something out of the resolution process, which is not happening now. We are looking into it,” the official added.

The amendments needed to the IBC were discussed in a meeting of a colloquium earlier this week. The meeting was attended by officials of the Insolvency and Bankruptcy Board of India (IBBI) and Reserve Bank of India, resolution professionals (RPs), bankers and judges of the National Company Law Tribunal. The amendment Bill is likely to be placed before Parliament next year in the Budget Session. Some of the changes, however, may be made through alterations in rules as well.

The separation of resolution and distribution will be done by retaining the service of the RP beyond the approval of the resolution plan.

“The RP and the committee of creditors can decide the details of distribution as a subsequent activity after the resolution plan has been approved,” the official said.

Industry experts say while handover to the successful bidder has not been delayed, litigation by creditors can lead to problems for the winning bidder.

“Some creditors, in order to get a bigger share, can arm-twist the bidder to give more money. For example, they can get an injunction on the corporate insolvency process, which would derail the plan,” said Anshul Jain, partner, PwC India.

The data released by the IBBI shows financial creditors have recovered 32.95 per cent of their claims in 553 corporate insolvency processes that were resolved till September this year. The IBBI said this only reflected the extent of value erosion by the time the debtor entered the resolution process.

“Yet it is the highest among all options available to creditors for recovery. Resolution plans on average are yielding 84 per cent of the fair value of the corporate debtors,” the IBBI said.