Formula on cards to distribute insolvency funds: Corporate Affairs Secy

The government will devise a formula for distribution of funds between financial and operational creditors after the approval of a resolution plan to resolve the ongoing dispute between the two parties, said Corporate Affairs Secretary Injeti Srinivas on Monday.

It may look at increasing the minimum threshold set for triggering the insolvency process from the current level of Rs 1 lakh, according to an executive of a public sector bank (PSB) who was present at a review meeting chaired by Finance Minister Nirmala Sitharaman with PSBs on Monday. Srinivas said the “only problem” between financial and operational creditors during the litigation process in bankruptcy cases remains the amount of recovery that the creditors get. The government is mulling an elaborate formula-based distribution of funds, he added. In the meeting, banks discussed issues related to the Insolvency and Bankruptcy Code (IBC), among other matters. Sources said the government might also nudge banks to take up only big cases, in terms of outstanding dues, to the IBC.

Srinivas said it was not a “happy situation when a good functioning company” was dragged to the National Company Law Tribunal (NCLT) by class borrowers such as homebuyers or debenture holders.

“The whole issue of the system getting overheated and the NCLT Benches being clogged is real,” Injeti said.

Smaller cases, he said, could be settled better outside the purview of the IBC, as the process was rigorous and supervised by courts. In the past three years since the IBC was introduced, 21,000 cases have come for resolution, of which 10,000 have been settled according to government data. Financial creditors can trigger insolvency under Section 7 of the IBC, if the company has defaulted a minimum of Rs 1 lakh.

The IBC, through various amendments, has resolved many issues related to Section 29A, which deals with the ineligibility of promoters and related parties from taking part in the resolution process. But certain other pressing issues remain.

While the Ministry of Corporate Affairs recently amended the Code to clarify that secured financial creditors are superior to operational ones and unsecured lenders, the issue of distribution of funds between different classes of creditors is a matter under litigation in the Supreme Court.

Operational creditors of Essar Steel have raised objection to the amount allocated to them after the resolution process. “Who gets how much is an issue which still needs to be resolved,” Srinivas added.

The MCA is also planning to take steps for making the entire process of the resolution transparent and less litigation-prone. The ministry is examining the possibility where the eligibility of bidders is determined as per the non-financial considerations and thereafter in the second stage those shortlisted are only allowed to bid on an auction platform. A threshold is also likely to be introduced for IBC cases, where a single class of creditors such as homebuyers or debenture holders can trigger insolvency. 

More IBC tweaks underway 

• Govt may nudge banks by prescribing a threshold for taking cases to the IBC
• May hike threshold for operational creditors to take cases to the IBC
• The resolution process may be made more transparent through a bidding process 
• Threshold approach for class buyers in case of large no of buyers
• Formula based distribution of dues to reduce litigation