A resounding nod

Supreme Court endorses the Insolvency and Bankruptcy Code

On Friday, a two-judge Bench of the Supreme Court cleared the path for the untrammelled functioning of the Insolvency and Bankruptcy Code (IBC). The IBC was enacted in 2016, replacing a host of laws, with the aim to streamline and speed up the resolution process of failed businesses. In particular, the IBC was supposed to provide a quick and efficient way to recover the most value from the assets that turn into bad debts for creditors. The inability of the Indian economy to wrap up a failed enterprise or indeed recover value from such insolvent businesses had been a glaring deficiency for a long time. The IBC was supposed to change that as well as herald a change in borrower behaviour. However, despite strict timelines mandated for the process, the evidence over the past two-odd years showed that the IBC process was getting bogged down in litigation — the original source of the problem in the pre-IBC era. Some of the biggest cases such as Essar Steel, Bhushan Power and Steel Ltd, and Jyoti Structures have been stuck in litigation. As a result, only 5 per cent of India’s Rs 14.5 trillion distressed assets has been resolved. But much of this is likely to change after the Supreme Court’s salutary decision, as it cleared the legal confusion on several key aspects of the IBC.

The apex court was hearing a clutch of petitions that questioned several different aspects of the IBC. One key challenge pertained to Section 29A of the IBC, which bars promoters of defaulting companies (classified as non-performing assets or NPAs) and connected persons from bidding in the eventual auctions. Petitioners had argued that a blanket ban on promoters was not only arbitrary and discriminatory but also undermined a speedy resolution. They also argued that ruling out promoters would lead to lower recoveries and that the retrospective application of this ban was unfair to the erstwhile promoters. The Supreme Court, however, found no fault in the IBC ruling out promoters who had been unable to service their debts. The apex court did not find Section 29A violative of Article 14 of the Constitution, which talks about equality before law. However, the Court did clarify that “related” parties (of the promoter) under Section 29A, which too are barred, would not include those relatives who were not connected with the business activity of the promoter concerned.

The other big aspect where the Supreme Court provided clarity was the differential treatment between financial creditors and operational creditors under Section 53 of the IBC. Here, too, the petitioners argued that the differentiation was violative of Article 14 of the Constitution. However, the Court justified the existing differentiation by making a salient distinction between financial debts, which are secured, and operational debts, which are unsecured. The apex court rightly underscored the relative importance of financial debts as their repayment infuses money back into the economy. The Court pointed out that approximately 3,300 cases have been disposed of in out-of-court settlements with claims amounting to over Rs 1.20 trillion. It said that the amount realised from the resolution process under the IBC was around Rs 60,000 crore, roughly 200 per cent of the liquidation value. The Court has thus provided an emphatic nod in favour of the IBC resolution process that the government had put in place and its decision should be welcomed.