A swift response

Govt has moved fast to address IBC problems

Less than a fortnight after the banking and financial system was thrown into turmoil by a decision of the National Company Law Appellate Tribunal (NCLAT) in the Essar Steel case, the Union Cabinet issued a series of amendments to the Insolvency and Bankruptcy Code (IBC) that address some outstanding issues in it. This is a remarkably swift response — not just by the standards of the Indian state but by any objective analysis. The government and the corporate affairs ministry deserve credit for recognising the scale of the problems and moving to address them so quickly.

The NCLAT judgment had, in effect, threatened a core principle of finance: That secured financial creditors get priority over other creditors in the bankruptcy process. The NCLAT had put operational creditors such as suppliers on a par with secured financial creditors such as banks in the distribution of the payoff from ArcelorMittal’s purchase of Essar’s assets, overruling the decision of the committee of creditors (CoC) regarding the distribution. The banks have appealed to the Supreme Court against the NCLAT judgment, but the Cabinet has acted more swiftly, saying that the IBC will be amended to ensure that the CoC will have the right to take decisions on the distribution based on purely commercial considerations. In other words, priority for secured financial creditors is restored. This will come as a relief to the market. Even beyond these specific circumstances, it is gratifying to know that the government is willing to step in with such speed to address problems in the implementation of what is in many ways its landmark legal and financial reform.

The Cabinet has also tightened the time limit requirements for the successful conclusion of the bankruptcy process. The law as it stands requires the process to be completed in 180 days, with a possible 90-day extension. But resolutions of cases are taking far longer — the Essar matter itself blew easily through that timeline, taking almost two years. The problem is that litigation over various aspects of the decisions being taken in the course of the bankruptcy process is not counting towards that 270-day total. The Cabinet’s proposed amendments close this loophole. The government said there would be “a deadline for completion” of the resolution process “within an overall limit of 330 days, including ligation and other judicial processes”. There has been widespread concern that the IBC is not working at the speed that has been promised, and the government has attempted to address those concerns.

But that is only part of the story. The underlying reasons why the 270-day limit is being breached also need to be given attention. In particular, there is a severe shortage of capacity in the bankruptcy process. Even when the law was designed, this was foreseen. The original draft of the law provided for a cadre of resolution professionals to ease this capacity constraint. It is not too late for the government to act in that direction. Creating such capacity would further aid implementing this vital and path-breaking reform.