Companies' suppliers cannot be burdened with 'overly restrictive conditions' under IBC: Parl panel

A parliamentary panel on Wednesday said suppliers to a company cannot be burdened with "overly restrictive conditions" in the hope of a probable revival under the Insolvency and Bankruptcy Code, as it presented the report on proposed amendments to the law.

The Standing Committee on Finance, chaired by BJP member Jayant Sinha, tabled the report on the IBC (Second Amendment) Bill, 2019. It was referred to the panel on December 23.

While noting that the Code is a transformational piece of legislation, the panel also expressed hope that the recovery percentage increases significantly in the near future.

Out of around Rs 8.4 lakh crore claims, the realisable amount is about Rs 3.57 lakh crore, which is 43 per cent of the total claims under the Code.

One of the proposed amendments pertain to supply of goods and services to protect a company as a going concern during the insolvency resolution period.

The committee said it is concerned that the intent behind this proposed amendment may turn into a case of over-regulation of suppliers, particularly MSME suppliers.

"The committee feel that just to make the IBC process smoother and in hope of a probable revival, suppliers cannot be burdened with overly restrictive conditions," as per the report.

According to the committee, market forces should resolve whether a supplier decides to supply to a corporate debtor, as there are limited resources available and each supplier has a limited capacity.

The capacity needs to be channelised and allocated in the best interest of the economy and not directed solely towards keeping the corporate debtor alive, the report noted.

Further, it emphasised that the payments due to micro, small and medium enterprises (MSMEs), who are operational creditors not included in the committee of creditors (CoC), should be ensured on priority in the course of the resolution process itself before the liquidation stage kicks in.

"The committee would therefore recommend that the Clause 5(b) (2A) should accordingly be deleted," it added.

The clause broadly refers to the supply of goods or services that a resolution professional considers critical to manage the operations of a corporate debtor as a going concern, should not be terminated during the moratorium period. This would be subject to certain the conditions.

Meanwhile, the panel said a much more strategic approach to strengthening the insolvency framework is required and that it intends to conduct further hearings in this regard.