The government came out in support of financial creditors and spelled out concerns over extensive litigation causing undue delays in insolvency proceedings, while introducing the Insolvency and Bankruptcy Code Amendment Bill in the Rajya Sabha on Wednesday.
The statement of object and reasons said the delays due to "extensive litigation" may hamper value maximisation, which goes against the spirit of the Code. The Bill also made a note of suggestions by various stakeholders that "if the creditors were treated on an equal footing, when they have different pre-insolvency entitlements, it would adversely impact the cost and availability of credit".
The Supreme Court on Monday gave a stay order on the recent NCLAT ruling in Essar Steel matter — that sought to put the different of class of creditors on par — had said that since it (Essar) is not a distribution of assets from the proceeds of sale of liquidation, the resolution applicant cannot take advantage of Section 53 to determine the manner in which distribution of the proposed upfront payment is to be made.
Ministry of Corporate Affairs (MCA) also submitted its affidavit batting for the financial creditors in the top court. Going forward with the amendments announced after the Cabinet decision last week specific provision has been added to the IBC saying all dissenting financial creditors and operational creditors will receive an amount not less than the liquidation value of the corporate debtor or the amount in accordance of Section 53 of the code.
The Bill has proposed a time limit of 330 days for completion of the resolution process including the litigation. If the process is not completed within the time frame, the Bill proposed passing “an order requiring the corporate debtor to be liquidated under clause (a) of sub-section (1) of section 33”.
According to legal experts, while the government might have been in an “activist mode” the Bill also seeks to take a guarded step towards respecting a strict separation of powers, by way of the introduction of the memorandum of delegated legislation. “This effectively recognises that the rule making power enshrined in Section 30 of the Code (power to decide manner of payment of debts) would be limited as it is a matter of procedure and administration and thus, indirectly, falls out of the scope and ambit of the Code,” said a legal expert, who did not wish to be named.
The government clarified that there was a need to "ensure that all creditors are treated fairly, without unduly burdening the Adjudicating Authority whose role is to ensure that the resolution plan complies with the provisions of the Code”.
The Bill stated that “views have also been obtained so as to bring clarity on the voting pattern of financial creditors represented by the authorised representative”.
The Bill provides for an explanation in the definition of “resolution plan” to clarify that a resolution plan proposing the insolvency resolution of corporate debtor as a going concern may include the provisions for corporate restructuring, including by way of merger, amalgamation and demerger. The Bill also provides clarity that the Committee of Creditors may take the decision to liquidate the corporate debtor any time after constitution of the Committee of Creditors and before preparation of Information Memorandum.
The IBC amendment bill also clarified that the resolution plan will be binding on all stakeholders, including central and state government or local authority to whom a debt is owed. This is the third tranche of amendments being made to the insolvency and bankruptcy law introduced in May 2016 to create an effective mechanism for dealing with non-performing assets.
The amendments will have to be approved by both houses of Parliament to come into effect.