New Delhi: The government’s proposed amendments to the Insolvency and Bankruptcy Code are likely to strengthen the position of banks who have lent to now-defunct or stressed companies.
The cabinet Wednesday approved a slew of amendments that seek to address some adverse rulings by tribunals, which sought to weaken the position of secured financial creditors like banks, who lent to companies against an asset or collateral.
The amendments also seek to make the insolvency process more time-bound and address the loopholes in the law to make the process more effective. The cabinet has approved an overall limit of 330 days for the process, including litigation and other judicial processes.
Another amendment seeks to include the commercial consideration in a resolution plan within the powers of the committee of creditors. ‘Committee of creditors’ includes financial creditors like banks.
Will it affect the Essar Steel case?
It, however, remains to be seen if this amendment will be retrospective and have any impact on the Essar Steel case.
Essar Steel — one of the 12 companies on the first list of defaulters identified by the Reserve Bank of India to be resolved under the IBC — is yet to see a final resolution despite being admitted to the National Company Law Tribunal for more than 550 days.
The latest twist in the long-drawn saga was a ruling of the NCLT that sought to treat operational and financial creditors at par, and said the committee of creditors cannot decide on the distribution of the proceeds. This saw the banks approaching the Supreme Court.
Also read: Essar insolvency ruling is a big blow to Modi govt’s signature reform
What are the proposed amendments?
One amendment cleared by the cabinet seeks to strengthen the position of financial creditors, while another seeks to reverse an order that had sought to provide the dissenting unsecured financial creditors and operational creditors fair and equitable treatment in the resolution process.
The proposed amendment states that dissenting financial creditors and operational creditors will get at least the amount equivalent to what they would have received if the company would have been sent to liquidation.
To be sure, the amount that can be received by such creditors can even be nil if the company is set to liquidation, as most of the amount is paid out to financial creditors.
The amendments also propose that votes of all the financial creditors will be cast in line with the decision taken by the majority of them.
‘Amendments welcome’
Sanjeev Krishan, partner & leader — PE & Deals at PwC India, said the amendments to the IBC are welcome, “specifically the clarity around process timelines, and the clarity around the binding nature of the proposed resolution vis-à-vis the central, state and local governments”.
He added that it appears that the position of the financial creditors will be strengthened once the amendments go through.
New Delhi-based advocate Deepak Joshi said the proposed amendments are a win-win for banks, but are clearly contrary to the some of the recent tribunal rulings.
“The amendment gives the power to the committee of creditors to decide on and approve the distribution of the proceeds as proposed by the resolution applicant, but only where a specific resolution plan has been approved,” he said.
“There have been instances where the distribution plan is not proposed and only an overall package is approved. It remains to be seen from the language of the amendment how this will play out.”
Also read: How SC upholding Insolvency and Bankruptcy Code will speed up settlement of cases