IBC changes to aid faster debt resolution

The Union Cabinet has approved seven amendments to the Insolvency and Bankruptcy Code (IBC) 2016, which will help the bankers to solve faster the cases such as Essar Steel, which is languishing in the bankruptcy courts for over 700 days.

The amendments enhance the power of the Committee of Creditors (CoC), or the lenders, while resolving non-performing assets (NPAs) at the National Company Law Tribunal (NCLT). The amendments will effectively check the rulings of bankruptcy courts that undermine the power of the creditors, or bankers, and give a longer period of 330 days to resolve the debt.

Dissenting creditors and operational creditors have to accept the liquidation value or the sum offered in the resolution plan, whichever is higher.

The Code gives the highest priority to financial creditors in the hierarchy of payments. This will help in preventing the National Company Law Appellate Tribunal ruling in the Essar Steel case, where the court said about 40% of the proceeds should go to the operational creditors. The amendments explicitly defined the rights of the financial creditors in the CoC, operational creditors and the unsecured creditors.

"Strengthening of powers of CoC on distribution of resolution proceeds – while the fineprint is awaited – is expected to lend clarity after the NCLAT decision to distribute 40% of the proceeds to operational creditors even though CoC has not approved the same. Specific clarity that the resolution plan is binding on all governments and local authorities – so a provision in the resolution plan providing for payment and waiver of tax and other statutory dues will be binding," Mehul Bheda, partner, Dhruva Advisors LLP, said.

The amendments have increased the resolution period to 330 days as the maximum time allowed for bankruptcy resolution, including for litigation and other judicial processes. This is higher than the present period of 270 days for clearing a resolution plan, but courts have taken a lenient approach of excluding the time spent on legal challenges by various parties from the timeframe.

"Commercial consideration will drive the distribution of sums realised and within the power of CoC. This is a pivotal amendment and goes to the heart of the IBC and the intent of the legislation to treat financial creditors on a different basis than operational creditors Dissenting creditors and operational creditors to accept the liquidation value or Sum offered in the resolution plan, whichever is higher, again a most pragmatic approach," Uday Bhansali, president, financial advisory at Deloitte India, said. "The new law will reduce a lot of doubt and nervousness amongst potential resolution applicants," Bhansali said.

Another key amendment is to specify that the bankruptcy resolution or liquidation arrived at under the Code is binding on central, state and local governments, to whom the bankrupt firm may owe dues.

"Timeline of 330 days (increased from 270 days) is sacrosanct – it will now be inclusive of time for litigation and other judicial processes. They have also emphasised on the timebound disposal by NCLT at the application stage. This brings back the importance of timebound insolvency resolution and discourages unnecessary litigation," Bheda said.