Changes aimed at faster resolution, follow NCLAT Essar Steel decision; boost to homebuyers.
The cabinet approved key changes in the Insolvency and Bankruptcy Code (IBC) aimed at restricting the resolution process to 330 days, including time for litigation, and ensuring the primacy of financial creditors over operational ones in case of recoveries. This clarifies ambiguities that had arisen following a recent ruling by the National Company Law Appellate Tribunal (NCLAT) in the Essar Steel resolution case. Homebuyers have also been given a stronger voice in the bankruptcy resolution plan of developers that haven’t delivered projects. The amendments will need to be approved by Parliament and may be introduced in the current session. Among the seven amendments approved by the cabinet on Wednesday, a key change retroactively clarifies an IBC provision to put the committee of creditors (CoC) in driver’s seat.
CoC to Decide on Distribution
The CoC will have the power to take commercial decisions on distribution of funds to various classes of creditors. Operational and unsecured financial creditors need not be treated on par with secured financial creditors. The “cabinet has approved changes to the IBC,” information and broadcasting minister Prakash Javadekar said Wednesday. The NCLAT had modified the Rs 42,000-crore ArcelorMittal resolution plan for Essar Steel to treat to treat various classes of creditors equally, providing for 60.7% recovery of claims for all. That prompted the government to push for quick changes to ensure that the spirit of the critical reform programme wasn’t undermined.
“We feel the order passed by the NCLAT is not in accordance with the provisions of the law,” said a government official. The order has been challenged in the Supreme Court by Essar Steel’s financial creditors, which had been set to recover around 92% of their claims under the resolution plan that had been approved by the National Company Law Tribunal (NCLT). According to the official, the government will also explain the intent of the IBC before the Supreme Court and clarify that operational creditors and unsecured financial creditors need not be treated equal to secured financial creditors for a resolution plan to be considered fair and equitable. The official added that the proposed amendments make it clear that the IBC requires that creditors are entitled to receive at least as much of the proceeds of a successful resolution plan as they would receive if the proceeds were to be distributed according to priority of payments set out during liquidation of a company. Under the IBC’s so-called waterfall mechanism, during liquidation debts to secured financial creditors and workmen are to be paid fully before payments to unsecured financial creditors and operational creditors.
FASTER RESOLUTION
The amendments should help free up resolution processes that have got stuck for various reasons. “The approval of the cabinet for IBC amendments are heartening and will clear several roadblocks currently holding up resolution under the law – in particular vesting with the CoC the ability to take into account commercial considerations in respect of distributions under the resolution plan, making the resolution plan binding on all stakeholders and comprehensive restructuring through schemes will help foster flagging investor confidence,” said Cyril Shroff, managing partner, Cyril AmarchandMangaldas. As per the changes cleared by the cabinet on Wednesday, a resolution plan will be binding on all stakeholders including the Centre, state governments and local authority to which dues may be owed. The government wants to keep the IBC process from dragging on indefinitely because of litigation. It wants to ensure that corporate insolvency resolution process (CIRP) is completed in 330 days, inclusive of any litigation. The current timeline of 270 days has been extended in a number of cases with lawyers seeking to exclude time taken for litigation. Companies will have to be sent for liquidation if the resolution process breaches this 330-day window.
BOOST TO HOMEBUYERS
The government has also addressed a longstanding demand of homebuyers who have filed cases against builders for non-delivery of flats. A proposed amendment will ensure that a majority vote from creditors such as homebuyers will be counted as a 100% vote from that class of creditors in favour of or against a resolution plan. For example, if out of 100 homebuyers, half or more of those present and voting back a resolution plan, then all homebuyers would be considered to have voted for it. This is likely to impact insolvency cases such as that of JaypeeInfratech.
The government has also sought to reduce delays at the beginning of insolvency proceedings initiated by financial creditors by requiring NCLT benches to explain why an application has not been admitted or rejected within 14 days. The proposed amendments also seek to enhance the flexibility available to applicants by clarifying that a resolution plan may include corporate restructuring programmes such as mergers, demerge and amalgamation. The government official cited above also said that such restructuring would not come under the scanner of tax authorities on the suspicion of manipulation for the purposes of evasion.
