The Rajya Sabha on Monday approved amendments to India’s bankruptcy law, restoring secured creditors’ priority claims on payouts from the sale or liquidation of insolvent companies.
Not only do the new amendments plug loopholes in the Insolvency and Bankruptcy Code (IBC), which some promoters had used to stall resolution of their bankrupt companies, but the changes also seek to ensure time-bound resolution of insolvency cases.
Replying to the debate in the upper house, finance minister Nirmala Sitharaman said the amendments are a response to the aberrations that crept into the law’s interpretation during the insolvency resolution of Essar Steel Ltd. “The interpretation given by the NCLAT (National Company Law Appellate Tribunal) to the Essar Steel case by trying to treat secured creditors and operational creditors at par was defeating the purpose and the spirit of the act,” Sitharaman said.
The changes will help Essar Steel’s secured creditors, who have challenged in the Supreme Court the NCLAT ruling that operational creditors be treated on a par with financial creditors at the time of settling claims.
“With such serious interpretative problems coming up, it was only incumbent upon the government to come up with such amendments which are clarificatory in nature,” Sitharaman said.
The amendments also mandate a strict 330-day timeline for the insolvency resolution process, including any legal challenges.
IBC currently allows a maximum 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 this time frame.
Once the proposed amendments are cleared by both houses of Parliament, the clock will be ticking even during litigation.
Sitharaman said as the government gains experience, it will be necessary to come up with amendments to the bankruptcy code from time to time as it is a path-breaking legislation.
The finance minister said greater emphasis is being given on the need for a time-bound disposal at the application stage. “The delays during the admission stage itself are worrying. We are emphasizing on timely admission of cases and timely completion of the resolution process,” she said.
The amendments are expected to address the issue of sanctity of timelines of completion of the entire corporate insolvency process. Out of the 12 big accounts initially referred to IBC, five cases are pending for more than 600 days due to continuous litigation by some party or the other. The statutory period of admitting a case is 14 days.
Sitharaman said that as of 30 June, 101 bankruptcy cases were withdrawn, 120 resolved and 475 moved into liquidation. Out of the 475 cases, 349 were referred to the Board for Industrial and Financial Reconstruction (BIFR) or they were sick units before IBC came into force in 2016. “Majority of the cases, which are now under the resolution process, are due to the legacy, which has come from the BIFR stage. So, if BIFR cases are also dealt with now with a certain rapidity, it is because IBC is proving its worth and what could not be achieved through the BIFR is actually being achieved now,” said Sitharaman.
A total of 6,079 cases have been disposed of before admission to the restructuring process amounting to ₹2.84 trillion worth of bad loans, which, Sitharaman said, is a success of IBC. “It means that people realize that if the resolution process starts, they may lose control of the company or the resolution process will impact their credibility,” she said.
Sitharaman said the behavioural change is happening for the good.
“The whole objective is not to kill and finish off. We are actually coming up with resolutions, which can help the unit to take rebirth. So, IBC is actually giving life to them,” she added.
Credit rating agency Moody’s Investors Service on 25 July said India’s proposed bankruptcy code amendments are credit positive for banks. “The proposed amendments aim to improve the code’s effectiveness, and three of the proposals have credit-positive implications for Indian banks,” it said.