The government had in October 2019 announced its intention to bring in the distribution formula, stung by an NCLAT order that had trimmed financial creditors’ share of the recovery in the Essar Steel case from 90% to 60%, and raised the pie of operational creditors.
The government has dropped its plan to firm up a formula to distribute resolution proceeds under the Insolvency and Bankruptcy Code (IBC) and reduce the committee of creditors’ (CoC) remit on the disbursement of funds. The decision comes amid fears that it could lead to further litigations on the appropriateness of any such formula and delay resolutions, a senior government official told FE.
As such, the resolution of close to a third of 1,961 ongoing insolvency cases has been dragging on beyond the mandatory 270 days, primarily due to legal hassles. The government had in October 2019 announced its intention to bring in the distribution formula, stung by an NCLAT order that had trimmed financial creditors’ share of the recovery in the Essar Steel case from 90% to 60%, and raised the pie of operational creditors.
This went against the very legislative intent of the IBC that had enshrined greater protection to financial creditors (than the operational ones), recognising the secured nature of their debt. The government was then forced to promulgate an ordinance to further reinforce the authority of financial creditors who comprise the CoC.
Subsequently, the Supreme Court, too, endorsed the CoC’s remit and paved the way for ArcelorMittal’s Rs 42,000-crore acquisition of Essar Steel.
“Financial creditors’ rights are adequately protected now, with solid legal backing. At the same time, operational creditor’s rights, too, have been legitimised in the IBC. So, there is a rethink over whether to come out with a formula, especially when the law is getting settled. It’s not necessary now,” the official said.
Another source says there is a fear that defaulters may use any such move as an excuse to go into litigations in ongoing cases. As such, the defaulting promoters’ dogged pursuit to hold on to their insolvent companies using every trick in the book have inordinately delayed the resolution of major cases, from Essar Steel to Bhushan Steel. This has cast a shadow over the IBC that promises the time-bound resolution of stressed assets.
The Ordinance in December 2019, based on a clutch of amendments, was also aimed at making the resolution/liquidation process faster and also remove ambiguities, if any, that might have resulted in various NCLT/NCLAT benches giving rulings that were divergent and even went against the spirit of the legislation.
Source: Financial Express