IBC Bill: Lok Sabha clears amendments to strengthen financial creditors’ rights

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The amendments also give lenders explicit power over the distribution of resolution proceeds of toxic assets.

The Lok Sabha on Thursday approved amendments to the Insolvency and Bankruptcy Code (IBC), explicitly endorsing greater rights for financial creditors than operational ones and fixing the period to complete the resolution process – including litigation – of a stressed firm at 330 days to cut delays.

The amendments also give lenders explicit power over the distribution of resolution proceeds of toxic assets. Since the Rajya Sabha has already cleared the IBC (Amendment) Bill 2019, it will now be made into law after the Presidential assent.

Replying to a debate on the Bill in the Rajya Sabha earlier this week, finance minister Nirmala Sitharaman had referred to the Essar Steel case (where the financial and operational creditors were treated at par by the NCLAT) and said the latest amendments were in response to events that eroded legislative intent of the IBC. The appellate tribunal had trimmed lenders’ share of the recovery from 90% of their admitted claims to 60%. The government was amending IBC as “very serious interpretative problems were coming,” she had said.

On Thursday, the minister reiterated in the Lok Sabha that the changes were aimed at bringing more clarity on key IBC provisions and ensuring timely resolution. Liquidation was not the sole agenda of the bankruptcy code, she added.

To expedite the insolvency process, the amendments also fix a firm timeline of 330 days for resolving cases. Currently, while the IBC allows a maximum of 270 days for resolution to be over, it doesn’t set any timeframe to complete the litigation process, resulting in several high-profile cases, including Essar Steel, dragging on for months together.

According to another amendment cleared by the Cabinet, financial creditors who have not voted for a resolution plan that is approved by a 66% majority and operational creditors will get the resolution proceeds or the liquidation value, whichever is higher.

“This will have retrospective effect where the resolution plan has not attained finality or has been appealed against,” the government had said earlier.

This means the Essar Steel case will be covered under it and the amendments will help secured creditors, led by State Bank of India. They have challenged the NCLAT ruling in the Supreme Court.

As per the amendments, at the time of its constitution, the CoC will also be empowered to decide on the liquidation of a stressed company (if there is no case for a revival of it), instead of waiting for months to entertain resolution plans for it.

Analysts say as per the amendments, votes of financial creditors like homebuyers will be cast “in accordance with the decision approved by the highest voting share (over 50%) of such financial creditors”.

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