Govt clears changes to insolvency law; secured lenders to get preference

In a big relief for banks, the government is bringing in multiple reforms to the three-year-old Insolvency and Bankruptcy Code (IBC), providing clarity about preference to secured lenders over operational creditors, to be applicable retrospectively; strict timelines for the resolution and litigation process; and powers of the committee of creditors (CoC).

Lenders and legal experts say that the amendments, especially regarding the treatment of operational creditors, will help end the uncertainty around recovery for the financial creditors of Essar Steel.

“The amendments aim to fill critical gaps in the Code and clarify the intent of the law,” Union minister Piyush Goyal said during the Cabinet briefing on Wednesday.

Addressing one of the biggest criticisms of the IBC, the Cabinet also approved setting strict timelines for the corporate insolvency resolution process. From the earlier time limit of 270 days set only for the CoC to approve the plan, the government has extended the deadline to 330 days including the litigation and judicial process.

A senior State Bank of India (SBI) official said the bank would pursue its petition against a National Company Law Appellate Tribunal (NCLAT) ruling in the Essar Steel case, in the Supreme Court. “An amendment doesn’t make it a law immediately. Hopefully, the SC will take cognizance of today's amendment,” the official said. The plea will come up for hearing on July 22.

A lender to Essar Steel said the move should plug the gaps in the insolvency process for Essar since it would apply retrospectively. “The amendment covers two important aspects, that Section 53 can be applied and it would have retrospective effect where the resolution plan has not attained finality or has been appealed against. Also, it clarifies that commercial consideration in the matter of distribution proposed in resolution plan is within the powers of CoC,” the lender said.

The Cabinet decision comes days after an NCLAT ruling, seeking to put different classes of creditors on a par, said since it (Essar) was not a distribution of assets from the proceeds of sale of liquidation, the resolution applicant could not take advantage of Section 53 to determine the manner in which distribution of the proposed upfront payment was to be made.

Anshul Jain, partner, PwC, said, “This is a classic example where tribunals are taking different views of interpreting laws, and law is catching up so fast that appellate authority (the Supreme Court) is not getting a chance to review its decision.” 

The Cabinet decided that a specific provision would be added to the IBC saying all dissenting financial creditors and operational creditors would receive an amount not less than the liquidation value of the corporate debtor or the amount in accordance with Section 53 of the Code – whichever is higher. Section 53 refers to a waterfall mechanism for distribution of assets in the event of liquidation.

Key amendments

| Dissenting financial creditors and operational creditors to accept liquidation value or sum offered in the resolution plan
| Overall deadline increased to 330 days, including litigation period
| Commercial consideration to drive distribution of sums realised, and within the powers of CoC
| Liquidation after formation of CoC but before information memorandum's preparation gets nod
| Comprehensive restructuring, including M&A, as part of the resolution plan allowed
| Approved resolution plan will be binding on central and state government authorities