Clipped from: https://www.thehindubusinessline.com/opinion/editorial/fast-tracking-ibc-resolution/article66446861.ece
Proposed changes in bankruptcy law welcome
Making the bankruptcy law more efficacious | Photo Credit: subodhsathe
The IBC law has been subject to chopping and changing since its inception nearly seven years ago. But the latest round of proposed amendments to expedite resolutions are arguably the most sweeping in scope since the inception of the law in 2016.
The proposed amendments are a response to some basic infirmities in the IBC, whose merits as a creditor-in-control debt resolution model cannot, however, be disputed. These infirmities, broadly speaking, are: delays by lenders in approaching the National Company Law Tribunal with NPA cases, delay by the NCLT in admitting such cases, and delay in the process itself. The salient features of the proposal are: speeding up the admission of cases; a clear framework for out-of-court approaches in order to fast-track resolution; and a new waterfall mechanism where operational creditors could get a better due. It also suggests clubbing defaults in the case of group entities for efficient resolution; and contrarily, ring-fencing unviable parts of a business to arrive at a resolution that is restricted in scope to the affected assets.
With respect to speeding up admissions, the latest proposal seeks to remove the discretionary power of the adjudicating authority (AA) once default has been established by information utility. To ensure fast track resolution, an “informal” out-of-court settlement may be initiated by “unrelated” financial creditors with the AA overseeing the process. The pre-pack insolvency resolution process, introduced for the benefit of MSMEs in the wake of Covid, where the financial creditors cobble a plan and get the court’s nod, is sought to be extended to all entities. However, in pursuing these fast track options, it must be kept in mind that the moratorium on assets may not hold, posing a risk to the going concern. In the case of pre-pack, the debtor remains in possession. Therefore, while expanding the scope of pre-pack it is important to ensure that errant promoters do not benefit.
The law would require tweaking to deal with ‘group resolutions’ where defaults tangled between parent and group companies would have to be seen as one. The principle of separating a defaulting project from the rest has been spelt out specifically with respect to real estate, keeping the interests of home buyers in mind. However, it is as yet unclear how this segregation can be made, except by creating a special purpose vehicle. More detailed rules are called for. Similarly, the proposals rightly suggest that the approval of the resolution plan should be separated from the distribution of proceeds.
To deal with distribution, a new waterfall mechanism has been suggested where the financial creditors will get up to 100 per cent of the liquidation value, while the rest of the proceeds realised on resolution of the debt will be distributed ‘rateably’ between stakeholders. With liquidation value acquiring significance, it will be important to arrive at it credibly. These changes will help IBC deliver on its promise better.