Brake on bankruptcy not the courts’ role

Brake on bankruptcy not the courts’ role

Insolvency resolution a vital economic need.

Insolvency courts must get their act together to make the bankruptcy code work for swift resolution of corporate distress. Protracted distress is a major structural impediment that the financial system, companies and investors face, and should be resolved, to get the wheels of the economy moving. Conceptually, the Insolvency and Bankruptcy Code (IBC) is sound, thanks to rules, that have evolved over the last three years. But courts are where the process is getting jammed: the distribution of the proceeds realised under resolution plans, for example, has been disputed in many corporate insolvency resolution processes (CIRP). This has led to prolonged litigation and undue delays in completing the process.

A case in point is the Essar Steel resolution plan: financial creditors have challenged the order by the National Company Law Appellate Tribunal (NCLAT) to treat various classes of creditors equally in the Supreme Court. The apex court should rule on the matter urgently so that banks don’t shy away from putting the bankruptcy code to use and reduce bad loans in their books. Sensibly, recent amendments to the code have put the Committee of Creditors (CoC) in the driver’s seat, brought clarity on the primacy of secured creditors over unsecured creditors in the recovery of dues and set stringent timelines for the resolution and litigation process. The principle that it must be left to the CoC to formulate a resolution plan and also decide the amount that has to be paid to unsecured creditors has merit. Lawmaking is the prerogative of Parliament and bankruptcy courts must stop acting on their own to change provisions in the code. Their remit is limited to operationalising the code.

Data as on June 30 shows that about 54.5% of the CIRPs ended in liquidation compared to about 14% that ended with a resolution plan. The sale of the company as a ‘going concern’ will help subserve the public policy goal to maximise the value of the asset being resolved, provided courts do not hold up the process. Bankruptcy courts must cooperate for speedy completion of CIRPs.