Unto the breach

Unto the breach

The eight amendments proposed to Bankruptcy Code will plug some loopholes.

The Insolvency and Bankruptcy Code (IBC), which was enacted in May 2016, is a critical link in a chain of steps initiated since 1991 to transition India to a market economy. The first set of reforms lowered entry barriers and thereby expanded sectors such as aviation. The early reforms however didn’t provide for exit options. This led to enormous misallocation of resources and lost opportunities as zombie firms took up scarce resources. IBC is the best possible solution. On Wednesday, the Cabinet approved eight amendments to IBC aiming to safeguard the Code’s underlying spirit.

A key aim of the Code is to induce behavioural change, particularly among promoters. Continued ownership following default of debt obligations is no longer guaranteed. One consequence of this aim is a spate of litigations. Insolvency likely has the single largest body of case laws. Some judicial interpretations seem to create doubt rather than clarify. In others, interpretation appears to run counter to the law’s aim. The resolution process of Essar Steel, where secured creditors have claims of Rs 45,559 crore, has dragged on way past the 270-day deadline as stakeholders mount legal challenges. The latest ruling in this case has created uncertainty for secured creditors.

The aim of the eight amendments is to rectify these challenges by filling gaps in the corporate insolvency resolution framework. NDA has done well to act on it as it’s important to plug loopholes. The majority of amendments strive to ensure deadlines are met. A new deadline of 330 days has been fixed. Also, a simple majority of creditors in favour of a resolution plan is now enough to move things forward. The Cabinet did well to address the anomaly created by the latest ruling on Essar Steel. The Code needs support as it’s an important pillar of a market economy.