Welcome tweaks to the bankruptcy code

Welcome tweaks to the bankruptcy code

These would improve the resolution process.

The government has done well to approve judicious amendments to the Insolvency and Bankruptcy Code (IBC) to deliver better outcomes. Key changes include clarity on the primacy of secured creditors over unsecured creditors in the recovery of dues, easing the voting rules for homebuyers and setting strict timelines for the resolution and litigation process. This will cut legal delays, help resolve pending cases and motivate banks to put the bankruptcy code to use. The extant code allows the proceeds from liquidation of the company to be distributed first to secured lenders or banks and to pay off workmen’s dues before payments are made to unsecured and operational creditors — under the so-called waterfall mechanism. However, the priority of payments is not crystal clear in a resolution plan that entails sale of the company as a ‘going concern’.

Confusion arose due to an order by the National Company Law Appellate Tribunal (NCLAT) in the Essar Steel resolution to treat various classes of creditors equally. The amendment, to be ratified by Parliament, remedies this flaw. It will help banks recover more dues, clean up their books and boost investment. Henceforth, bankruptcy courts will not have the leeway to deem the provisions of the code, enacted by Parliament, as unfair and act on their own to set out what they think is right. It is fully up to the Parliament to make changes in the IBC, and bankruptcy courts to operationalise it. Putting the Committee of Creditors (CoC) in the driver’s seat is welcome. The Supreme Court must recognise the principle that it must be left to the lenders to design a resolution plan and decide how much to pay unsecured creditors.

Cases have to be admitted fast, and concluded in 330 days. Delays defeat the purpose of IBC. However, the government should provide more human and financial resources to the NCLT, to induct expertise and capacity. Sensibly, the amendments propose that a majority vote from homebuyers, who already are on the CoC, will count as a 100% of their votes on the resolution plan.