18 July 2019: Stung by the NCLAT orders that have trimmed lenders’ say on the recovery from what is envisaged in the insolvency code, the government has reinforced their authority in deciding how to disburse the proceeds under the insolvency process. Essentially, this would mean financial creditors’ precedence over other claimants in laying hands on the recovered amounts would be cemented and the tribunals would find it impossible to upset the order of distribution prescribed in the code.
The Cabinet on Wednesday approved a clutch of amendments to the Insolvency and Bankruptcy Code with an intent to make the resolution/liquidation process faster and also remove ambiguities, if any, that might have resulted in various NCLT/NCLAT benches giving rulings that were divergent and even went against the spirit of the legislation.
“Inclusion of commercial consideration in the manner of distribution proposed in resolution plan (will be) within the powers of the committee of creditors (CoC),” a government spokesperson tweeted after the Cabinet meeting. The CoC comprises only financial creditors.
The government thinks that the appellate tribunal’s order, asking secured lenders of Essar Steel to disburse a larger share of recoveries to operational creditors than what was decided by the CoC, was clearly against the intent of the IBC.
The NCLAT had trimmed lenders’ share of the recovery from 90% to 60%. “The proposed amendment clarifies that the CoC has the discretion to decide on the amount that operational creditors will get, with safeguards so that certain sum is indeed received by them,” said Sapan Gupta, national practice head (banking and finance), at Shardul Amarchand Mangaldas.
Sources said the government is also considering making a submission explicitly stating the intent of the law before the Supreme Court where the Essar Steel ruling has been challenged by the CoC led by State Bank of India. The idea is to ensure that the NCLAT verdict doesn’t set a precedent and undermine the CoC’s say on the distribution of recovery proceeds. Analysts say any such government intervention will potentially alter the apex court’s verdict in favour of banks in the Essar Steel case.
To cut delays, the amendments have mandated that the entire resolution process, including litigation, will have to be completed in 330 days. Currently, while the IBC allows a maximum of 270 days for resolution to be over, it doesn’t set any time-frame to complete the litigation process, resulting in several high-profile cases, including Essar Steel, dragging on months together.
At the time of its constitution, the CoC will also be empowered to decide on the liquidation of a stressed company (if there is no case for a revival of it), instead of waiting for months to entertain resolution plans for it. Analyst say as per the amendments, votes of financial creditors like home buyers will be cast “in accordance with the decision approved by the highest voting share (over 50%) of such financial creditors”.
“The law (IBC) is already very, very clear. But if there is any further clarity required to make it even more explicit, the government is open to doing that as well,” an official source had told FE earlier in the day. There should be no confusion that operational creditors were not on a par with the secured financial ones, he added.
While approving ArcelorMittal’s Rs 42,000-crore offer for Essar Steel, the NCLAT recently modified the resolution plan cleared by the CoC, holding that secured creditors will get only Rs 30,030 crore, or 60.7% of their (admitted) claims of Rs 45,559 crore, and the rest will go to operational creditors, treating the latter on a par with financial creditors. Operational creditors had made total claims of Rs 19,719 crore and could get Rs 11,969 crore, or 59.6%, as per the NCLAT’s order.
The earlier plan approved by the lenders had provided for 90% recovery for all financial creditors and around 20.5% for operational creditors (with dues of more than Rs 1 crore), based on their claims admitted by the adjudicating authority.
In another case, the NCLAT is trying to ensure that Provident Funds recover their dues ahead of secured lenders on grounds that it involves savings of people.
In the Essar Steel case, the NCLAT noted that distributing a larger share of the proceeds only to secured financial creditors at the cost of operational creditors was against the provisions of Sections 30(2) (b) and Regulation 38 (IA). However, legal experts have pointed out that Section 30(2)(b) clearly says that as long as the operational creditor gets a minimum of liquidation value, the CoC can decide on the amount to be distributed. Moreover, Section 31 says that once the resolution plan is approved by the Adjudicating authority, it is binding on the corporate debtor, employees, members, creditors and so on. They also say that Regulation 38, which says the amount due to the operational creditors under a resolution plan shall be given priority in payment over financial creditors, simply means that the former should get their money back earlier.
The CoC in its appeal before the apex court last week stated that it had the power to deal with all commercial aspects of the resolution plan submitted by ArcelorMittal India. Manoj Kumar, head (M&A, transactions and insolvency) at consultancy firm Corporate Professionals Capital, said: “The concept of fairness to all stakeholders (in distribution) is already provided in the law with a minimum guarantee of liquidation value to the operational creditors on priority, and the rest is left to the commercial wisdom of the resolution applicant. As the approving authority is CoC, all plans are bound to be tilted in favour of financial creditors and till the time the plan provides the minimum liquidation value to operational creditors, it cannot be considered as illegal.”
According to another amendment approved by the Cabinet, the financial creditors who have not voted for a resolution plan that is approved by a 66% majority and the operational creditors will get the resolution proceeds or the liquidation value, whichever is higher. “This will have retrospective effect where the resolution plan has not attained finality or has been appealed against,” the government said. This means the Essar case could be covered under it.