ET View: Welcome tweaks in the bankruptcy code

The government has done well to approve changes in the Insolvency and Bankruptcy code to give financial creditors preference over unsecured creditors to receive their money back when the assets of the company are sold and recoveries made. The changes, to be ratified by Parliament, will help clear backlog of pending cases, motivate banks to put the bankruptcy code to use and lower credit costs for companies.

It also sends a clear message that bankruptcy courts do not have the leeway to deem the provisions the Code, enacted by Parliament, as unfair and act on their own to set what they think is correct. It is fully up to the Parliament to make changes in the law, and the Court’s rulings will have be based on the law of the land.

The Supreme Court has already held that the bankruptcy law is ultra-virus of the Constitution. The proposed changes are meant to ensure a hurdle-free resolution process and a swifter clean-up of bad loans to get the wheels of the economy moving.

The trigger for the changes in the IBC came after the modifications made by the National Law Company Tribunal’s in a case relating to Essar Steel, where it almost usurped the right of Parliament to make law. Bloomberg’s columnist Andy Mukerjee called this a dangerous decision by the bankruptcy court, saying this is not how it works anywhere in the world as in loans backed by collateral, the lender expects to be paid first out of the bankruptcy proceeds.

What was the trigger for the changes? The NCLT’s modification of the Rs 42,000 crore Arcelor Mittal resolution plan for Essar Steel to treat various classes of creditors equally, providing a 60.7% recovery for all. The order was challenged in the Supreme Court by Essar Steel’s financial creditors that had been set to recover around 92% of claims of the resolution plan.

Rightly, the government will explain the intent of the IBC to the Supreme Court and clarify that operational creditors and unsecured financial creditors need not be treated equal to secured financial creditors for a resolution plan to be fair and equitable. The change will also put the Committee of Creditors back on the driver’s seat. That is welcome.

Other changes include the limiting the resolution process to 330 days, including the time limit for litigation. It has also addressed the concerns of home buyers who have filed cases against builders for non- delivery of flats.

The IBC is a transformational reform, which sends a message to large borrowers they cannot turn the other way when they do not repay their loans, saying it’s a lenders problem. Course corrections in the law make eminent sense to speed up the progress in resolving the bad loan problem. This will improve the health of the banking system.


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