Recently, the NCLAT in Essar Steel Judgment had given parity in terms of status to the operational creditors and lenders by observing that the committee of the creditors has given raw deal to operational creditors and therefore, accordingly went on to modify the Resolution Process. This Judgment triggered for the amendments in the code by the central Government.
The Lok Sabha on August 01, 2019 passed the Insolvency and Bankruptcy Code (Amendment) Bill 2019 and the same was cleared by the Rajya Sabha on July 29, 2019. By way of this amendment, the Central Government seeks to bring a clarity regarding the preference of Financial Creditors over Operational creditors in the matter of assets distribution of the corporate debtor. The amendment addresses three different issues- 1. It strengthens provisions related to the time limits, 2. It specifies the minimum payout to the Operational Creditors in Resolution Process and 3. It specifies the manner in which representative of a group of financial creditors should vote.
Under the Code, the Financial creditor may file an application before the National Company Law Tribunal (NCLT) for initiating the insolvency resolution process. After finding the existence of default which is to be done within 14 days, a Committee of Creditors consisting of Financial (CoC) creditors is constituted for taking decisions regarding insolvency resolution. The CoC will appoint a resolution professional who will present a resolution plan to the CoC. The CoC must approve a resolution plan, and the resolution process must be completed within 180 days. The period can be extended by a period of up to 90 days if the extension is approved by NCLT. If a resolution plan is rejected by the CoC, the debtor will go into liquidation. The code provides an Order of priority for the distribution of assets in case of liquidation of the debtor. By way of a 2018 amendment, home-buyers who paid advances to a developers were to be considered as financial creditors. They are represented by an insolvency professional appointed by the NCLT.
The amendment provides an explicit and express authority to the Committee of Creditors of the loan defaulting company over the distribution of proceeds in the resolution process. Further, Section 31(1) is amended to the effect that the Resolution Plan approved by the Adjudicating Authority shall be binding on Central Government, State Government or the Local Authority. The further effect of the amendment provides that the order of priority in distribution of liquidation assets should be maintained in use of distribution of bid amount of Resolution Plan. This is done by inserting "the manner of distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub-section (1) of section 53, including the priority and value of the security interest of a secured creditor" in Section 30(4).
To safeguard the interest of the operational creditor the amendment states that the operational creditors should receive an amount which should be higher than the amounts receivable under liquidation, and the amount receivable under resolution plan, if such amount were distributed under the same Order of priority as under Section 53.
With regard to the voting by the representative of the financial creditors, the bill states that such representative will vote on the basis of the decision taken by a majority of the voting share of the creditors that they represent. The amendment also sets a new deadline i.e. of 330 days for completion of the resolution process.
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