Damage control(The Hindu)

Mains Paper 3 : Economy
Prelims level : National Company Law Appellate Tribunal’s
Mains level : Maintaining safeguard the interest of the operational creditors

Context

•  The Cabinet approved several amendments to the Insolvency and Bankruptcy Code (IBC) on Wednesday.
•  Two of them inclusion of distribution of recovery proceeds within the powers of the Committee of Creditors (CoC) and bringing back the relevance of Section 53 of the Code in the insolvency process have diluted the recent National Company Law Appellate Tribunal’s (NCLAT’s) ruling in the Essar Steel case.

Sanctity of the IBC

•  In what could have threatened the very sanctity of the IBC, the NCLAT had set aside the CoCs’ decision on how the ₹42,000 crore Arcelor Mittal’s offer would be distributed among creditors, arguing that the CoC was not empowered to do so.
•  By placing the manner of distribution of proceeds within the ambit of commercial decisions of the CoC, the latest amendment has upheld the sanctity of the collective decision of the CoC.
•  On the ground of fairness, the NCLAT had prescribed a sharing arrangement that treated all classes of creditors secured, unsecured financial creditors and operational creditors — identically.
•  By wiping out the distinction between secured and unsecured creditors, the ruling went against the basic tenets of commercial law that accords priority to secured creditors and equitable treatment of ‘similar creditors’.

Safeguard the interest of the operational creditors

•  The NCLAT had held Section 53 of the Code (which lays down the hierarchy of payment in liquidation where unsecured and operational creditors come after secured creditors) irrelevant under the insolvency process.
•  Essentially NCLAT ruled that distribution of debts to the financial and operational creditors during the Corporate Insolvency Resolution Process cannot be equated with distribution of proceeds to all stakeholders after the liquidation (Section 53).
•  Therefore, the resolution applicant cannot take advantage of Section 53 for the purpose of distribution to be made in favour of certain creditors.
•  The latest amendment has clarified the rights of dissenting financial creditors and operational creditors, ensuring a minimum amount both under resolution or liquidation in accordance with Section 53,
•  In turn upholding the principle of vertical comparison or repayment hierarchy that gives priority to secured creditors.

Way forward

•  The amendments may have to put rest the gnawing concerns of the secured creditors for now, it does not address the inequitable distribution that had caused the NCLAT to give a higher share to operational creditors in the Essar Steel case.
•  The position of operational creditors remains the samebefore and after the amendment.
•  This will have to be addressed urgently. Undue delays in the IBC process are also a cause for worry. The Essar Steel case has been stuck for nearly two years in court.
•  The amendment has capped the maximum time allowed for resolution to 330 days from 270 days.
•  However, it's imperative that this timeline is respected.

Online Coaching for UPSC PRE Exam

General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q.1) With respect to “Medical Termination of Pregnancy Act of 1971”, consider the following statements:
1. It only protects married woman by allowing them to terminate an “unplanned and unwanted pregnancy." The same is not extended to single women.
2. The Act allows abortion of pregnancy in the case of minors or mentally ill persons without the consent of the guardian.

Which of the statements given above is/are correct?
A. 1 only
B. 2 only
C. Both
D. None

Answer: A
Mains Questions:
Q.1) Describe the safeguard the interest of the operational creditors in the context of amendments to the Insolvency and Bankruptcy Code.