THE GIST of Editorial for UPSC Exams : 09 JULY 2019 (Diluting the code (Indian Express))

Diluting the code (Indian Express)

Mains Paper 2: Polity
Prelims level: National Company Law Appellate Tribunal
Mains level: Constitutional framework of IBC

Context

• Last week, the National Company Law Appellate Tribunal (NCLAT) approved the resolution plan filed by ArcelorMittal for Essar Steel.
• But the two-member bench of the appellate tribunal modified the manner in which the proceeds from the sale would be distributed.
• Earlier, the resolution plan had proposed to pay financial creditors 92.5 per cent of their dues. But as per the order, both financial and operational creditors will recover 60.7 per cent each of their admitted claims.
• The judgement, which, in effect, places operational creditors at par with secured financial creditors at the time of settling claims, is likely to have far reaching consequences.

Constitutional framework of IBC

• Under the Insolvency and Bankruptcy Code (IBC), Section 53 deals with the distribution of proceeds from the liquidation of assets.
• It lists the hierarchy in which various claims against the firm would be settled. Under this waterfall mechanism, after the costs associated with the insolvency resolution process and liquidation are settled, dues owed to secured creditors and workmen have to be settled first.
• This is followed by discharging dues of employees, unsecured creditors and governments, in this particular order.
• After these claims have been settled, the balance is to be distributed among preference and equity shareholders, in that order.
• Thus the structure draws a clear distinction between the claims of secured creditors and operational creditors in the liquidation process, with the former having the first right.

Implications from this judgement

• However, the judgement draws a distinction between claim settlement in the resolution and liquidation process. It notes that as the case is not about “distribution of assets from the proceeds of sale of liquidation.
• The resolution applicant cannot take advantage of Section 53 for the purpose of determination of the manner in which distribution of the proposed upfront amount is to be made in favour of one or other stakeholders”.
• Creating this distinction is problematic.

Way ahead

• The consequences of this order stretch beyond this particular case.
• To argue that claims of financial creditors can be treated at par with operational creditors would muddy the waters as it loses sight of the basic distinction between secured and unsecured creditors.
• In fact, in its judgement on the constitutionality of the IBC earlier this year, the Supreme Court had justified the difference between financial and operational creditors, making a critical distinction between financial debts which are secured and operational debts which are unsecured.
• Reportedly, lenders in the ArcelorMittal/Essar Steel case plan to move the Supreme Court to appeal against the NCLAT decision. The Supreme Court would do well to clarify this issue.

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Prelims Questions:

Q.1) With reference to the Arctic Fox, consider the following statements:
1. It is primarily a carnivore that lives inland, away from the coasts.
2. It is listed as vulnerable in IUCN Red List status.

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)In insolvency proceedings, distinction between secured financial and operational creditors must be maintained. Comment.