The Lok Sabha on Thursday passed the Insolvency and Bankruptcy Code (Amendment) Bill 2019, which was cleared by Rajya Sabha on July 29.
The Bill seeks to bring in clarity regarding the preference of secured financial creditors over operational creditors in the matter of distribution of assets of the corporate debtor.
Union Minister for Finance and Corporate Affairs Nirmala Sitharman said that this clarification was necessitated in view of the recent ruling of NCLAT in Essar Steel case which granted operational creditors equal status as lenders in the distribution of the bid amount of resolution plan.
The NCLAT in that case modified the resolution plans approved by the Committee of Creditors on the ground that it gave a raw deal to the operational creditors.
Expressing that such developments will erode the original intent of the Code, the Central Government mooted the amendment to give committee of creditors of a loan defaulting company explicit authority over the distribution of proceeds in the resolution process. Section 31(1) of the Code is sought to be amended to clarify that the resolution plan approved by the Adjudicating Authority shall also be binding on the Central Government, any State Government or any local authority .
The order of priority in distribution of liquidation assets should be maintained in case of distribution of bid amount of resolution plan as well, the amendment states. This is sought to be done by inserting the words "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) of the IBC. In the Essar case, NCLAT had ruled that hat 'waterfall mechanism' under Section 53 of IBC is only applicable to distribution of proceeds from liquidation and not to resolution bids.
To safeguard the interests of operational creditors, the Bill states that they should be paid the higher amongst the amounts receivable under liquidation, and the amount receivable under a resolution plan if such amounts were distributed under the same order of priority as in Section 53.
Also, an explanation is inserted to the definition of "resolution plan" in Section 5(26) to clarify that a resolution plan of corporate debtor as a going concern may include the provisions for "corporate restructuring, including by way of merger, amalgamation and demerger".
As regards the voting power of representative of class of 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.
If an application has not been admitted or rejected within fourteen days by the Adjudicating Authority, it shall provide the reasons in writing for the same, as per amendment proposed to Section 7(4).
The amendment also sets a new deadline of 330 days for completion of resolution process(it was 270 days earlier).
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