Two recent news items shook me from the IBC exile I took after the three exhausting blog posts on the Essar Steel judgment.

Readers of this blog will recall an exchange I had with Ravi Kadam on the issue of operational creditors being given a seat on the elite Committee of Creditors that decides the fate of the bankrupt company:

AB: Now I’m coming to a question, and it’s actually my final question – this goes to the core of the Insolvency and Bankruptcy Code. The fulcrum of the Act is the committee of creditors, which is expected to control the insolvency resolution process. Now, a committee of financial creditors controlling a company inverts the usual logic of corporate theory, which is that the company should be controlled by the equity shareholders because they are the owners of the residual value of the company, and therefore they have the highest incentive to maximise the profitability of a company…because they get paid last. Financial creditors actually get paid first. So they usually speaking only have the incentive to have their debts paid and move on. And therefore at least in theory they are less likely to worry about salvaging value for whoever is lower down the chain. Do you think the committee of creditors should be replaced with a committee that is more representative of all stakeholders?

RK: Yes, I think so. Particularly, I feel very strongly that operational creditors, many of them who have borrowed money themselves to supply goods and services to the corporate debtor, are put on a much lower scale in the scheme of things, and they do not even have a seat at the committee of creditors’ table unless they form 10% of the total debt. I don’t think that insolvency resolution can be so one-sided only in favour of one set of creditors, viz. financial creditors. So for operational creditors, it’s clearly a lacuna in the law, and the NCLTs and the NCLATs have been recognising this, and we find lately that in various cases, even after the resolution plan is otherwise in line with Section 30(2) the operational creditors are being paid something by the resolution applicants. Therefore a more representative CoC – how it should be structured is a difficult question – but certainly a more representative CoC will go a long way towards giving finality to the resolution process.

The question contains my views on the issue, and Mr. Kadam seemed to agree. Based on an article published in the Economic Times of December 18, it looks like Justice Nariman, who is hearing a case challenging the constitutional validity of various provisions of the Code, also agrees:

In some cases, even the operational creditors’ debt is huge but at present they don’t have a say in the resolution process, a two-judge bench led by Justice RF Nariman said. The bench is expected to resume hearing of the case next month, when the court will reconvene after the winter recess.

Such creditors have to be given some voice in proportion to their debt and also be given voting rights, Justice Nariman suggested. Think about this and get back, he told attorney general KK Venugopal.

Maybe operational creditors will be treated on par with financial creditors soon? Exciting times.

Having banged on in blog post after blog post about how Section 29A is strangling the IBC, I smiled to read that even Mr. Jaitley thinks that the whole idea of disqualifying promoters and the havoc in wreaked in the Company Law Tribunals may just have been a bit ill-advised:

Finance Minister Arun Jaitley on Tuesday said changes in Section 29A of the Insolvency and Bankruptcy Code (IBC) may be required as the earlier amendment may have been “too wide” in relation to the definition of related parties. “Some people have represented to me that in the amended 29A, the reading may be too wide particularly in relation to the definition of related parties?” he said at a conference on IBC co-hosted by Insolvency and Bankruptcy Board of India (IBBI).

Section 29A, which was introduced via an ordinance in November 2017, bars wilful corporate defaulters and “connected person” from bidding for stressed assets (including own), which is under the Corporate Insolvency Resolution Process (CIRP).

“You can’t amend the law every time but certainly this is a point worth consideration on the agenda…”

Worth considering indeed.