The turbulent seas of the IBC witnessed another storm last month, with the passing of the Insolvency and Bankruptcy (Amendment) Act, 2019. For practicing lawyers, the law has changed again, and everyone has to once more go through the trouble of buying a fresh copy of the bare act.
The biggest changes are the amendments to Sections 30 and 12, both aimed at speeding up matters. My thoughts are as follows.
The Amendment of Section 30 – About time
The change to Section 30 represents a much-needed legislative stop to the judiciary’s increasing (and unfortunate) enthusiasm in analysing the minutiae of financial bids. When it comes to bids (or resolution plans, as the Code calls them), Tribunals were originally only expected to ensure that operational creditors were not getting less than what they would get if the company was liquidated. This “liquidation” figure would often be zero, but the law is the law. However, in its Swiss Ribbons judgment, the Supreme Court decided that it wasn’t that simple, and endorsed a more searching enquiry into resolution plans, to wit “whether operational creditors are given roughly the same treatment as financial creditors, and if they are not, such plans are [to be] either rejected or modified so that the operational creditors‘ rights are safeguarded.” Thus, Tribunals could now go through plans to see if they discriminated against operational creditors, and even modify them if necessary. Just to be clear, the power to modify an approved resolution plan is wholly absent in the Code. It owes its existence to the Supreme Court.
Moreover, Tribunals were not expected to go into whether the plan provided for more money to one financial creditor and less to another. However, in Binani Industries, the NCLAT decided that a resolution plan was “discriminatory” as it provided differing payments to similarly situated financial creditors and rejected it on this ground. This added one more layer of enquiry for Tribunals: Were all financial creditors being treated the same under the resolution plan?
The last act in the play was the NCLAT’s judgment in Essar Steel, in which it changed around the whole bid to ensure that all creditors, operational and financial, over Rs. 1 crore, would get 60.7% of their debts back. It reached the figure of 60.7% with the aid of some heavy mathematics (set out in its unreadable judgment) thereby providing the final, unanswerable proof that Tribunals had wandered far beyond their remit.
As per the new amendments, bidders can discriminate as they please between financial creditors and operation creditors. As long as the latter are getting liquidation value, there will be no questions asked (or, as the amendment puts it, rather peremptorily, such discrimination “shall be fair and equitable”). They can also discriminate as they please between one financial creditor and another, as the new rule is that dissenting financial creditors are also entitled to only liquidation value. The Tribunals (and the Supreme Court) have plainly been told that their services in ensuring parity between creditors are no longer required.
Section 12 – The New, Delusional Timeline
The other big change is to Section 12, the statute that makes it mandatory to complete the insolvency resolution process in 270 days. Section 12 had been watered down by the Supreme Court in its ArcelorMittal judgment to exclude the time wasted in litigation. In a case of being too clever by half, the new amendment makes it mandatory to complete the entire process in 330 days including time taken in legal proceedings.
This sounds good on paper, but ignores the real reason why IBC cases take so long – the tedious and vague qualification criteria for bidders contained in Section 29A, which inevitably lead to sustained squabbles between rival bidders to get each other disqualified. The Supreme Court (as it does) made things more complicated in its Swiss Ribbons judgment by declaring that Section 29A challenges could be judged taking into account “antecedent facts” which were “reasonably proximate” to the date of submission of the resolution plan. In other words, Section 29A disputes involve an ocean of facts and arguments, and it is unconscionable, in such circumstances, to ask the understaffed Company Law Tribunals to finish the entire insolvency resolution process in 330 days.
My prediction is that the Supreme Court will get over this new legislative hurdle by itself extending the time by taking resort to its power under Article 142 of the Constitution to do “complete justice” in a case. Ask yourself: Do we need more litigation in the Supreme Court?
