SC Upholds Bankruptcy Code

The Supreme Court upheld the Insolvency and Bankruptcy Code, backing the government’s efforts to deal with the bad-debt burden of banks and rejecting challenges by the promoters of defaulting companies barred by the law from regaining control of their firms. The court said the IBC was working and had led to rising credit flows.

“We are happy to note that in the working of the code, the flow of financial resource to the commercial sector in India has increased exponentially as a result of financial debts being repaid,” said the bench comprising justices RF Nariman and Navin Sinha.

The top court commended the IBC for bolstering the recovery of bad debt, saying a “defaulters’ paradise” had been ended. Several provisions, such as preferential treatment to financial creditors over operational ones (suppliers of goods) had been questioned by the petitioner

They had also disputed the broad sweep of Section 29A, which barred not just promoters but any individual or entity “related” to them from seeking to take over the ailing entity. Among the promoters contesting the IBC were Sanjay Singal of Bhushan Power and Steel, represented by senior advocate Mukul Rohatgi and lawyer Mahesh Agarwal.

The court rejected all challenges, except to clarify that the related entities should have been connected with the business of the promoter to be barred from bidding. Defaulters who repay debt within a year of them being classified as non-performing assets (NPAs) can submit resolution plans for assets as can promoters if they clear debt with interest.

“The provisions of Section 29A are intended to ensure that, among others, persons responsible for insolvency of the corporate debtor do not participate in the resolution process,” said the bench. “Parliament rectified a loophole… which allowed a backdoor entry to erstwhile managements in the resolution process. Section 30 of IBC, as amended, also clarifies that a resolution plan of a person who is ineligible under Section 29A will not be considered by the committee of creditors (CoC).”

The verdict will have an impact on the biggest insolvency cases, such as that of Essar Steel. Following ArcelorMittal’s highest bid for the company, the Essar Group’s Ruia family has sought to regain control by pledging to repay all that is owed. JSW Steel has pledged to support Essar.

The top court made minor tweaks to the law. It directed the government to set up NCLAT circuit benches across India within six months and also gave effect to another judgment that mandated all such tribunals would be under the law ministry rather than the corporate affairs ministry as they are now. The top court said that it would refrain from interfering in economic policy and lean in favour of the presumption that the law was constitutional.

Attorney general KK Venugopal had urged the court not to interfere with the 2016 law, citing executive privilege to take economic policy decisions. The bench agreed, saying the legislature should be allowed leeway because it had to deal with complex problems that don’t have easy solutions, especially with regard to economic matters. Moreover, in the context of the changed economic scenario, the expertise of people dealing with the subject should not be lightly interfered with, it said.

The court noted that previous attempts to address the issue had failed. After the code became operational, about 3,300 cases have been disposed of by the adjudicating authority based on out-of-court settlements between debtors and creditors involving claims amounting to over ₹1.2 lakh crore, the court said. Eighty cases have since been resolved by resolution plans being accepted. Of these, the liquidation value of 63 is ₹29,788.07 crore. However, the amount realised from the resolution process is in the region of ₹60,000 crore, over 202% of the liquidation value, it said, citing the Reserve Bank of India.

As a result, credit given by banks and financial institutions to the commercial sector (other than food) has risen from ₹4,952.24 crore in FY17 to ₹9,161.09 crore in FY18 and to ₹13,195.20 crore in the first six months of FY19, it said.

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