The Union cabinet on Wednesday cleared major changes to the bankruptcy law that will enforce a strict 330-day timeline for the insolvency resolution process, including any legal challenges, and uphold secured creditors’ priority right on the sale or liquidation proceeds of bankrupt companies.

The eight amendments to the Insolvency and Bankruptcy Code (IBC) will also aid decision-making in the case of bankrupt entities such as property developers, which have a large number of creditors, including homebuyers.

The amendments are aimed at speeding up the bankruptcy resolution process that has been mired in litigation and correcting anomalies that have crept into its functioning since the law came into force in 2016.

Promoters of large bankrupt companies have been steadfastly resisting loss of control over their business by challenging decisions of lenders and bankruptcy tribunals in higher courts.

IBC currently allows a maximum of 270 days for clearing a resolution plan, but courts have taken the lenient approach of excluding the time spent on legal challenges by various parties from this time frame. Once the proposed amendments are cleared by Parliament, the clock will be ticking even during litigation, said Injeti Srinivas, secretary in the ministry of corporate affairs.

One of the key amendments proposed is to make explicit the rights of financial creditors, who have not voted in favour of a rescue plan, as well as that of operational creditors. The amendments specify that they will get a share of proceeds from the sale of the debtor company or its liquidation as per the hierarchy specified in IBC.

The Code gives the highest priority to those who have brought interim finance to meet the costs of resolution or liquidation, followed by dues to workers for the past two years and dues to secured creditors in equal priority. Employees other than workmen, and unsecured creditors and operational creditors are further down the line in the priority of receiving resolution or liquidation proceeds.

The proposal will help secured creditors of bankrupt Essar Steel Ltd, led by State Bank of India, that have challenged in the Supreme Court a ruling by the National Company Law Appellate Tribunal that Essar Steel’s operational creditors have to be treated on a par with financial creditors at the time of settling claims.

A person familiar with the discussions in the government said on condition of anonymity that it will submit the cabinet decisions before the apex court, clarifying that the legislative intent of IBC was to accord higher priority to secured creditors. The proposed amendments also say that lenders can include commercial considerations in the manner of distributing the proceeds.

A statement from the government said the amendments aim to fill the critical gaps in the country’s corporate rescue framework.

Another key amendment is to specify that the bankruptcy resolution or liquidation arrived at under IBC is binding on central, state and local governments, to whom the bankrupt firm may owe dues. This will prevent state authorities including income tax officials from questioning a rescue plan adopted in a court-monitored process.

The amendments proposed also rework voting rights in the case of companies where there are a large number of creditors such as homebuyers and bondholders.

The idea is to make decision-making easier even if a large number of them do not take part in voting.

According to the new formula, if more than half of these creditors who are present approve a plan, it will be considered that the entire class of creditors has approved it.

It will help in quick decision-making in the case of companies such as Jaypee Infratech Ltd, in which homebuyers have a 58% voting share on the panel of creditors.

Homebuyers were the biggest source of funds for the developer, more than lenders and deposit holders. #casansaar (Source - LiveMint)