Insolvency and Bankruptcy Code

First group insolvency proceeding points to larger weakness in IBC

Note4Students

From UPSC perspective, the following things are important :

Prelims level : CoC in IBC

Mains level : Paper 3- Issues with IBC

Context

National Company Law Appellate Tribunal (NCLAT) stayed the approval granted by the Mumbai bench of the National Company Law Tribunal (NCLT) to the resolution plan for the Videocon Group.

Concerns with resolution plan

  • Resolution plan submitted by Twinstar Technologies, provided for payment of Rs 2,962 crore — a mere 4.15 per cent of Videocon’s total admitted debt of Rs 64,838 crore.
  • Payment of debt not in fair and equitable manner:  Under the IBC (Section 30(2)(b)), the resolution plan must provide for payment of debts amongst creditors in a “fair and equitable” manner.
  • However, in the plan submitted by Twinstar, unsecured assenting financial creditors and operational creditors are getting a paltry 0.62 per cent and 0.72 per cent of their admitted dues.
  • Even the secured assenting and dissenting financial creditors had to settle for only 4.9 per cent and 4.56 per cent of their respective dues.
  • Confidentiality obligation concerns: Twinstar’s bid of Rs 2,962 crore is close to the liquidation value of the Videocon Group estimated at Rs 2,568 crore, thereby raising legitimate suspicion and concern over the confidentiality of the resolution process.
  • The I&B Regulations, 2016 state that the resolution professional must maintain the confidentiality of the fair market value and liquidation value of the corporate debtor and can only disclose the same to the CoC members after the resolutions plan have been submitted.
  • Time delay: Status-quo ante has been restored until the next date of hearing by which time more than three years would have passed since the Videocon group was admitted into insolvency proceedings.
  • This is way beyond the statutory timeline of 330 days.

Confidentiality rules need to be revised

  • The CoC members must, on receipt of the information, issue an undertaking of confidentiality.
  • But no such obligation falls on the resolution professional.
  • Further, Section 29(2) of the code provides that the resolution professional must disclose all “relevant information” to the resolution applicant and it is for the resolution applicant to ensure compliance with confidentiality obligations.
  • Again, there is no such duty imposed on the resolution professional.
  • Even under Section 25 of the code, titled “Duties of resolution professional”, the specific duty to maintain confidentiality of sensitive information is absent.
  • Clearly, the current regime does not have much deterrence value so as to ensure solemn adherence to confidentiality.

Conclusion

Videocon was one of the first test cases to examine the prospects of insolvency jurisprudence in India and the first one, for group insolvency proceedings.  However, almost four years and a 95 per cent haircut later, the call for an immediate course correction couldn’t be louder.


Back2Basics: Operational creditor and financial creditors

  • When a corporate defaulter is brought under the resolution process (Corporate Insolvency Resolution Process or CIRP), there can be two types of creditors to whom the corporate should give back money –
  • (1) the entities who gave loans or funds to the corporate.
  • (2) the entities from whom the corporate bought inputs and other services.
  • The financial creditors are basically entities (lenders like banks) that have provided funds to the corporate.
  • Their relationship with the entity is a pure financial contract, such as a loan or debt security.
  • On the other hand, business and other entities that have provided inputs and other materials and services and to whom the defaulted corporate owes a debt are called as operational creditors.
  • Both have claims on the defaulted corporate or the defaulted corporate owe payments to both these categories.
  • Rights for these categories under the resolution process are also different.
  • The IBC gives a clear preference to the claims of the financial creditors over the operational creditors through several procedures.

Haircut

  • A haircut is the difference between the loan amount and the actual value of the asset used as collateral.
  • It reflects the lender’s perception of the risk of fall in the value of assets.
  • But in the context of loan recoveries, it is the difference between the actual dues from a borrower and the amount he settles with the bank.
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