The main purpose of the Insolvency & Bankruptcy Code (IBC) is to allow secured lenders to recover a major part of their dues in case a company goes under. That purpose was being defeated as, in the absence of clarity, the NCLAT was interpreting the law differently and treating all creditors equally. The repayment system under IBC is designed as a waterfall mechanism in which secured and senior lenders get primacy as opposed to unsecured and subordinate lenders. The government has now approved amendments to the code that will allow payments to be made first to secured lenders and workmen before the same is made to unsecured and operational creditors.
The Committee of Creditors (CoC) under the IBC has been made the main body to decide the repayment mechanism through majority vote. The courts will now not have the luxury to interpret the law according to their wish as things have been spelled in black and white. It is always upon the Parliament to spell out the law. The tribunals and the courts are there only to interpret and operationalize it. Confusion arises only when the law is not clear and the government has done well to rectify the grey areas.
Another welcome amendment is for allowing the majority vote of the homebuyers in the C0C to count as votes of 100% of homebuyers for the purpose of the resolution plan. This was necessary as the resolution gets prolonged as other homebuyers approach the courts and get stay orders on points of law. The government is also alive to the fact that delays defeat the purpose of the IBC. Hence, it has prescribed that the total process, from admission of the case to final resolution, be completed in 330 days. While this is good, the NCLT is woefully short of resources and as more cases come up, the government will have to provide it with both human and financial resources for it to work efficiently and maintain timelines.
