Secured Creditor , IBC Amendment Bill - 2019

Present discussion is limited to recent amendments  in Section 30 of the Code and its implications on the overall resolution processes.

Existing provisions

# Section 30 (2)(b) provides for the 2[payment] of the debts of operational creditors in such manner as may be specified by the Board which shall not be less than the amount to be paid to the operational creditors in the event of a liquidation of the corporate debtor under section 53;

# Section 30(4) The committee of creditors may approve a resolution plan by a vote of not less than 5[sixty-six] per cent. of voting share of the financial creditors, after considering its feasibility and viability, and such other requirements as may be specified by the Board:

Recent amendment

“# Section 30 (2)(b) provides for the payment of debts of operational creditors in such manner as may be specified by the Board which shall not be less than–

         (i) the amount to be paid to such creditors in the event of a liquidation of

the corporate debtor under section 53; or

         (ii) the amount that would have been paid to such creditors, if the

amount to be distributed under the resolution plan had been

distributed in accordance with the order of priority in sub-

section (1) of section 53,

whichever is higher, and provides for the payment of debts of financial creditors, who do not vote in favour of the resolution plan, in such manner as may be specified by the Board, which shall not be less than the amount to be paid to such creditors in accordance with sub-section (1) of section 53 in the event of a liquidation of the corporate debtor.

# Section 30(4) The committee of creditors may approve a resolution plan by a vote of not less than 5[sixty-six] per cent. of voting share of the financial creditors, after considering its feasibility and viability, #[the manner of distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub-section (1) of section 53, including the priority and value of the security interest of a secured creditor] and such other requirements as may be specified by the Board:

# Inserted in the proposed amendment 

Analysis

Let’s look to the amendments to # Section 30 (2)(b). There are two important additions to this sub-section namely

- (ii) the amount that would have been paid to such creditors (Operational Creditor), if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priority in sub-section (1) of section 53,

Prior to the recent amendments, the minimum amount [in terms of  Section 53(1)] which was to be paid to operational creditor was based on the liquidation value only, which has now been changed to either liquidation value or the resolution plan value, whichever is higher.  This amendment is a welcome amendment in favour of operational creditors.

- In the recent amendments , the concept of minimum amount [in terms of  Section 53(1)] to be paid to operational creditor, has been extended to dissenting financial creditor also, which has far reaching consequences. A  financial creditor will be tempted to become a dissenting creditor if his proposed share in the resolution plan is lower than the liquidation value of the underlying asset in his secured credit, increasing the chances of pushing greater number of cases towards liquidation, which is against the objectives of the code for maximization of the asset / enterprise value. In the process of liquidation the enterprise value of the CD is lost forever.

These amendments  has other implications also. As per the Code / Regulations, the valuation report (fair value & liquidation value) is not disclosed to the resolution applicant, as such the distribution of the plan funds will have to be reworked by the CoC, on the basis of the voting pattern of CoC members.

Further the amendment in # Section 30(4) ensures that the distribution  takes into account the order of priority amongst creditors as laid down in sub-section (1) of section 53, including the priority and value of the security interest of a secured creditor, leaving very little  scope for judicial intervention in the matter.

Disclaimer: The sole purpose of this blog is to create awareness on the subject and must not be used as a guide for taking or recommending any action or decision. A reader must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog.