Landmark Indian court order paves way for faster resolution of bankruptcies

Landmark Indian court order paves way for faster resolution of bankruptcies

The recent Supreme Court ruling is a step in the direction of countering the massive non-performing loan problem faced by the Indian banking sector.

Doing business in India just got easier. In a landmark judgment, the Indian Supreme Court has ruled that the Committee of (secured) Creditors (CoC) will have the final say of distribution of funds in all insolvency cases under the Insolvency and Bankruptcy Code (IBC), India's new fast track corporate resolution process.

The case

Arcelor Mittal, the world's largest steel company had won the bid to acquire Essar Steel, India's fourth-largest steel company, which had been dragged by creditors to the bankruptcy court. The process got delayed by a series of litigations, the last of which was filed by secured creditors against the National Company Law Appellate Tribunal (NCLAT) ruling giving secured and unsecured creditors equal rights over the sale proceeds.

“To look at secured and unsecured creditors in the same way is a bit of a disaster," Nilang Desai, Partner at AZB & Partners, said in an interview with BloombergQuint. “It destroys the basis of new lending. And, therefore, by definition, you must look at secured and unsecured lenders differently." That is precisely what the Supreme Court has done. “There is no principle of equality between secured and unsecured creditors... Bankruptcy courts don't have a say in deciding the distribution of funds between creditors.

They can only examine the legality of the resolution plan approved by the panel of lenders of an insolvent company,” the court said. There is, technically, the possibility of one of the parties to the case filing a review petition that is heard by the same bench that passed this order. But most reviews end in failure and legal experts said there is little chance of the apex court entertaining any review of its judgment.

Binding precedent

The IBC was enacted by India's Narendra Modi government court to ensure timely resolution of bankruptcies, which typically dragged on for years, and sometimes decades, and finally yielded on average only about 25 per cent of the outstanding liabilities of the debtor companies.

But a series of litigations by the managements of the debtor companies as well as by secured and unsecured creditors have delayed the process way beyond the 270-day deadline set by the law.

Experts said the issue of distributing funds between secured and unsecured creditors was probably the last of the unresolved outstanding issues delaying corporate insolvency resolutions and that this judgment of the Supreme Court would set a binding precedent for other corporate resolutions that are pending before the bankruptcy courts.

“The Supreme Court has made it very clear that the decision taken by the committee of creditors is final and binding. This clarity is not only important for the Essar case, it would also be very important for all other cases which go through the process of IBC,” Prashant Kumar, Chief Financial Officer of State Bank of India, India's largest bank, told the media.

Deadline not sacrosanct

The court also said the 330-day deadline set for resolution of corporate insolvencies is not sacrosanct and can be extended in exceptional cases.

Less scope for delays

Legal experts that 'India Global Business' spoke to say the judgment considerably reduces the scope for delays by blocking an important path for frivolous litigations. This is also likely to be a huge positive for the Indian economy as a faster resolution of bankruptcies will lessen the burden on the Indian banking sector, which is facing a massive non-performing loan problem estimated at $190 billion or about 10 per cent of the total loan book of the Indian banking sector.

This has crippled the capacity of banks to provide fresh credit and also of debt-laden companies to take fresh loans for new projects and expansions. Quick and timebound resolution of the debt problem will, thus, not only help the banking sector return to good health but also lead to improved credit culture, which, in turn, will make it that much easier to do business in India.

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