Amendments to Insolvency and Bankruptcy Code

The Rajya Sabha has passed the amendments to the Insolvency and Bankruptcy Code aimed at faster decision-making in the case of bankrupt entities such as property developers, which have a large number of creditors, including homebuyers.

Amendments Proposed

• The amendment retroactively clarifies an IBC provision to put the committee of creditors (CoC) in driver’s seat. The CoC will have the power to take commercial decisions on the distribution of funds to various classes of creditors. Further operational and unsecured financial creditors need not be treated on par with secured financial creditors.
• The amendment states that the creditors are entitled to receive at least as much of the proceeds of a successful resolution plan as they would receive if the proceeds were to be distributed according to the priority of payments set out during liquidation of a company.
• The amendments also make the resolution plan binding on all stakeholders including the Centre, state governments and local authority to which dues may be owed.
• The amendments propose for a 330-day timeline which includes the time for litigations.
• The amendments also state that majority vote from creditors such as homebuyers will be counted as a 100% vote from that class of creditors in favour of or against a resolution plan.
• The amendments seek to reduce delays in beginning the insolvency proceedings initiated by financial creditors by requiring NCLT benches to explain why an application has not been admitted or rejected within 14 days.
• The amendments also seek to enhance the flexibility available to applicants by clarifying that a resolution plan may include corporate restructuring programmes such as mergers, demergers and amalgamation.

Waterfall Mechanism

Under the waterfall mechanism of the IBC, during liquidation debts to secured financial creditors and workmen are to be paid fully before payments to unsecured financial creditors and operational creditors.