Secured Lenders Set To Get Preference Over Operational Creditors As Government Moves To Amend Insolvency Law

The government plans to amend the Insolvency and Bankruptcy Code (IBC), providing clarity about preference to secured lenders over operational creditors.

The cabinet has approved setting strict timelines for the corporate insolvency resolution process.

From the earlier time limit of 270 days set only for the committee of creditors (CoC) to approve the plan, the government has extended the deadline to 330 days including the litigation and judicial process.

The cabinet has decided that a specific provision would be added to the IBC stating that all dissenting financial creditors and operational creditors would receive an amount not less than the liquidation value of the corporate debtor or the amount in accordance with Section 53 of the IBC – whichever is higher.

Section 53 refers to a waterfall mechanism for distribution of assets in the event of liquidation.

After the amendments, dissenting financial creditors and operational creditors would have to accept liquidation value or sum offered in the resolution plan.

Comprehensive restructuring, including mergers and acquisitions (M&A) would be allowed, as part of the resolution plan.

Commercial considerations would drive distribution of sums realised, within the powers of the CoC.

The approved resolution plan would be binding on central and state government authorities as per the amended law.