IBC amendments may make resolution faster but raise inter-govt conflicts

The recent Insolvency and Bankruptcy Code (IBC) amendment, proposing a plan that would be binding upon Centre, state and local authorities, could pave the way for faster resolution in sectors such as telecom, mining, while opening doors for inter-government conflict. 

Several government bodies have questioned the validity of resolution plans that reduces their claims. At present, the IBC has a provision that holds that once the Resolution Plan is approved, it shall be binding upon all stakeholders, including corporate debtor, its employees, members, creditors, guarantors, and other stakeholders involved in the resolution plan. 

The proposal to sell RCom’s assets to Jio was shelved in March this year on account of lack of permission by the Department of Telecommunications, to which RCom owes a large sum of money. Subsequently, RCom was admitted to insolvency process by NCLT Mumbai. “The move to provide the clarification comes at a relevant time since interested applicants were wary of bidding for the spectrum, apprehending a legal battle with the DoT over unpaid spectrum dues,” said Punit Dutt Tyagi, executive partner, Lakshmikumaran & Sridharan Attorneys. 

He said the clarification, coupled with the Supreme Court’s recent verdict that the dues for spectrum usage charges belong exclusively to RCom, will mean that the DoT will have to file its claims before the Resolution Professional like any other operational creditor, and will be bound by the decision to take a haircut on its past dues, as may be agreed upon by the CoC.

Earlier this month, the Department of Telecom (DoT) rejected the resolution plan for bankrupt Aircel on the grounds that the amount proposed was insufficient to cover for its licence and spectrum-related dues. A sum of Rs 16.50 crore has been earmarked for all operational creditors, including the government. 

Aircel which declared bankrupt in March 2018 is under a debt of Rs 26,000 crore, received lenders’ approval to hand over the control of the company to asset reconstruction firm UV Asset Reconstruction Company Ltd. 

However, with the new amendment, the Corporate Affairs Ministry has clarified that the government department would accept the proposal from the successful resolution applicant as the final settlement of dues against the corporate debtor, and cannot pursue separate proceedings to recover any remaining amount once the management of the corporate debtor stands transferred under the resolution process. 

The IBC has stressed on the “clean slate” concept and also has an over-riding clause under Section 238 of the Act which states: “The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.”

Besides, the proposed amendment also requires state governments to be on board with the approved resolution plan. Stressed companies in the mining sector, which is a state subject, would not need the state government’s approval to implement a plan. 

“The resolution plan is a law under the IBC. However, it is still to be seen how this change will play out as the Centre might need to take states on board in the spirit of cooperative federalism,” said Anshul Jain, partner, PwC. 

The government had also proposed various amendments in the Stamp Duty Act in the Interim Budget in February 2019. “The changes have not yet been made effective as the Centre is still getting the states to agree,” Jain added. 

All resolution plans have to factor the cost of stamp duty in their financial models under the IBC.