Business Standard

Friday, February 14, 2025 | 01:38 AM ISTEN Hindi

Notification Icon
userprofile IconSearch

'Clubbing creditors could lead to unintended consequences'

'Clubbing creditors could lead to unintended consequences'

Ashwin Bishnoi
The Code appears to club secured creditors with unsecured creditors. This treatment could lead to certain unintended consequences:

(a) If secured creditors constitute less than 25 per cent of the financial debt, the unsecured creditors would be able to "cram down" a resolution plan. This is counter-intuitive, since secured creditors in such a situation may opt out of the insolvency process and enforce their rights separately.  

(b) If secured creditors constitute a significant majority of the financial debt of the company (say greater than 75 per cent, as might be the case with several companies), then unsecured creditors are denied their veto rights, which they would ordinarily have if separate classes were recognised.

However, the Code also gives greater freedom to the insolvency resolution professional (IRP) and the creditors committee to formulate a viable plan. It remains to be seen whether as part of this, we will see IRPs granting differential recovery rights to counter the voting impairment in certain cases.

The joint parliamentary committee (JPC) has made many suggestions designed to facilitate the intent of the Code. These include:

(a) Amendment to Clause 20(2)(c) to permit super senior debt without the consent of creditors where they already have twice security cover

(b) Removal of the performance bond requirement on insolvency professionals and insolvency agencies to incentivise entry in to this new sector

(c) Last, a considered decision by the JPC to include a mechanism for time-bound asset sales. Whether this yields a US-style 363 regime (the kind utilised in Lehman, General Motors, Nortel Networks) remains to be seen. A 363 regime is a court-sanctioned fast process for asset sales with limited consent requirements.

The writer is a partner with Khaitan & Co

Don't miss the most important news and views of the day. Get them on our Telegram channel

First Published: May 08 2016 | 10:03 PM IST

Explore News