The government is considering whether it would be possible to lower the approval threshold for resolution plans under the Insolvency and Bankruptcy Code (IBC) so that too many insolvent companies can be prevented from going into liquidation.
As things stand now, more than 75% of creditors need to agree to a resolution plan, meaning that just over 26% can reject it and force a company into liquidation.
The government feels liquidation should be the last resort and is considering whether such plans can be approved by a two-thirds majority or even a simple majority.
According to Section 30(4) of the IBC, “The committee of creditors may approve a resolution plan by a vote of not less than 75% of voting share of the financial creditors.”
The Hyderabad bench of the National Company Law Tribunal (NCLT) recently cleared a resolution plan approved by 66.67% of the Committee of Creditors.
The government feels such a lower limit could be provided in the law as liquidation results in lowering the value of assets and also leads to jobs losses due to closure.
Experts said the government will have to clarify whether it means majority by number or value.
“In most cases, the small lenders simply follow the SBI, which has maximum exposure to the loan,” one said. “If the value of the company is not realised, then the IBC process is irrelevant.” As India’s largest lender, State Bank of India is typically the largest creditor.
The IBC was introduced about an year ago, but the government is still trying to fine-tune the resolution procedures. A 14-member IBC law committee formed to identify issues that may impact efficiency of corporate insolvency resolution will submit its recommendations before the end of February.
Ministry of Corporate Affairs (MCA) officials recently met bankers, chairman and managing directors, resolution professionals to discuss delays in approvals, demands for stamp duty exemption for transfer of insolvent companies, and forest clearance among other subjects.
An extension of 60 days is expected to be announced soon for completing the bankruptcy resolution process. The extension of 60 days will be provided only to the companies currently under insolvency resolution. The current law allows a maximum 270 days for resolution — an initial 180 and 90 days of extra time on top of that.