IBC - The Journey So Far – Part III

EMERGING LEGAL ISSUES CLOGGING RESOLUTION : There are few major emerging issues which could impact resolutions under IBC, one of which is shrinking market for resolution. With a view to settle the issue, Section 30 of the Code was also amended, by inserting a requirement for CoC to, inter alia, take into account the order of priority amongst creditors u/s 53 including the priority and value of the security interest of a secured creditor, while approving a resolution plan. Further, if the "debts owed to a secured creditor" is not restricted to the extent of the security, there would be broad scope for misuse of the priority granted under Section 52, as even creditors who are not secured to the full extent of their debt would rely on the mere fact of holding any form of security, to recover the entire amount of their unpaid dues in priority to all other stakeholders. The sanctity of priority of charge has also been recognized in various other reports : World Bank Report of 2015 Titled Principles for Effective Insolvency and Creditor/Debtor Regimes states: "Claims and Claims Resolution Procedures Treatment of Stakeholder Rights and Priorities C12.1 The rights of creditors and the priorities of claims established prior to insolvency proceedings under commercial or other applicable laws should be upheld in an insolvency proceeding to preserve the legitimate expectations of creditors and encourage greater predictability in commercial relationships. Rules of priority should enable creditors to manage credit efficiently, consistent with the following additional principles: C12.2 The priority of secured creditors in their collateral should be upheld and, absent the secured creditor's consent, its interest in the collateral should not be subordinated to other priorities granted in the course of the insolvency proceeding.