IBC Amendment Bill, 2019: Will it bring distributive justice

By Vinod Kothari


Insolvency laws are all about distributive justice, inspired by the pari passu rule enunciated centuries ago. The key theme of insolvency laws is that since there is a shortfall of assets to pay off everyone, everyone with similar ranking of priorities should be paid proportionately.

The IBC Amendment Bill, 2019, introduced in the Rajya Sabha on 24th July, 2019, is a commendably prompt response to the issues arising out of the ruling of the NCLAT in the matter of Standard Chartered Bank & Ors. Vs. Satish Kumar Gupta, RP of Essar Steel & Ors.[1]. However, it certainly leaves one wondering whether

(a) it has addressed the essential issue of unfair prejudice which is quite intuitively likely in  & a resolution plan, and

(b) whether the insertion of Explanation 1 in section 30 (2) unambiguously captures the intent of the lawmaker, or will it lead to further confusion and bestow adjudicating bodies with an abstract over-arching condition of “fair and equitable” distribution to the creditors.

Likelihood of Unfair Prejudice

The concerns expressed by the NCLAT in Essar Steel were essentially from the viewpoint of operational creditors. The law is doubly unfair to operational creditors: Operational creditors are nowhere in the Committee of Creditors and, therefore, they are not involved in the approval of the resolution plans.  Moreover, the law creates a disparity between financial creditors and operational creditors, even if both are unsecured, as the priority of unsecured financial creditors is higher than that of unsecured operational creditors.

The likelihood of unfair prejudice in resolution plans is evident from the fact that one class of creditors (financial creditors) decides the fate of another class of creditors. While, theoretically, one may argue that the resolution plan is prepared and submitted by the resolution applicant, however, the applicant is completely conscious of the fact that it is only the financial creditors who will vote on the same. Therefore, it is quite intuitive for the resolution applicant to pay just the liquidation value to the operational creditors, and yet pay higher amounts to secured and unsecured financial creditors.

The NCLAT ruling had taken the stand that if the resolution plan proposes to pay a higher quotient to the financial creditors than operational creditors, even though in the same ranking, it is prejudicial. The ruling challenged one of the strongest prevailing beliefs that the Code does not care for justice to operational creditors. Hence, there were strong reactions to the ruling. The fact that the Supreme Court has already seized the matter, and in the meantime, not to allow jurisprudence to take its own time to develop, the Parliamentary process has been triggered in matter of few days, still undermines the basic concern expressed by the NCLAT – how does one expect the operational creditors to get justice, when they are nowhere in the decision-making process, and the Committee of Creditors is almost given a free hand, even to the extent of scuttling down the scope of intervention by the adjudicating bodies?

The issue still remains: is a resolution plan nothing but a mere contract? If it is a contract, it cannot have the binding force of an order of the adjudicating body, binding on everyone, including those not in the contract-making process. If it is an order of the adjudicating body, how can it possibly not have the right to ensure that there is no unfair prejudice to any class of creditors? It is notable that the concept of “unfair prejudice” is there in corresponding provision of the UK law [section 6 (1) (a)].

Insertion of Explanation 1 to section 30 (2)

Explanation 1 proposed to be inserted in section 30 (2) reads: “For the removal of doubts, it is hereby clarified that a distribution in accordance with the provisions of this clause shall be fair and equitable to such creditors.”

First and foremost, the Explanation starts with the expression “for the removal of doubts”, meaning thereby that it is a clarificatory amendment, and therefore, as per established principles, it will date back to the date of enactment of the law.

However, one may be perplexed by the word “shall be fair and equitable to such creditors”. Is the lawmaker trying to say, a distribution, if done in accordance with section 30 (2), shall be deemed fair and equitable, or is it expecting an abstract attribute of fairness and equitability in addition to the distribution as per section 30 (2)?

For the sake of ready reference, the two minimum conditions for a resolution plan as per section 30 (2) are:

  • Dissenting financial creditors are proposed to be paid at least such amount as would be payable, if the distribution was done in accordance with section 53, and preserves the power of making regulations by the IBBI.
  • Operational creditors, as per the newly inserted clauses by the Bill, are to be paid at least higher of (i) liquidation value; or (ii) amount proposed to be paid by the Resolution Applicant, if the same is distributed in accordance with section 53. The two clauses may have elusive similarity, but the first one is simply the liquidation value of the assets, unconcerned with the amount proposed to be paid by the resolution applicant, and the second one is the appropriation of the amount paid by the resolution applicant. It is remotely likely that the second one will be lower than the first one.

If the resolution plan is paying as per the minima provided above, does the condition of “fair and equitable” come on the top of the above, or any distribution ensuring the minimum distribution as above is deemed fair and equitable? If the latter is the interpretation, then adjudicating bodies get the power to use the overarching condition of fairness and equitability in every resolution plan. However, if the lawmaker meant that the distribution done according to section 30 (2) shall be deemed to be fair and equitable, the deeming fiction is, regrettably, missing in the language of the Explanation.


The Cabinet has acted with commendable promptness, at least in trying to speak the mind of the lawmaker. Maybe, even before the Supreme Court gives its final verdict on the Essar Ruling, at least the issue of relevance of section 53 in resolution plans and the extent of prioritization for operational creditors may be clarified by the law itself. However, it is important that the language of the law has to be clear.

[1] https://ibbi.gov.in//webadmin/pdf/order/2019/Jul/4th%20July%202019%20In%20the%20matter%20of%20NTPC%20Ltd.%20Vs.%20Satish%20Kumar%20Gupta%20&%20Ors.%20[CA(AT)(Insolvency)%20242-2019]_2019-07-04%2016:18:24.pdf

Link to our other relevant articles :

The Insolvency Amendment Bill, 2019: Highlights

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