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Inter-se Ranking of Creditors – Not Equal, but Equitable

-Megha Mittal, Associate and Prachi Bhatia, Legal Intern 

(resolution@vinodkothari.com)

Insolvency laws, globally, have propagated the principle of equitable distribution as the very essence of liquidation/ bankruptcy processes; and while, “equitable distribution” is often colloquially read as “equal distribution” the two terms hold significantly different connotations, more so in liquidation processes – an ‘equitable distribution’ simply means applying similar principles of distribution for similarly placed creditors.

Closer home in India, the preamble of the Insolvency and Bankruptcy Code, 2016 (‘Code’/ ‘IBC’) also upholds the principles of equitable distribution – thus balancing interests of all stakeholders under the insolvency framework. Judicial developments have also had a significant role in holding such equity upright[1]. However, in the recent order of the Hon’ble National Company Law Appellate Tribunal, in Technology Development Board v. Mr. Anil Goel[2], the Hon’ble NCLAT has refused to acknowledge the validity of inter-se rights of secured creditors once such security interest in relinquished in terms of section 52 of the Code.

In what may potentially jeopardize interests of a larger body of secured creditors, the Appellate Authority held that inter-se arrangements between the secured creditors, for instance, first charge and second charge over the same asset(s), would not hold relevance if such secured creditors choose to be a part of the liquidation process under the Code – thus placing all secured creditors at an equal footing. The authors humbly present that the instant order may not be in consonance with the established and time-tested principles of ‘equitable’ treatment of creditors. The authors opine that contractual priorities form the very basis of a creditor’s comfort in distress situations – as such, a law which tampers with such contractual priorities (which of course, are not otherwise hit by avoidance provisions) in those very times, will go on to defeat the commercial basis of such contracts and demotivate the parties. This, as obvious, cannot be a desired outcome of a law which otherwise delves on the objective of ‘promotion of entrepreneurship and availability of credit’. The authors have tried putting their perspective in this article.

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Out-and-Out Ouster of Ineligible Persons- Liquidation Amendment Regulations, 2020 enact Discussion Paper proposals

-Megha Mittal

(resolution@vinodkothari.com

The Insolvency and Bankruptcy Board of India (“IBBI”/ “Board”) vide Notification No. IBBI/2019-20/GN/REG053, dated 06.01.2020, introduced the IBBI (Liquidation Process) (Amendment) Regulations, 2020 (“Amendment Regulations”) w.e.f. the same day.

In what seems to be an adaptation of the ideas proposed in the Discussion Paper dated 03.11.2019[1], the Amendment Regulations seem to have provided for  “out-and-out ouster” approach towards persons ineligible under section 29A of the Code, in liquidation processes too, thereby imbibing in the Liquidation Process Regulations, the orders of the Hon’ble National Company Law Appellate Tribunal (“NCLAT”) in Jindal Steel and Power Limited v. Arun Kumar Jagatramka & Gujarat NRE Coke Limited (Company Appeal (AT) No. 221 of 2018)[2] and State Bank of India v. Anuj Bajpai (Liquidator) (Company Appeal (AT) (Insolvency) No. 509 of 2019)[3]

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