Supreme Law News

Insolvency laws to make lending tough, Will Govt Act ? Supreme Law to take up matter with the government.

In the wake of recent Supreme Court judgment on IBC, two things are very clear. One, lending is going to become tough.

Two, government dues are going to cut into pie of lenders, banks. Already banks were at receiving end when it came to recovery or settlement or resolution under IBC.

The hair cut was as high as 92 per cent and on average 61 percent. Supreme Court has placed tax departments and government agencies on par with secured creditors, under Insolvency Law.

The ruling has raised worries that tax authorities may claim a significant portion of the recovery, potentially compromising financial lenders' interests and altering the priority of government dues.

Since its introduction in 2016, the Insolvency and Bankruptcy Code has found more and more takers. Yet it remains marred by some structural shortcomings, including constant delays in resolution and haircuts.

Timelines for closure of cases have increased across all categories, data shows. “Of the over 2,100 ongoing CIRPs, there has been a delay of more than 270 days for the completion of the process of 65 per cent of ongoing CIRPs in June 2023 as compared to 75 per cent in June 2021 and 61 per cent in June 2022,” a CareEdge report shows.

While the overall recovery rate has increased to 31.62 per cent till Q1FY24, for the cases which have been resolved, the creditors have continued to face a haircut of approximately 68 per cent on admitted claims.

SC in its ruling said that statutory creditors like tax authorities and government agencies would be considered as secured creditors under the IBC. Lenders are now worried that following the SC judgment, taxmen may claim a large chunk of the recovery.

The recovery rate rose to 33 per cent of admitted claims in the September quarter from 29.5 per cent registered earlier, IBBI data shows. This is amid improved investor interest in a broad range of small and medium enterprises.

Lenders are also concerned that the SC ruling puts the amount due to central and state government below that of unsecured creditors.

“The present interpretation negates the basic structure of the IBC and compromises secured creditors’ ranking.

It is high time now for government to initiates measures to restore the sanctity of creditors’ rights over charged assets, which is the basic safety net for lending, to ensure smooth lending for the growth of the nation and banks as such.

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( LLM, MBA, (UK), PhD, AIMA, AFAI, PHD Chamber, ICTC, PCI, FCC, DFC, PPL, MNP, BNI, ICJ (UK), WP, (UK), MLE, Harvard Square, London, CT, Blair Singer Institute, (USA), Dip. in International Crime, Leiden University, the Netherlands )

Advocate & Consultant Supreme Court of India, High Courts & Tribunals.