By Advocate Srijan Tiwari
The Insolvency and Chapter Code 2016 represents a pivotal development in India’s authorized framework geared toward enhancing the nation’s ease of conducting enterprise. Enacted with the President’s assent on 28th Might 2016, this laws has successfully streamlined and codified the beforehand fragmented and complicated panorama of chapter legal guidelines in India. There’s a “Waterfall Mechanism” current in Part 53 of IBC, 2016 which is defined right here.
Amongst its quite a few commendable provisions, Part 53 stands out prominently for its delineation of the methodology governing the allocation of proceeds derived from the liquidation belongings of a company debtor. Given the various array of stakeholders concerned, comprehending Part 53 necessitates a nuanced interpretation to understand its underlying jurisprudential ideas. The waterfall mechanism established therein serves as a litmus check for the preamble of the code, which underscores the crucial to harmonize the pursuits of all events affected by insolvency proceedings.
This discourse goals to elucidate the intricacies of the waterfall association prescribed by the Insolvency and Chapter Code (IBC), thereby unveiling the distinctive options that outline its essence. In essence, by delving into the mechanics of Part 53 and the broader framework it embodies, we endeavor to light up the foundational ideas that imbue the Insolvency and Chapter Code with its significance, underscoring its function in fostering a balanced and conducive setting for enterprise operations in India.
In most cases, the quantity obtained by lenders is usually considerably lower than what the profitable decision applicant pays to amass the belongings of an organization by the company insolvency decision course of (CIRP). Nonetheless, the Insolvency and Chapter Code establishes a structured framework for expeditiously resolving insolvency and chapter instances, providing alternatives for the revival of distressed firms. The fee made by the profitable bidder serves to settle the money owed of the bankrupt firm, with funds allotted in response to a specified order often called the Waterfall Mechanism underneath the IBC. The Waterfall Mechanism dictates the sequence wherein proceeds from the sale of a company debtor’s belongings are distributed amongst stakeholders. This distribution happens in a hierarchical vogue, prioritizing the claims of sure stakeholders over others.
Part 53 of the Insolvency and Chapter Code outlines a Waterfall Mechanism that specifies the sequence and precedence for distributing proceeds from the sale of liquidation belongings among the many stakeholders of a company entity. The “non-obstante clause” initially of Part 53 confers overriding authority upon the Waterfall Mechanism established underneath the IBC, superseding any conflicting provisions of statutes enacted by central or state governments.
First, the Insolvency Decision Course of Prices and the liquidation prices should be paid in full. Subsequent in line are the workmen’s dues for the 24 months previous the liquidation graduation date, and money owed owed to secured collectors who’ve relinquished their safety, each of that are ranked pari passu. Following these are worker dues for the 12 months previous the liquidation graduation date, unsecured monetary collectors, operational collectors, authorities and statutory dues, and eventually, fairness shareholders and companions, if any.
You will need to be aware that Part 53 clearly outlines the hierarchy of claims throughout liquidation. This hierarchy should even be adopted through the fee distribution underneath the decision plan, as mandated by Sections 30(2)(b) and 30(4) of the Insolvency and Chapter Code, launched by latest amendments. This highlights the important function of the waterfall mechanism not solely within the liquidation part but in addition within the revival course of by a decision plan.
Numerous judicial pronouncements have elucidated the importance of the waterfall mechanism, notably within the matter of Committee of Collectors of Essar Metal India Restricted v. Satish Kumar Gupta & Ors. On this case, it was adjudicated that the Nationwide Firm Legislation Tribunal (NCLT) doesn’t possess residual jurisdiction to reject a decision plan solely on the premise of its perceived unfairness or injustice to a selected class of collectors. Offered that the pursuits of every class of collectors have been duly thought-about and addressed in accordance with the waterfall mechanism delineated in Part 53 of the Insolvency and Chapter Code, together with the valuation of safety pursuits of every creditor, the NCLT is compelled to sanction the decision plan.
There was disagreement between judicial interpretation and the statutory framework because of courts and tribunals departing from Part 53 of the IBC in sure instances. Within the ruling in State Tax Officer V. Rainbow Paper Mills Restricted, the court docket thought-about the state authorities to be a secured creditor and equated it with the duty of workmen to repay money owed through the settlement course of. The excellence between authorities dues secured by operation of regulation and people secured by contractual transactions was primarily eradicated consequently. This choice delayed the decision course of by requiring tribunals to first outline the standing of claims.The express inclusion of “authorities dues” underneath Part 53(1)(e)(i) of the Insolvency and Chapter Code (IBC) was neglected on this case, which is noteworthy. This clause locations the fee of presidency obligations under different obligations, stating that they should be paid after wages, workmen’s compensation, money owed to secured collectors, and unsecured loans, amongst different obligations. This highlights the issue in arriving at an accurate textual interpretation of the regulation and provides one other layer of complexity to determining the exact precedence standing of secured authorities dues underneath the Code.
Nevertheless, within the case of Paschimanchal Vidyut Vitran Nigam Ltd V. Raman Ispat Personal Restricted, the Apex Courtupheld the legality of the safety curiosity established within the appellant’s favor and clarified that, relying on the specifics of the transaction with the company debtor, funds owed to statutory companies such because the appellant, fairly than to the federal or state governments, must be categorized as both operational or monetary debt. Nonetheless, in response to Part 53(1)(e)(i) of the Code, these obligations don’t fall underneath the class of obligations owed to the federal authorities or any state authorities.As a result of company debtor in Rainbow Papers present process chapter decision procedures as a substitute of liquidation, there existed a factual distinction between that case and the current occasion. Moreover, the Courtroom categorised the state authorities as a “secured creditor” in Rainbow Papers as a result of the case didn’t take into account the waterfall mechanism outlined in Part 53 of the Code. The Courtroom underscored that “authorities dues” are explicitly lined underneath Part 53 of the Code, highlighting Parliament’s intent to distinguish authorities debt from obligations owed to different secured collectors.
A vital factor of the waterfall mechanism is the complete fee of Insolvency Decision Course of prices earlier than any distributions are made to different stakeholders. This ensures that interim finance suppliers, who take substantial dangers by lending to distressed firms, obtain their due funds, together with any curiosity, promptly. Failure to honour these obligations may undermine confidence within the insolvency framework. The waterfall system encompasses eight stakeholder tiers organized in descending order of distribution precedence. It’s designed to prioritize the pursuits of weak operational collectors, inserting them on equal footing with secured monetary collectors. Regardless of the necessity for exact definition in sure sections to make sure a complete framework underneath the Insolvency and Chapter Code, the regulation’s dedication to equitable remedy has successfully simplified enterprise operations for all events concerned.
(Advocate Srijan Tiwari, with over a decade of expertise, recurrently practices Insolvency and Chapter Code (IBC) issues earlier than the Nationwide Firm Legislation Tribunal (NCLT) and the Delhi Excessive Courtroom. The views expressed are of solely of the creator.)
