Transplanting Absolute Priority in Indian Bankruptcy Law: Part I

In 2016, India revamped its bankruptcy legislation and introduced a new framework for resolution of financially distressed businesses. The Insolvency and Bankruptcy Code (IBC) was intended to usher in a new era of efficiency and galvanize India’s ailing bankruptcy regime. The results thus far have been mixed. One of the issues that has frequently arisen under the new regime is how to distribute the resolution proceeds amongst different classes of creditors. The doctrine evolved by courts and tribunals has been to leave any question on distribution to the discretion of the Committee of Creditors – an approach developed to insulate bankruptcy proceedings from excessive judicial interference. In this paper, which will be published across two volumes, I endeavour to show that this approach is flawed and contributes to the systemic problems afflicting the Indian bankruptcy regime. Drawing on doctrine developed in transnational bankruptcy law, I argue in favour of adopting the absolute priority rule as a fixed rule for distribution of resolution proceeds in India, which can augment value maximization and enable efficient resolution of distressed debt. Part I of this paper will trace the origins, evolution and migration of the absolute priority rule in transnational bankruptcy law. Part II, which will be published in the following volume, will make the case for transplanting absolute priority in Indian bankruptcy law.