INSOLVENCY NORMS UNDERGO CHANGE AMID COVID-2019

[Dr. Sanjiv Agarwal]

Covid-2019 or Corona virus has impacted almost entire world including India. It has changed the way of life and has impacted businesses deeply and adversely so much so that even many resourceful and strong economies are facing its dreaded impact. The economies have been hit by and large in all sectors including corporate performance, banking, liquidity crisis, debt management and commercial defaults.

In order to attempt bringing economy back to normal (or near normal) Central Government has announced a stimulus package worth ₹ 20 lakh crore which has since been detailed by the Finance Minster in five tranches, last one being on 17 May, 2019. These include various measures to ease out business compliances, steps for ease of doing business, fiscal measures including relaxations, liberal compliance environment, steps to boost demand and enhance liquidity in system by way of economic and fiscal reforms.

Reforms proposed in Insolvency Law

One of the crucial reforms were announced on 17 May, 2017 in relation to Insolvency law, i.e., Insolvency and Bankruptcy Code, 2016 (in short, IBC). These reforms may not yield immediate benefits but are aimed to boost demand in mediums to long term, make business environ stronger and resilient and boost business sentiment across the board.

The reforms announced in Insolvency law are both, timely as well as well envisioned. In fact, in the given situation, they are strategic. The major reforms in insolvency and bankruptcy are towards easing the trigger for IBC to get attracted, i.e.,

• Threshold for initiating IBC proceedings raised from ₹ 1 lakh to ₹ 1 crore
• Fresh proceedings under IBC to remain suspended for a period of one year (earlier it was announced to be suspended for six months in March, 2020)
• The threshold trigger to exclude Covid related debts
• Specific framework for micro, small and medium enterprises (MSMEs)

There have been various other measures taken or announced which indirectly aim at easing out corporate’s concern include measures by way of liquidity support, granting of pending refunds, funds to non-banking finance companies (NBFCs), moratorium allowed to banks leading to enhanced liquidity to borrowers, steps taken to boost demand and domestic production as well as consumption etc. Collateral free loans, participation by way of equity for small businesses, partial guarantee for NBFCs etc are some of the other measures which would help in doing business and prevent liquidity crisis and eventually bankruptcy. However, there should be no fears under IBC law now as its operation has been deferred by a year resulting in no filings under the IBC for next one year. There is a special insolvency framework for micro, small and medium enterprises (MSMEs) in the offing.

IBC proceedings to be Suspended for one year

Suspending the fresh proceedings for a year under IBC may help the defaulting companies but is likely to distort the recovery mechanism as well as market driven financial discipline. It may be noted that what is proposed to be suspended is only the fresh initiation under IBC Code upto a period of one year. Further, relaxations may depend upon the situation which unfolds over a period but atleast one year’s suspension will be there. Recently only, application of section 7, 9 and 10 of IBC were suspended for a period of six months  in March, 2020.

The Government fears that in view of Covid-2019, there could be increased number of cases under IBC due to defaults emanating from Covid created situation and as such has proposed embargo on any new filings under IBC. Ideally, instead of suspending the operation of IBC itself, Government should try to provide a platform to redress the debtor-creditor issues. Suspension may not be the desirable answer as the problems will continue till resolution is found. Further, suspension alone does not help as there are other legal recourse available to lender such as under SARFAESI Act, 2002, Debt Recovery Tribunal etc. There is no specific mention of stay of recovery procedures under other laws.

Government’s other argument is that in the present crises, there is no one to help companies ripe for IBC filings. Moreover, by suspension, distress buy-outs can be avoided. Finding buyers and investor too would be difficult in such times. It appears that one year embargo will apply to fresh filings only as the applications already filed can not be said to be hit by defaults due to Covid.

Since there may be no new IBC filings in next one year, financial creditors as well as operational creditors may not welcome this move. This includes the entire banking system.

This step may tend to make defaulting corporate debtors more delinquent pushing the IBC proceedings (otherwise very much needed) by a year by which time recovery may get impacted and valuations impaired. Banks will be worried as their recoveries will be hit, non-performing asset (NPA) levels will mount and balance sheets impaired in view of higher provisioning. Even if some relief or relaxation is granted by Reserve Bank of India, Corporate and Bank’s financial statements will actually not reflect a true and fair view in real sense. Thus, on one hand borrowers will have no fear or threat and on the other hand bankers / lenders will be helpless. If the situations worsens, it will create further distortions in the system.

The suspension should not be applicable to section 10 of IBC cases for corporate insolvency resolution plans. By doing so, it would be allowing the corporate debtor to accept a slow death and deprive them from a possible resolution in a timely manner.

Though there have been delays in implementation of IBC in terms of deadlines be it at creditors level, on account of resolution professional  or legal framework, (NCLT and NCLAT), IBC has been at effective tool to address defaulters. Infact, even this decision will have adverse impact on share market behavior too.

Today it is not sure whether the impact of Covid will be for a year or even longer. If it goes beyond, the problem would still persist. As such, at this juncture, we are not sure to whether this one year holiday will just be one year only  or it may be further extended as none of us know how Corona will behave in future and how countries will be able to deal with it in terms of spread, prevention and cure.

Suspension of IBC for one year as well as enhancing the threshold to rupees one crore simultaneously also does not make any sense as if suspension is effected, there was no need to enhance the limit to rupees one crore. Further, suspension should also apply to voluntary insolvency initiated by corporate debtors in which case, unviable units will be forced to incur losses and continue. This needs clarification.

The only relief in terms of work load would be to NCLT and NCLAT which are presently flooded with IBC cases. Further, insolvency professionals and associated service providers would also face the heat of such suspension for a period of one year which will leave them dry and cry from business perspective.

It is learnt that in other countries, such a suspension has not been resorted to.