Insolvency & BankruptcySuspension of The Insolvency & Bankruptcy Code Provisions – Boon or Bane?

Prelude           

Recently the Government of India through the Ministry of Finance has announced that the Insolvency & Bankruptcy Code (“IBC”) proceedings under Section 7, 9 and 10 would be suspended for a period of 6 months and no new proceedings can be filed under these Sections. A new Section 10A is expected to be inserted in the IBC which will bring the suspension into effect.

This is being done in light of the announcement made by the Union Finance Minister Nirmala Sitharaman on March 24^th while increasing the threshold limit of minimum debt amount from Rs. 1 lakh to Rs. 1 crore. She was quoted as saying that the Government wished to review the situation after March 30^th and if deemed necessary, these relevant provisions of the IBC would be suspended for a period of 6 months at least.

What was the need?   

This decision has obviously being taken in light of the COVID – 19 Pandemic to ensure that the due to the financial stress that the companies are already facing, they are not into insolvency with no turning back.

This decision has also stemmed from the increasing pressure of insolvency against companies, especially MSMEs. This added with the fact that no new buyers or financial investors would be willing to invest for the successful insolvency resolution of the distressed companies which would inevitably lead them into liquidation.

This is being brought in as a one-time measure, initially for the period of only 6 months. The Government has also emphasized if need be, the Section 10A would be further extended for a period of 6 months and that this Section 10A would not be in force for a period of more than 1 year from the date of its insertion.

What would be the impact?

The major concern and impact that would be seen is on the debt restructuring of the companies during and after the Pandemic. It is no secret that even the biggest of giants are in a financial turmoil right now and the smaller companies are the ones that are taking the biggest hit.

Therefore, most of them would have been looking at some sort of a resolution plan to keep them as a going concern had insolvency proceedings been initiated against them. Similarly, a lot of stressed companies would have been looking for Debt Restructuring through the provisions of IBC once situation normalized after the Pandemic.

Similarly, the organizations who have huge credit stuck in others, especially the Operational Creditors, and do not have the financial viability to continue will also be ultimately forced into liquidation. With IBC provisions still in place, they could have resorted to recovering their debts in a more time bound and efficient manner. Hence, this suspension has gone against the very idea of introducing IBC in the first place, i.e. keeping the company as a going concern.

For Financial Creditors such as the banks and financial institutions, the RBI had already imposed a moratorium of 3 months on the recovery of loan and therefore, the suspension of Section 7 has now come as a two edged sword. These financial institutions are now facing stress on their balance sheets, which they may or may not be able to survive.

Conclusion And Critique

Though the notification is awaited to that effect but the blanket suspension of the IBC provisions has raised many eyebrows not just in India but also from the Creditors abroad. Though the companies whose creditor list was increasing by the day may take a sigh of relief, this suspension may also hamper the foreign companies investing in India as they would be afraid of not having a proper recourse mechanism for recovery of their debts and/or resolution of companies which are financially stressed.

It is often being aired that instead of resorting to a blanket suspension, the model followed by Australia could have been followed and apart from increasing the minimum threshold limit and providing temporary relief to financially stressed business and individuals.

It is not an alien fact that almost 50% of the applications in the NCLT are for a debt of below Rs 1 Crore. Since the threshold limit was already increased to Rs. 1 Crore by the MCA notification dated 24.03.2020, another mechanism to combat the issue of insolvency could have been to carve out specified exceptions rather than a blanket suspension.

One more change that the Government could have brought in instead of a blanket suspension is to increase the time period in Section 8 from 10 days to may be 3 months or more. This would have given a corporate debtor more time to reply to the operational creditor and handle his finances and pay of the debt rather than a sword hanging over his head of immediate action by the operational creditor under Section 9.

There is a dire need to revisit the suspended provisions of voluntary insolvency under Section 10 otherwise it would only leave an already stressed operational creditor without any recourse of keeping itself a going concern. Any delay in pushing the company into insolvency may also affect the market value of the assets especially since this Pandemic has already lowered the buying and investing power of corporations.

Restructuring exercise post COVID-19 can be a business saving mantra for many businesses so that they can retain better color in their balance sheet rather than falling to the tune of the times and increasing the red side.

Therefore, going by the global clues in insolvency during the COVID-19 times, a better mechanism towards damage control exercise would be that the Government amends this blanket suspension and instead resorts to bringing in changes in the procedural aspects or increasing time limits under the Act and even providing monetary relief to stressed businesses. This would create a balance between the different creditors and debtors that IBC has for so long strived to achieve.