The outbreak of coronavirus pandemic resulted in lockdown 1 in India on March 25, 2020. The whole country was on a stand-still and all the work had been paused for an indefinite period. Only the medical sector as well as the essential commodities sector was functioning. With companies’ operations at a halt, various companies, partnerships, and sole proprietorships were on the verge of insolvency.
Where the whole country was on lockdown, IBC rules have to amended to overcome the problems that the pandemic arose. This was the moment where maximum industries and companies were to face a huge amount of losses because of the halt in the businesses and due to lack of workforce. A time where businesses can do nothing to help themselves out of the losses, IBC had to amend to provide these businesses an opportunity to recover and have the ability to pay back the creditors so as to avoid insolvency.
Government, on June 5, 2020, suspended sections 7,9 and 10 of the IBC which deals with the initiation of the insolvency process. Finance Minister Nirmala Sitharam declared that these have been suspended for a period of six months which may extend up to a year. Along with that, the lockdown period would not be counted in any resolution process ongoing and would be treated as if the period never existed. Section 7 of the code deals with filing an application for the initiation of insolvency by a financial creditor against a financial debtor. Section 9 allows operational creditors to file for the initiation of insolvency. Under Section 10 a defaulting company can itself for file for the initiation of the insolvency to save itself from creditors. The timeline for 330 days for the resolution process has also been suspended. In order to bring into effect, the new changes which have been introduced for an indefinite time, section 10A was created in the code which reads as follows: “Suspension of initiation of Corporate Insolvency Resolution Process:
Notwithstanding anything contained in Section 7, 9 and 10, no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed for any default arising on or after 25th March 2020 for a period of six months or such further period, not exceeding one year from such date, as may be notified in this behalf:
Provided that no application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the said default occurring during the said period.
Explanation- For the removal of doubts, it is hereby clarified that the provisions of this section shall not apply to any default committed under the said sections before 25th March 2020.”
RBI has also given the enterprises a three-month relief to the borrowers for the loan repayment. Though borrowers will still be safeguarded in cases below 1 crore for an additional period of three months.
CHALLENGES WITH THE NEW ORDINANCE
There are many aspects that have not been clarified in the notifications that have come forward. Nowhere has it been mentioned whether these changes have been made to the existing filed applications which have not yet been taken up. It is not clear whether these changes are retrospective or not.
Another ambiguity that was discovered was that no expiry time of these changes was mentioned. The amendments were majorly made for the MSMEs of the country. The country is a developing one which would mean a huge number of MSMEs in the nation. However, the face that was missed while making the amendment was that this ordinance might do more harm to these small businesses rather than simply help them. Though these would now be exempted if the amount is less than 1 crore, MSMEs will face a huge problem in the cases where they are owed money. These businesses usually help huge corporates in terms of credit. 1 crore is not an amount that they would be owed by these huge businesses. This will make it harder for them to ensure the recovery of their debts as the same extended threshold lies for all types of businesses regardless of their size or nature. MSMEs are majorly operational creditors to such businesses. With banks asking for their own loan repayment and these small businesses unable to recover their debts, there is going to be a lot of pressure on these enterprises. However, these still have two alternative remedies they could seek, namely, filing for a civil suit to recover debts in arbitration or seeking protection under the MSME Development Act,2006. But under the IBC, they are facing problems rather than protection.
A generalized ordinance would not help in this situation as different sectors of business have been affected differently. While restaurants have been affected heavily, the medical sector has boomed. This amendment would, therefore, be a violation of Article 14 of the Constitution as all businesses are treated equally and not in an equitable manner. A set standard bar cannot be applied to all types of existing businesses. Different sizes of businesses have to be treated differently. With the same treatment, the small creditors who have leaned to the big enterprises will face major setbacks since their recovery amount will be very less than 1 crore.
The suspensions have also been made considering the fact that the realization of assets would be difficult during this time as bidding would not go as planned. Even a moratorium period would not go as planned. The businesses have to handle and save their enterprises on their own. With no insolvency proceedings, the enterprises would have to run despite the losses incurred and might not even be prepared for future losses.
IBC was created for the quick recovery of debts and addressing grievances of such issues. However, with the pandemic situation in the country, the purpose of this code is about to be defeated with all insolvency initiations at hold. The minimum limit to file for insolvency when even a day’s delay occurred was earlier 1 lakh as per section 4 of the code. Now, considering maximum business might incur heavy losses resulting in the inability to pay creditors on time, the threshold for the insolvency initiation is 1 crore.
COMPARISON BETWEEN PAST AND FUTURE OF IBC
Even before the pandemic outbreak, the IBC was not proving itself to be a success. With all cases getting transferred from the civil courts to the NCLT, the burden of cases was already too much to handle. Most of the cases were not being dealt with within the stipulated time frame and out of the rest, only a few of them were successful in debt recovery and the others were handled through arbitration. With the already failed plan of the IBC, the post-COVID impact is not much hope for the NCLT to handle the upcoming huge number of insolvency and debt recovery cases. Mostly all sectors are being immensely hit by the pandemic leading to huge losses. With such a number of enterprises going into losses, the number of cases will also increase. The NCLT already being unable to take up the previous load of cases might face extreme difficulty to add on to the pile of cases already being lingered on.
NCLT already lacked the capacity of benches and tribunals to deal with the issues apart from the heavy workload. There is a very limited number of benches to deal with these issues. Therefore, the resolution could not be done quickly as it should have been done. After the pandemic, the pressure is only going to increase. Resolution professionals were already limited and now with the number of cases increased, the resolution professionals will also face problems dealing with so many enterprises. After the lockdown, the enterprises will face heavy losses that might not even get recovered and so resolution professionals will face a greater challenge during the moratorium period.
Previously, the limit of Rs. One lakh was considered too much to file for insolvency because smaller creditors gave loans below that amount as well. While one lakh was not a huge loss for large enterprises, bad debt of such amount for micro-enterprises was a lot. With the threshold increased to an unimaginable level, MSMEs might not even sustain the post COVID period. The amount credited by them will not be considered under IBC. Though they still have other modes of redressal such as a civil suit, it will take a lot more time than it should. NCLT was created to deal with cases at a much quicker pace which later on came to be a maximum of 330 days. The civil suit takes a lot more time in that with no one specialized in the law. NCLT was specially created to deal with such matter and thus the benches have expertise in the field.
MSMEs would have to work even sustaining losses because they cannot file for their insolvency as per section 10 of the code in case of defaults. In such a situation, these might not be able to survive after the lockdown with the continuously growing losses. Though RBI has given a relief of three months and there is an extended relief of three months, loans would have to pay to the banks. In a situation where the enterprises are incurring losses continuously, repayment of loans would not be possible for such small businesses landing them into more trouble and eventually resulting in the death of the business.
In Belgium, no amendments in any act were made. However, certain measures were taken. Premiums for companies in certain sectors were given. Filing of corporate income tax, legal entities’ income tax, and non-resident tax returns was postponed along with filing for VAT returns. Property tax was deferred.
In France, the business can request for deferral for certain taxes for up to 3 months. Though insolvency law has not been amended as of now, the government has been authorized to do so whenever it deems fit. Currently, the situation is being monitored by the Ministry of Economic Affairs.
In both Australia and Germany, temporary suspension of insolvency proceedings has been ordered to save small businesses from ending.
In Hungary, payment moratorium has been introduced to safeguard the interest of debtors allowing them relief from the obligation of paying on time. During this period, the debtor is not bound to repay his debts. Such debtor need not apply for the moratorium period and simply has to fall in the specified category and meet the agreement requirements. This shall take effect from December 2020.
Most of the countries of the world have postponed the filing of taxes and allowed an extension to pay the loan without penalties imposed. India as well has postponed the filing of taxes till June 30, 2020. Globally, this situation is being currently monitored and nothing can ensure that there shall be no loss to businesses in any country. Every country is taking action as it deems fit as per the situation. These cannot be applied equally to all countries as different countries have been affected at different levels by the pandemic.
COVID 19 has brought an unprecedented situation across the world. India has taken up measures mostly to support the small business sector. Though the intent of the laws passed is to support the MSMEs, the impact of these laws may not be completely positive. On one side, MSMEs are being safeguarded from being insolvent. On the other hand, they are being denied the right to recover their debts from huge businesses as creditors. The law passed has been passed for all businesses irrespective of their size and nature. This would adversely affect certain sectors and small industries more. The law passed is violative of Article 14 of the Constitution which says that equals need to be treated equally and not everyone needs to be treated equally. Since every business is being treated equally, many industries are bound to suffer more problems than before after the passing of the Ordinance.
IBC in the past had numerous flaws and was not working as expected due to various reasons majorly being a lot of backlogs. The quick recovery process was already not on track. With the outbreak of the pandemic, this will further slow the process and even fewer resolutions will be made possible as debt recovery will be extremely tough.
In this hard time, most of the business of the country is struck hard by the lockdown of the country. With the workforce gone and no business for the complete lockdown period, the companies have incurred huge losses. Be it a large or small business, all have been affected immensely in this situation.
Even after the lockdown period, businesses cannot expect a quick recovery of their funds lost. The pandemic has not yet been wiped out. Due to the continuous increasing cases of the disease, people are still advised to stay at home and not go out until it is a necessity. People are refraining from going out as much as they can which means that the demand chain has been affected. It will take a little time for production to come back on track as well as a lot of delays have been caused by the lockdown and the workforce still cannot be fully functional due to the migration of most workers. This has led to a problem in the supply chain as well.
It will take a lot of time to adapt to the new normal. For this, the government is taking steps to mitigate as many losses as possible. However, since such a situation has never arrived before, these steps cannot ensure everything to be correct and will be tested and changed as the situation changes. Until then, these blanket amendments have been enforced.