prpri COVID-19 Impact On IBC COVID-19 Impact On IBC

COVID-19 (coronavirus) is significantly impacting businesses and the economy worldwide. In the middle of the ongoing crisis, every regulator authority, be it the Reserve Bank of India, the Securities and Exchange Board of India, the Ministry of Corporate Affairs or the courts, has made efforts to ease the burden on businesses,creditors and general public,by recalibrating their existing regulatory frameworks to addressing the emerging scenario, same has been done in IBC.

Major Changes brought in IBC due to COVID-19:

Regulation 47A introduced in IBBI (Liquidation Process) Regulations, 2016 &  Regulation 40C introduced in IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

Revised IBC threshold limit, from Rs. 1 lakh to Rs. 1 crore.

Three month moratorium on repayment of term loans.

Govt to suspend insolvency provisions from IBC for up to 1year.

Govt plans pre-packaged IBC deals to ease the burden on bankruptcy courts. where a restructuring plan has been agreed in advance between the company and its creditors.

The National Company Law Tribunal has cancelled the Summer Vacation, 2020 for all its benches, in view of loss of work due to the lockdown.

Positive & Negative Impact of Recent Changes on Businesses & Creditors:

Introduction of Regulation 47A & 40A.

The Insolvency and Bankruptcy Board of India (IBBI) by introducing regulation 47A & 40C; ensuring that the national lockdown period will not be counted for the purpose of timeline of completion of any activity under their respective regulations. It will ensure that unnecessary defaults do not occur in the future. This move would also ensure that the NCLT is not flooded with procedural applications seeking extensions and or condonation of delay in meeting timelines.It is a major relief provided to corporates.

Revised IBC threshold limit from Rs.1 lakh to Rs.1 crore.

Aiming protection to the Micro, Small & Medium Enterprises (‘MSMEs’) from being pushed into insolvency, the MCA vide its notification dated 28.03.2020 has tried to relieve these entities by increasing the threshold limit for claim from Rs 1 lakh to Rs 1 crore. Now, the companies can focus on stabilizing the business operations rather than being under the constant fear of inevitable insolvency.

A few months ago, the government made another amendment under IBC introducing a minimum threshold of 100 or 10% of the homebuyers, whichever is lower. Now these recent two amendments will surely impact homebuyer rights. They limit the avenues for redress available to aggrieved consumers.

Three month moratorium on repayment of term loans.

RBI in a press conference dated March 27, 2020 announced that all banks and NBFCs have been permitted to allow a moratorium of 3 months on repayment of term loans. Availing such a moratorium would also not lead to a down grading of the borrower’s credit rating or affect the risk classification of the loan.The rescheduling of payments will not qualify as a default for the purposes of supervisory reporting.

Govt to suspend insolvency provisions from IBC for up to 1 year.

In a bid to avoid companies at large from being forced into insolvency proceedings as businesses get impacted due to COVID-19, government is preparing to introduce a new clause10A, under section 10 of the code. An ordinance would be promulgated to suspend Section 7, 9 and 10 of the IBC  for 6 months and the suspension time can be extended up to 1 year.

But, IBC suspension will hurt debt restructuring process. IBC provides the most viable option for debt restructuring of stressed firms. Instead of suspending the Code, the government should amend it suitably. Debt restructuring would be particularly necessary after Covid-19 crisis.

Indian law presently provides 3 routes to debt restructuring. First, the RBI’s June 7 Circular, which provides an out-of-court restructuring option. Second, the IBC, that could be used for restructuring under the aegis of the NCLT. Third, a scheme of arrangement under the Companies Act, 2013, which is hardly used in practice. And now with the IBC due to be suspended, the only option practically left is the RBI Circular.

The Circular applies only to RBI-regulated lenders.The IBC does not suffer from any such limitations. It applies to all claimants of the corporate debtor, including lenders, whether regulated by the RBI or not. This provides a much more holistic restructuring framework compared to the Circular. Moreover, IBC provides a statutory moratorium on recovery actions by all claimants. This assures every creditor that no other creditor can engage in an asset grab race during the restructuring.

Some Winning Bidders look to wriggle out.

Resolutions under IBC may  become tough to get, after the onset of Covid-19 crisis as bankers fear winning bidders will review their interest in bankrupt companies and renegotiate bids or pull out altogether. As Currently tight cash flow condition is going on in the country, this tight liquidity condition will impact stressed firms’ value maximisation, leading to a decline in number of interested bidders for these assets.

Bankers now fear that many winning bidders will invoke the material adverse effect clauses to lower the price they are paying to buy companies.

Difficult to disburse interim funds to IBC firms.

Resolution professionals (RPs) are facing tight liquidity conditions to keep firms as going concerns. They are then left with one option to get interim finance from lenders. During this current tight cash flow condition, It is very difficult for any lender to disburse interim finance to the stressed firms which are undergoing insolvency resolution process since recovery will be a major concern.

Recognizing the need of the hour, the writer has provided some additional measures that can be taken by the government, which are as follows:

Government to increase the number of NCLT benches to tackle the the growing no. of cases.

Allow resolution plan to be amended after its submission: Given the current situation, The resolution plan submitted to the adjudicating authority  may not meet the haircut amount due to the effect of Covid-19. Therefore, the CoC should be allowed to reconsider its views on a previous plan, and submit a revised plan.

Revised IBC threshold limit from Rs.1 lakh to Rs.1 crore, to be a temporary measure only: If it is made perpetual, it would be causing a lot of unrest among small operational creditors, MSMEs etc, as they would not be in position to drag the corporate debtors into insolvency due to the higher threshold of more than 1,00,00,000.

Changing the locus of the promoter of the corporate debtor under section 29A(c) of the IBC: The short window of 1year has prevented even genuine promoters from being given a second chance, even though such promoters are often in the best position to revive their businesses. In view of the current situation the period of 1year be extended to 2 years for the time being.

The requirement of 90% of the CoC agrees under section 12A of the code, to exit the insolvency process thus bringing the promoter back in control of, be reduced to 75% of the committee.

Amend section 30(4) of the code, and requirment of 66% to approve a resolution plan by financial creditors, be increased to 75%.

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July 2021