CS Chahat Jain

Chahat Jain

In the Press Release held on 24th of March, 2020 the Finance Minister, Nirmala Sitharaman announced many relaxations in the wake of surging outbreak of Covid-19 and considering the extended situation of lockdown in the Country. The economy has been hit hard by this outbreak. Amidst the lockdown, extension of corporate deadlines and relaxation of taxation norms brings in great relief to the taxpayers and businesses in the country.

Besides all the positive moves, revamping the threshold of default to trigger Insolvency and Bankruptcy Code, 2016 (‘IBC’ or ‘Code’) from 1 lakh to 1 crore is a cheerless move to provide reliefs to MSMEs and other small companies. IBC is a behavioural law. Increasing the limit to 1 crore to save MSMEs may lead to increase in blocked or dead debts of such MSMEs or small business houses who are in reverse the operational creditors for such big corporate debtors.

Above this, the Government is mullingover the suspension of the Section 7,9 & 10 of the Code for a period of 6 months to 12 months through an Ordinance. However, it can be construed that the companies in which the insolvency process has already begun shall continue its process subject to relief in timelines for any activity that could not be completed due to ongoing lockdown[1] in the country.To add on, the Ordinance would also pave a way to restructure loans however the same is currently not permissible by the RBI.

Section 7 pertains to application by a financial creditor (i.e. banks, financial institutions, etc.), Section 9 pertains to application by Operational creditors which provides goods and services to corporate debtors and Section 10 pertains to application by debtor company itself who is unable to pay off its debts.

This revision and suspension are aimed to provide cushion to MSMEs and buffer to the crashing economy, but it has shaken up the noble intention of the Code of reviving the stressed firms. The objective is to keep the firm alive, to maximise the value of the asset and balance the interests of all stakeholders. It is definitely not liquidation.  Suspension of such sections may lead to loss in the value or quality of the assets of the Cooperate debtor.

Since the initiation of insolvency proceedings during these times are likely to severely clog the NCLTs and therefore, the government calls for suspension, albeit for a temporary period. However, a blanket ban will take a hit to the creditors and it could take much longer time for operational creditors to recover their dues in absence of legal recourses.

Another area of concern is the companies which are stuck in the debts and wants to exit by their own. Suspension of Section 10 could backfire as such corporate debtors unable to recover from the Covid 19 impact or already indistressed situation much before the pandemic may be stuck in debt and will not have a timely and viable exit option. Keeping the Section 10 in action could allow such crashed corporate debtors a second chance for revival and realise of its debts.

Further, suspension of Section 7 for around 12 months or more may lead to question on RBI’s ageing and provisioning norms for the financial creditors. According to the RBI’s June 7’ 19[2]circulars, banks get 210 days from the day of default to come up with a resolution plan for borrowers with outstanding dues of over Rs 2,000 crore. They are expected to make additional provisioning of 20 percent, over and above the provisions they hold, if the plan is not implemented within 180 days. If the plan is not implemented within 365 days, provisioning goes up up to 35 percent. Banks will have to substantially increase provisioning and provide adequate capital buffer to absorb losses on account of large defaults.

Increasing the threshold has already wiped off large chunk of operational creditors from filing application for recovery of their debts, closing the doors for such long period may hurt their business, debt and revenue cycle. Further,the RBI has already allowed financials creditors to provide a moratorium of three months on loan instalments, which can defer the liquidity of the financial creditors and pose difficulty in extending credit to potential borrowers. Even if the credit is extended to potential borrowers, such borrowers shall be in limited or no capacity to repay considering the temporary lockdown in recovery mechanism, which shall only further dry up the liquidity of the creditors.

Building up gap between debt and recovery mechanism for a such proposed periodwould save the economy, is an imperative question of judgement. The Government taking little too much step to protect the corporate debtor through suspension should have also come up with the rescue major for the creditors who despite of second phase of the lockdown will be left remediless till the long questionable suspension period. On contrary, the period of six months may not be enough for the borrowers to regain their repayment capacity, the movement of payment is hauled disrupting the cycle leading to growing uncertainties of economic recovery, the suspension of the IBC may not render envisaged outcomes.

Since no economy knows the end date of this pandemic and its repurcations, it is not only India, that has suspended the aforesaid sections of the Code or has bought amendments in the provisions of its bankruptcy law. Many countries in the world has opted for such suspension of the insolvency laws in their respective countries. The UK government has suspended initiation of any new cases against companies which are in good health and are impacted due to this pandemic.

In the United States, Chapter 11 that talks about the bankruptcy law in the USA has been amended to take into its ambit the debt size of USD 7.5 million to provide support to number of companies which have been or are likely to be impacted due to the pandemic.

Australia have chosen to increase the eligible debts for receipt of bankruptcy notices by individuals from $5000 to $ 20,000. Further, such individuals will also get time for 6 months to comply with the same. Also, the personal liability of the directors of the company debts have been suspended.

While, in Germany, the government has suspended the obligation for filing for insolvency till 30th September, 2020. Along with, providing protection to the management of the insolvent companies from personal liability in connection with payments affected during the pandemic.

Indeed, the step taken by the Government would safeguard the economy and shall prevent the mass initiation of corporate insolvency proceedings against the companies that have defaulted due Covid 19 impacted period and lessen the burden of already burdened NCLTs but this is surely not why the IBC was came into existence in the first place.Steps are required to safeguard both the sides of scale.However, increasing the threshold limit from Rs. 1 lakh to Rs. 1 crore will always be an hinderance amongst numerous business of the country and only time will say if any application against the said ordinance will be filed before the Apex Court.

https://taxguru.in/corporate-law/revised-ibbi-insolvency-resolution-process-corporate-persons-third-amendment-regulations-2020.html

https://taxguru.in/corporate-law/ibbi-liquidation-process-second-amendment-regulations-2020-notified.html

https://taxguru.in/rbi/rbi-releases-prudential-framework-resolution-stressed-assets.html

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