Ashika Jain and Lakshay Garg*
The present situation has unleashed a series of events that were unimaginable a few months back. This slowdown due to the pandemic has brought an unpredictable economy and increased stress in the global business scenario. The World Bank has also suggested that policy measures should be taken to strengthen the insolvency framework of the countries so that firms could be saved and economic recovery is boosted. In these hard times, the decision of suspending IBC for 6 months has provided relief to some and has raised doubts in the minds of others. The suspension implicates that creditors will be barred from initiating insolvency proceedings against the corporate debtors. The intent behind this measure is to provide relief to the corporate debtors, against the specter of IBC, who are already beleaguered by the prevalent circumstances. The suspension was imposed to reduce the burden on NCLT, to put less stress on the efficacy of its functioning.
An acceptance to incompetence
The external variable in the form of the COVID outbreak has hampered the business worldwide. Moreover, there are severe distressing conditions that businesses have to face mostly due to cash-flow issues and default on their debt obligations. Mandatory procedures under Corporate Insolvency Resolution Process such as interim financing for insolvent assets, time-bound resolution process, and a “creditor in control” model may not be easily met under the present COVID-19-induced conditions. Another concern can be an over-burdened NCLT besides everything. These could be the probable reasons to suspend the Code.
The suspension is not expected to automatically solve the muddle as much as it buys time for inevitable decisions. The present change may reduce the number of cases for the time being, but in the absence of a concrete monetary policy move, piles of case files may flood the NCLT post-suspension. Moreover, suspending IBC to prevent liquidation prove to be counter-intuitive as firms that could otherwise be restructured will now directly go into liquidation. Even if a firm manages not to go into liquidation immediately, the value will keep on deteriorating, making the operations of the stressed firm highly unfeasible. The step was indeed taken due to the high stress in the economy encountered by the banks even before the initiation of the lockdown period. A loan of 25 lakh crore outstanding to the MSMEs with a 9-10% bad loan criterion added to the worries of the government departments.
The decision to suspend the IBC is a done deal, yet it does not appear to be a suitable move under the present circumstances. IBC does not penalize or oust the promoters unless they have been at the helm of a stressed company or those who have defaulted in their guarantee obligations. It helps to rebuild (by way of a proper mechanism) the businesses that otherwise may have lost their identity due to the non-payment of debts.
Alternatives to IBC
1- Post the suspension period, the secured lenders may wish to recover their dues by the enforcement of security under the SARFAESI Act. However, this alternative has its setbacks. It becomes a herculean job due to the involvement of arbitration and litigation processes. The corporate debtors and promoters will always want to strike back with the challenging actions leading to protracted litigation, hence making it a highly ineffective recovery mechanism. Moreover, the SARFAESI Act provides relief only to certain groups of creditors making it unavailable for the other classes thereby making it an incomplete method of recovery.
2- Another alternative that stands out in these times is the June 7 framework as notified by the RBI under the head “Prudential Framework For Resolution Of Stressed Assets“. It requires lenders to carve out their case that prima facie reviews the debtor in the scenario involving default, which aids in future course of action that might include a resolution plan or initiation of legal proceedings for insolvency or recovery. If formulation of a resolution plan is called for, and inter-creditor agreement is formulated that will govern the inter-se dealings on how to agree on and approve a resolution plan and will provide for related standstill provisions until the plan is implemented, etc.
Some of the essentials of the June 7 framework include:
– Asset reconstruction companies are not covered under the said framework but are still required to enter into an inter-creditor agreement.
– Lender that is not covered under the said provision will have to enter the inter-creditor agreement only voluntarily.
– The trade creditors or the government authorities cannot be a party to the inter-creditor and participate in the resolution plan for the corporate debtor even if they are owed money by the corporate debtor.
Drawback: The notification provides only partial relief to the debtor and may be impacted by the recovery action taken by other creditors who are not bound by the terms of the resolution plan. Furthermore, the demands of the operational creditors will not be met who would then prefer to re-building their cases once the IBC is back or will take their chances with litigation and arbitration.
3- One of the alternatives available for the scheme of Creditor Arrangement is under section 230 of the Companies Act, 2013. Although this provision has not been looked upon a lot so far, yet in the absence of IBC, creditor schemes under the Companies Act could provide a feasible alternative to resolution under IBC. The benefits include the binding nature of all the stakeholders and limited grounds of judicial review.
Drawback: The main drawback of a creditor scheme is that it does not initiate an automatic moratorium, unlike the IBC, hence leaving a possibility that a precipitative action might be initiated to enforce security or seek injunctions. It is advised that the regulatory changes made by the government should be thoughtful, flexible, and reasonable towards time as well as companies. One cannot put a red light on a resolution system and provide a slapdash answer to a bigger problem.
4- The alternates provided by Sunil Mehta Committee can be put to test in these times. This committee started a project named Sashakt where the following plans were given a thought while administering the issue of NPA resolution:
– SME-Led Resolution: it suggested that an SME committee should be set up to deal with loans up to Rs. 50 crore by using a template approach
– AMC-Led Resolution: The idea is to the fate of delinquent firms through mergers and acquisitions. In such difficult times, government should try its best to operationalize existing asset management companies while also promoting foreign investment in the distressed asset companies.
– Asset Trading Platform: it is a platform whereby an exchange is created for trading the distressed companies. It further helps to enable mobility and price discovery of the said assets.
5- Sale of exposure of the banks to the asset reconstruction companies: This structure will allow private equity investors to participate in the restructuring of stressed debt by investing in security receipts issued by ARC. Thereafter, a deal can be sought out by ARC with the promoters of the stressed debtor for resolving the stress. This gives greater flexibility in dealing with stressed assets.
Learning from other jurisdictions
– Policies such as “prepacked resolution” may be adopted, following the footsteps of other jurisdictions.
– The UK propounded Corporate Insolvency and Governance Bill, 2020 which proposed a “restructuring vehicle”. It fundamentally provides corporates with numerous benefits and considerable flexibility such as cross-class cramdown. The government in the country needs to come out with irrefutable measures whereby the framework provides a collective resolution between the creditors, while simultaneously providing for safeguards to balance transparency with maximization in the value of businesses.
– The idea of “Bad Bank“, which was developed as a response to the 2008 crisis can be relaunched. The plan has been considered globally, such as by EU due to its uniqueness of combining the ownership of government and private resources to encourage quick solutions.
Though the suspension is expected to be a reassurance measure, one must take a holistic view while dealing with the after-effects and possible outcomes. The uniqueness of the IBC Act is that it not only provides for the revival of a corporate debtor but all the stakeholders. The suspension of IBC will not stop lenders from endeavoring to recover their capital but the protean nature of the IBC process would be missing in the alternative processes. Furthermore, there are chances of mala fide routes paving the way for the lenders as the deterrent actions of IBC stands suspended. The fact that a binding framework of resolution outside of IBC has never found much success in the Indian market scenario adds to the plight. Furthermore, all the creditors coming together without the sword of IBC, has never found much success.
With IBC suspended and Covid-19 induced insolvencies on the rise, there will be an increased need for the channels which could help restructure the debt and effectively deal with debt exposure and non-performing assets respectively. Therefore, this may be the perfect opportunity to implement reforms centered on the strengthening of debt restructuring and resolution outside the ambit of the IBC.
Author 1- Ashika Jain| 2nd Year| B.B.A. LLB | Gujarat National Law University, Gandhinagar, Gujarat
Author 2- Lakshay Garg | 3rd Year| B.Com.LLB | Gujarat National Law University, Gandhinagar, Gujarat