COVID19 has forced countries around the globe to adopt tough measures to curb its spread. Many countries as a consequence were put under a complete lockdown which in turn has forced major world economies into recession and has caused the world GDP to contract. India too is no exception to it and to aid companies during these tough times, the government has announced multiple relaxations in IBC.
The Government had declared a nationwide lockdown on March 24th in order to contain the virus’ spread. This meant that various business enterprises were going to suffer as there would be no revenue generation owing to which there would’ve been an increase in debts. So, in order to safeguard the interests of such enterprises, particularly MSMEs, the Finance Minister announced some changes in the Insolvency and Bankruptcy Code of 2016. It is obvious that there is going to be almost no revenue generation amidst this crisis which will lead to an increase in defaults and business enterprises, be it small or big corporations would be dragged to NCLTs thereby hampering the economy. Therefore, the Finance Minister while addressing the media had declared that the threshold of monetary default under Section 4 of the Code would be raised from 1 lakh to 1 crores. It was also announced that if this kind of situation continues till 30th April then sections 7, 9 and 10 would be suspended too for a period of six months.
The situation since then has only worsened as a consequence of which section 7, 9 and 10 of IBC remain suspended. While making announcements regarding the 20 lakh crore bailout package, the Finance Minister had also announced that initiation of fresh insolvency cases would now be suspended for 1 year from the previous 6 month period. It was also declared that all COVID19 related defaults would be excluded from IBC.
The government has undertaken such steep measures with the objective of safeguarding the business enterprises of the country from the shutdown of all economic activities. But this is only a half blanket protection as suspension of insolvency proceedings puts the creditors and debtors at a disadvantage.
Suspension of section 7 and 9 can be seen as a necessary move by the government to keep the companies afloat and in business in a time when the country has been under lockdown for over 2 months; owing to which economic activities have come to a halt and businesses have been incurring losses as a consequence.
Suspension of Insolvency Proceedings will guard the companies from their assets being liquefied and will provide them with enough time to secure more funding and credit from investors and banks. However, suspension of Section 10 falls short of such justifications. Section 10 has been enacted to provide an opportunity to the company itself to file for CIRP under IBC if the management feels that no other viable option is available. Who can be a better judge of the company’s financial standing than its management itself and if they themselves are of the opinion that the company’s financial distress is too acute and insolvency is the only way out, they should not be barred under any law or statutory provision to do the same otherwise it will only add to their problems. In the present scenario, this would only cause the company’s assets to deteriorate further in value over the next year.
The measure can also be detrimental to the creditors as exclusion of COVID19 related debts will lead to an increase in bad debts as the move provides the borrowers with an escape route from repaying their dues taking undue advantage of the situation.
The suspension of IBC does not lead to full protection to the debtors either as only part II of the code has been suspended and Part III of the code still remains operational, meaning that insolvency processes against the personal guarantors to the company have not been suspended. Therefore, personal guarantees made by the promoters and directors of the companies can still be taken to the insolvency court under Part III of the code.
Apart from instituting an insolvency process under IBC, the lender also has an alternative as a recourse. He can within his rights initiate a sale of immovable properties of a debtor and can also take over the management of the debtor under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). So far, it would seem that the government has no intention of suspending the SARFAESI Act, along with IBC.
Suspension of IBC would not make any huge difference rather will only deprive the creditors and debtors of its benefits, as the defaulter company will no longer then have the benefit of Moratorium period under Section 14 of the code by which the defaulter company remains protected from any recovery and coercive actions against it.
Also, as far as operational creditors are concerned, they have always been in a state of uncertainty regarding the realisation of their debts. Operational creditors are those who run the operations of the companies such as its employees; and under the current scenario their interests would be jeopardised too as then there will be an increase in employees’ unpaid dues.
However, the creditors do have recourse available in case they want to proceed for their claims against wilful defaulters even after the suspension of insolvency proceedings under IBC. Creditors may file for a summary suit under Order XXXVII (37) of the Code of Civil Procedure, 1908 or a standard commercial suit under the Commercial Court Act, 2015.
The issue here is that for a creditor to file for a suit under the Commercial Courts Act, there is a prerequisite requirement of Court fees; 1% of the total amount claimed which is to be paid by him in accordance with the Court Fees Act. It acts as a major deterrence to the creditors as the said fee can at times be very high with respect to the amount claimed when the same under IBC is a fixed sum of Rs.25000 and Rs.2000 which is to be paid by financial and operational creditors respectively for filing an application.
The government has so far been very conscious of the country’s economic situation and has been undertaking steps necessary to keep the country’s economy afloat but they at the same time must ensure that a system of checks and balances is maintained as suspending IBC alone would not be enough as there are still other mechanisms in place for the initiation of Insolvency proceedings against the defaulter company. Suspension of IBC is not an adequate step as the objective behind the enactment of the Code will be defeated thereby, depriving the creditors and debtors of its benefits.
There is a need to bring an alternate remedy for the creditors like making the institutional director of the bank the part of the company’s board of directors’ so that interests of the creditors can be served. Currently, the step undertaken by the government is a half baked solution. No country other than India has suspended their insolvency mechanisms rather they have provided for some relaxations. Suspending IBC will have severe consequences as exclusion of COVID-19 related debts will then give the company advantage to escape from their liability.
Also, operational creditors like employees will face acute financial distress as there is a chance that many companies; not being able to make profits because of the temporary pause in their business operations owing to this pandemic, now excluding COVID-19 related debts will give the defaulting companies a way out from paying the dues of such employees thereby worsening their situation. The nation has already witnessed the case of Jet Airways where a number of people lost their jobs and were not paid their dues. The government before taking such steps should’ve considered all the circumstances as such incomplete measures will only serve injustice to both the creditors and debtors.
Section 7(i) of the Commercial Courts Act, 2015 r/w Schedule I of the Court Fees Act.
1) Animesh Upadhyay- 4th Year law student at Dr. Ram Manohar Lohiya National Law University, Lucknow
2) Shikhar Shukla – 4th Year law student at Dr. Ram Manohar Lohiya National Law University, Lucknow