The Insolvency and Bankruptcy Code, 2016 (hereinafter referred as ‘IBC’) was introduced by the government of India in the year 2016. On 01.10.2016, the government established Insolvency and Bankruptcy Board of India (IBBI) for implementation of the IBC that consolidates and amends the laws relating to reorganization and insolvency resolution of a corporate entity. The Insolvency and Bankruptcy Board of India (IBBI) is a key institution in the insolvency ecosystem.
The Government on 29th March, 2020 vide notification No. IBBI/2019-20/GN/REG059 amended the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 and inserted Regulation 40C which is a special provision relating to time-line and provides that “Notwithstanding the time-lines contained in these regulations, but subject to the provisions in the Code, the period of lockdown imposed by the Central Government in the wake of Covid-19 outbreak shall not be counted for the purposes of the time-line for any activity that could not be completed due to such lockdown, in relation to a corporate insolvency resolution process”. This initiative was undertaken to resolve problems faced by the stressed companies under the insolvency process and mitigating the risks of lenders, bidders and resolution professionals. The board understands that it is difficult for the Resolution Professional (RP) to continue to conduct the process, for members of the Committee of Creditors (CoC) to attend the meetings, and for bidders to submit resolution plans, during the period of lockdown. Considering the above situation, decision was made to exclude the lockdown period from timeline for resolution process. About 2,000 companies are currently undergoing resolution process under the IBC, including Jet Airways, Reliance Communications, Videocon Group and Lavasa.[1]
The Ministry of Corporate affairs had earlier issued a notification dated 24th March, 2020 stating that “S.O. 1205(E) In exercise of the powers conferred by the proviso to section 4 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), the Central Government hereby specifies one crore rupees as the minimum amount of default for the purposes of the said section”. The Hon’ble Finance Minister Mrs. Nirmala Sitharaman has stated that no additional fees will be charged for filing delayed during a moratorium period from April 1 to September 30 for any document, return, statement etc. required to be filed in the MCA-21 Registry, irrespective of its due date.[2]
Further, the Finance Minister stated that newly incorporated companies which are required to file a declaration for commencement of business within six months of incorporation will be given an additional six months as a relief measure. Besides, non-compliance of minimum residency in India for a period of at least 182 days by at least one director of any company, under Section 149 of the Companies Act, will not be treated as a violation.[3]
Considering a major hit by COVID-19 pandemic and corporates going standstill with their regular business operations, government has even decided to suspend provisions that trigger insolvency proceedings against defaulters for upto 12 months. The government has also decided to suspend three sections i.e. 7, 9 and 10 of the IBC for upto six months and the suspension time allocated would be one year and the decision was further confirmed by the Union Cabinet. The section 7 and 9 of the IBC, pertain to initiation of corporate insolvency proceedings by a Financial Creditor and an Operational Creditor respectively. The section 10 of IBC relates to filing an application for insolvency resolution by a corporate.[4]
The government is well aware of the situation and is actively looking after needs of individuals as well as the corporate bodies. Measures adopted by the government have been appreciated by the industry and legal fraternity alike, to quote Mr. Raj Panchmatia, Partner, Khaitan & Co. “It is actively taking steps to alleviate any hardship that may have been created. Bringing this specific amendment is all the more relevant given the strict timelines under the Code and to also address the issues faced by the stakeholders due to lockdown.” [5]
It is also expected that lenders would become more lenient, giving rise to section 12A cases under the IBC. Section 12A was inserted in the IBC in June, 2018 to allow withdrawal of insolvency application by the applicant with the approval of 90% of the members in the committee of creditors.
“The impact of corona virus will be highly disruptive for the insolvency industry; even the plans which were either approved or under consideration by the committee of creditors and NCLT may go back to the drawing board” said Mr. Sumant Batra, managing partner at law firm Kesar Dass B & Associates, which specialises in proceedings under the IBC. [6]
If insolvency proceedings are initiated at a mass scale, then it can have a devastating impact on the economy, because, during the Corporate Insolvency Resolution Process (CIRP), the management of the corporate debtor switches hands with the Resolution Professional and he/she only carries out such activities that are essential for running the businesses as a going concern. Keeping up with the needs of the fast-changing business environment, IBC has been amended for the fourth time since 2016 with multiple amendments under corollary laws in order to ensure an effective working of the economy. It will be intriguing to wait and watch if the government eventually relents to industry’s demand for suspension of key provisions of the IBC for as long as six months. These amendments are likely to smoothen the insolvency resolution process and may prevent the corporates from sailing close to the wind during this period of recession that India Inc. is set to face amidst the lockdown.[7]
However, Government’s proposal has failed to consider that some lenders, including Operational Creditors, may not be able to absorb the fallout of bad debts. Similarly, it may add to the already stressed balance sheet of financial institutions, and they may not absorb any more pressure. By denying lenders the right to invoke insolvency proceeding under IBC, it is denying them the right to recourse to a timely and efficient debt resolution mechanism. In fact, it will only prolong their struggle to enforce debt and may increase the stress on the financial system that was already struggling with bad debts prior to the breakout of COVID-19 as well as on individual lenders themselves.
The Government needs to come up with more nuanced policy measures, rather than stopping recourse to the IBC on a blanket basis. These are few suggestions which the Government can consider as an alternative. Firstly, section 29A of the IBC should be revisited, as this section prevent the incumbent management and promoters from proposing resolution plan in insolvency resolution proceedings. This section will unfairly prevent existing promoters who may have defaulted due to conditions caused by COVID-19 pandemic, from retaining control of the debtor and considering the situation, other persons may not be willing to propose a resolution plan for companies in the near term. This may lead to oversupply and fire sales of assets. Thus, restricting the applicability of Section 29A, potentially only to wilful defaulters would ensure that the distress will get resolved in an orderly and efficient manner and not imposing burden on the promoters.
Secondly, the government should focus on enhancing the infrastructure, practically e-court infrastructure, for the NCLTs and NCLAT. The government should also consider exemptions from the dispensable process related requirements, so that the system is not overwhelmed by a large number of insolvency resolution cases and can resolve more efficiently.
Thirdly, the RBI can issue guidelines on the basis of which financial institutions may consider resources to the IBC.
The steps taken by the Government are with the view that business survive from threat of immediate stress without compromising management bandwidth, so that economy can recover. However, it has failed to consider the stress upon the Operational and Financial Creditors. This may also give an opportunity to unscrupulous borrowers to take advantage of the situation. For that, the Government has to give recourse to its strategy to tackle the situation and stabilise the economy.
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[1] https://ibbi.gov.in/legal-framework/updated
[2] https://ibbi.gov.in/legal-framework/notifications
Disclaimer: The views or opinions expressed are solely of the author.