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In the wake of recent developments concerning the 2016 Insolvency and Bankruptcy Code (IBC), it is necessary to examine the numerous alternatives to debt management, coping with stressed assets, and promoting economic growth in the region. The Finance Minister announced several changes to the IBC to improve the ease of doing business, one of which being the exclusion of Covid-19 ‘s related debt from the definition of “default.” The threshold for insolvency initiating has also been raised to Rs. 1 crore via the Ministry of Corporate Affairs (MCA) Notification No. Oh, S.O. 1205[E]. Giving more force to the amendments adopted by the Law, Section 10A of the Insolvency and Bankruptcy Code (Ordinance) of 2020 has been added that suspends Sections 7, 9, and 10 of the IBC for a while.
Significance of this development
India has postponed the start of fresh insolvency proceedings for a term of six months to secure the businesses harmed by the outbreak of Covid-19. The ordinance suspends these provisions on the basis that:
- the pandemic has generated confusion and tension for the company for causes outside their control.
- The nationwide lockdown has led to the interruption of routine business activities.
- In such circumstances, it has become difficult to find an adequate number of resolution applicants for a distressed / default business.
The ordinance thus indefinitely forbids the launch of insolvency proceedings based on default committed by the corporation within those six months (or one year if the stay is extended). The probability of financial defaults during this time is slim to zero, and few banks and NBFCs will have had reason to depend on IBC. However, the RBI moratorium does not apply to other financial creditors, such as bond and debenture holders, those to whom debts have been sold, etc. In the case of instance, IBC will no longer be triggered.
Suspension will also prevent operating creditors, such as sellers and suppliers, from filing insolvency proceedings against corporate debtors. To restructure debt, it would also prohibit corporate debtors from self-filing. Although the ordinance is meant to give a respite to the corporate debtor, the abolition of redress under IBC would simply entail the disbursement of liability without resolution. The Ordinance clarifies that the suspension will not apply to defaults made before 25 March 2020. It has also specified that mediation practitioners should be forbidden from launching illegal trade or unethical trade proceedings against directors of firms where the IBC mechanism is suspended.
Objectives and Purposes
- Schemes of Arrangement under the Companies Act of 2013
Section 230 of the Companies Act 2013 read with the Companies (Compromises, Arrangements and Amalgamations) Rules 2016 provides for a scheme of compromises or arrangements with members and creditors. This restructuring scheme aims to increase the productivity and profitability of the company by reorganizing its debt obligations towards its members and creditors.
The temporary suspension of IBC will see a reversal of the “creditor-in-control” regime under the IBC to the “debtor-in-possession” regime under the Companies Act. Nevertheless, the implementation of a clause such as a suspension or a stop in certain procedures when bringing an application before the National Company Law Tribunal ( NCLT) would draw more businesses to the system and shield them from a multiplicity of proceedings. Also, changes to ease procedural compliance or approvals and to set stricter timelines for debt reorganization will facilitate an even more effective alternative.
- Micro, Small and Medium Enterprises
The micro, small and medium-sized enterprises (SMEs) sector plays a pivotal role in the growth of the Indian economy, by encouraging businesses and creating opportunities. Bearing in mind the positive effect of the formalization of the MSME sector on the Indian economy, in its circular dated 11 February 2020, the RBI extended the deadline for MSME to benefit from one-time restructuring to 31 December 2020. This initiative would support the small and medium-sized businesses in the current economic downturn by allowing the strained industry to continue to function while trying to strengthen their balance sheets.
- Debt Recovery under the SARFAESI Act of 2002
The 2002 Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act (SARFAESI Act) is a remarkable piece of legislation implemented to provide security investors with two significant ways to realize their debts. First, it includes a securitization mechanism where NPAs are purchased by the Asset Reconstruction Company (ARC) by a secured borrower and funded by the issuing of security receipts expressing undivided interest in these financial properties or otherwise. Second, it provides for the security interest to be enforced by the secured creditor.
Taking the Indian corporate sector as a huge ocean, metaphorically, full of fish where one is greater than the other, the suspension of IBC will also have an effect on mergers and acquisitions in the coming time. It would necessarily prevent financially-stable companies from rescuing distressed companies by pumping-in funds to keep the operations moving. This contradicts the entire objective of the IBC, which seeks to settle and then liquidate the businesses.
The full suspension of IBC does not seem to be a reasonable idea in the presence of the Government’s already defined increased level, which would work out against the wishes of the creditors, the operating creditors in particular. Having said that, many countries have taken in reforms in their insolvency laws, but India is the only nation to suspend the IBC in its entirety. Although the blanket prohibition would present more issues than the issues it might fix. The solution of the problem would also be of a temporary sort, since after the suspension has been finished, an explosion of CIRPs(Corporate Insolvency Resolution Process) into India’s excessively burdened judicial system will be established.
Therefore, taking into consideration the global indices of insolvency during COVID 19 times, a safer method for the damage management exercise would be for the Government to modify this blanket suspension and then to bringing in the amendments to the operational aspects or to extend the time limits laid down in the Act and also to offer monetary relief to the firms under stress.
This would create a balance between the different creditors and the debtors that IBC has been striving to achieve for so long. Post-COVID-19 transformation exercise will be a business-saving tactic for many companies so that they can maintain more colour in their balance sheets rather than falling to the times and the increasing red side.
Author: Anisha Bhandari from Institute of Law, Nirma University, Ahmedabad, Gujarat.
Editor: Silky Mittal, Junior Editor, Lexlife India.