IBC Suspension May Hurt Debt Restructuring Process

Finance Minister announced on May 17 the suspension of fresh initiation of insolvency proceedings up to one year and exclusion of COVID-19 related debt from the definition of “default” under IBC with an aim on further development of comfort of doing business in India. This would mean that no applications for corporate insolvency resolution process (CIRP) can be initiated by financial creditors, operational creditors and the company itself during the period of applicability of Section 10A.

The pertinent question however which is unanswered by the government is that when the proceedings have been suspended then what is the need of the distinction in the definition of default?

By the increase in the threshold limit to initiate proceedings under IBC from the existing limit of Rs 1 lakh to Rs 1 crore, exclusion of default due to COVID-19 and barring initiation of new insolvency cases for next 1 year will certainly help corporate entities who sincerely want to pull themselves out of an economic crash or slowdown but this will eventually obstruct the recovery prospects of financial institutions in cases of existing defaults by a corporate entity and in those cases as well where the accounts have already been declared as NPAs.

Another ambiguity here is that when the threshold has been increased then what is the need of suspending section 7, 9 and 10 entirely? Also when the aforementioned sections are temporarily suspended then what is the need of increasing the threshold? It should have been done on case to case basis.

The blanket suspension of defaults on account of COVID-19 could lead to inadvertent consequences. Questions like why should a corporate entity not refer itself to insolvency, why should a financial creditor not refer entities to insolvency which is important in the current situation, what is the similar system of resolution, recovery steps are not reduced and therefore will continue to rise, what is the framework for creditors to come up with a viable resolution plan outside of IBC, a special Insolvency Framework for the form of section 240A which is proposed to be introduced for MSME, at this juncture it is not clear that when the sections to initiate CIRP are suspended then how is the addition of the new section be of any help continue to remain unanswered.

Another important aspect is the fate of the applications pending for admission in the NCLT, what would be the outcome of them? When does these amendments come into effect, are they retrospective in nature or prospective? Hopefully there will be a clarity on the above mentioned issues when the ordinance is introduced.

Covid19: Imperative That World Prepares For An Economic Depression

It is important to remember that IBC was brought in as a substitute to implementation and as a measure for viable companies to re-claim its lost credit and survive as a “going concern” with fresh life. Time and again, the preamble and intent has been upheld that the IBC is a means of resolution and not recovery. Departing from the decision of resolution, inevitably opens the door for recovery and this could be a huge unplanned significance of the blanket suspension.

The elementary notion of IBC – where a creditor is in control and the resolution professional takes charge and control over the debtor’s assets – would no longer be applicable and the foundation of the process has been irreversibly lost. The efficiency of IBC was achieved because of the significant departure from the past whereby the debtor in possession was substituted by the creditor in possession. IBC introduced the concept of creditor in possession and control.

Suspending IBC in entirety, while it looks like a relief to corporates, could actually lead to the corporates being in a state of flux, as all creditors coming together without the sword of IBC on them, has never really won the popularity vote otherwise there was no need for introduction of IBC in the first place and options like SARFAESI, CDR, SDR, Sustainable Structuring of Stressed Assets would have been enough. In times of Covid-19 related crisis, IBC provides the most viable option for debt restructuring of stressed firms. Instead of suspending the Code, the government should reviewed it again