COVID-19: Lockdown triggers amendments to Insolvency and Bankruptcy Code

lockdown-salil-1 Representational image | Salil Bera

The nationwide lockdown in the wake of COVID-19 outbreak has impacted the business environment due to the suspension of markets, leading to zero earnings for business communities and revenue losses for the state. At the regulatory level, amendments in corporate laws brought changes to S. 4 of the Insolvency and Bankruptcy Code, 2016 (IBC). The ministry of corporate affairs raised the threshold of default to Rs 1 crore from Rs 1 lakh as a response to the financial challenges arising from COVID-19.

More importantly, the Corporate Insolvency Resolution Process (CIRP) could be suspended for six months for either a financial creditor, operational creditor or corporate debtor to file an application if the situation prolongs beyond April 30. However, this amendment could adversely impact the regulatory environment, and in turn affect the business climate in the country.

The move to increase the default threshold to Rs 1 crore by the corporate debtor could be to prevent companies, especially those within micro small and medium enterprises (MSME) category, from being dragged to the National Company Law Tribunal for settlement of debts. This could be a breather for companies that are already struggling with business losses. On the flip side, this amendment could harm the interests of creditors whose only hope for fast realisation of debt is the IBC route.

Similarly, for the financial creditor, this will seriously affect the debt recovery process, leading to a credit crunch in the market. The operational creditor will find it difficult to file an application under S.9 due to the rise in the trigger amount. Even if a financial creditor initiates a CIRP if the default is above Rs 1 crore, the company will continue its business though it is unviable for the operational creditor to supply goods or provide services to the debtor. To that extent, their contractual obligation will not be suspended (S.14(2)(A) Amendment Act 2020) till the debtor commits a default. Even if the debtor commits a default, the right of the creditor to sue the debtor will be curtailed.

To extend this arrangement far beyond April would considerably bring down the value of assets of the corporate debtor and by the time the Rs 1 lakh ambit default is recovered, precious time would have been lost, hampering the interests of all stakeholders.

Further, during this period, the already distressed corporate debtor will find it even more difficult to operate due to diminished business during the shutdown. Statistics show that tourism, hotel, transport, aviation, maritime, automotive, construction, real estate, manufacturing, financial services, education, oil and gas are some sectors severely affected by the lockdown. The flawed thinking that the debtor, if given a longer time frame for repayment, would emerge successful from the crisis, is too optimistic a view to adopt.

The IBC Code, conceived in 2016, has undergone four legislative amendments and interference from courts. Rather than allowing the market to mature and adopt to the regulatory framework these repeated amendments only bring in chaos and unpredictability to an already volatile market. Clearly, the proposed move to suspend S. 7,9 and 10 is detrimental to the business environment which is already stressed due to the pre-COVID global downturn.

The lack of clarity on the suspension of contractual obligations, timelines, bidding etc., which are integral to the CIRP, affect the investor confidence in the country. The proposed changes should balance and protect the interests of all stake holders.

Instead of a blanket ban, the government should accommodate cases, subject to discretion of the tribunal, that will enable a distressed creditor to proceed under the code in a genuine case. This would avoid unnecessarily dragging the corporate debtor, especially MSME’s, to the NCLT and at the same time prevent unfair advantage to a deliberately defaulting debtor.

A relaxation from the maximum prescribed 330 days to complete the CIRP could be provided at the discretion of the tribunal, taking into account the procedural difficulties which occur during these difficult times. Further, with technological advancements, assistance should be provided to the committee of creditors for consultations through video conferences and finalise a resolution plan. Digital bidding and digitalisation of the tribunal proceedings should be incorporated.

The Insolvency and Bankruptcy Board of India should bring necessary notifications and regulations with immediate effect to streamline the entire process. During this time of digitalisation, India should not shy away from adoption of new technologies and the regulators must provide a conducive environment to conduct business. It took the country over 50 years to implement an effective bankruptcy code and improve the ease of doing business ranking to 63 globally.

At this point in time, suspension of the laws and processes each time a crisis strikes will only retard progress. The IBC has enabled debt recovery, managing the NPA crisis and credit availability. For the government, the next step is to evolve an effective debt recovery process and enhance credit availability in order to balance the interests of all stakeholders.

The writer is an assistant professor at the School of Law, Christ (Deemed to be University), Bangalore. The opinions expressed in this article are those of the author's and do not purport to reflect the opinions or views of THE WEEK