IBC Suspension – More a Problem than Solution?
Aishwarya Anand (Advocate)
When the economy is fighting back from the slowdown and disruption caused by COVID-19, the Finance Minister, as a part of her economic relief package and to promote an “Aatmanirbhar Bharat” has announced an ad-hoc suspension of section 7, 9 and 10 of Insolvency and Bankruptcy Code (\"IBC\") intending that no fresh insolvencies can be initiated against companies\' for one year while keeping the COVID-19 related-debt outside the purview of default under IBC. The intention of the government behind introducing this move is to reduce the burden on the companies while anticipating their revival as warned by the World Bank which stated that a gigantic economic slowdown is evident in India. The author through this article aims to analyze the implications of the suspension on IBC at the macro-economic level while arguing that the reasons as to why blanket-suspension on the IBC could not be a way out for an efficient revival of these companies and what could be the possible strategies that could be adopted, on the contrary.
Undoubtedly, the MSMEs required external support to save them from the defaults that occurred from COVID-19. To tackle this issue, the threshold for initiating CIRP was increased from 1 Lac to 1 Crore through a notification dated 24-03-2020. It can be considered to be a somewhat sensible move, though only for a limited time. However, the suspension on IBC is likely to be taken with a pinch of salt for a variety of reasons. Time and again, the insolvency laws of various countries have evidenced changes during the disruptive times like that in the great depression, the Asian depression et cetera. However, all economies had stressed on the newer and effective methods of restructuring rather than approaching a complete pause on the CIRP.
It would be essential to analyze the implications of the suspension of IBC, it would bring to the economy and they are presented below:
- Restriction on self-initiated CIRP under section 10 of IBC takes away the right of the Companies of opting itself out from the market. It has been a common scenario under the insolvency regime where companies opt for their restructuring through section 10 of IBC arising out of the unbearable financial crunch. This refusal negating the freedom of exit amid COVID-19 is exactly what is not required to be done, in utter contravention to the fundamental spirit of IBC.
- The presence of other recovery legislations poses a problem wherein a creditor, has other options to legally initiate recovery against the companies. For instance, Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act, 1993 can be effectuated in cases where if the creditor is a financial institution. Additionally, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFEISI) Act, 2002 can be used to recover the debt by a bank if security is involved. Needless to mention, a civil suit for money recovery under Order 37 of Code of Civil Procedure, 1908 can also be filed by an individual.
- Restricting the constitution of COC and Moratorium under section 14 of the IBC, which earlier used to benefit the debtor by providing the bar against the market-selling of its assets and initiation of legal proceedings would create an influx of recovery proceedings against the debtors once the suspension of the IBC gets over and even during the suspension, in certain cases.
- The promoters of the Companies will be targeted during the suspension of sections 7, 9, and 10 of the Code. It has been seen in a catena of occasions where the directors and promoters of the Companies extend their personal guarantees to its lenders and in these cases, they can be prosecuted under Part III of the IBC.
- Disturbance in the capital flow of the economy can be a possible outcome from the suspension of IBC as the prohibition would restrict the creditors from receiving any money from the companies which would act as a catalyst to the creditors making further defaults to their lenders. This can create a circular disturbance to the capital flow of the economy and can bring unexpected economic disruptions during COVID-19 where the economy should ideally target to get the capital flow moving.
Taking the Indian corporate market as a vast ocean, metaphorically, full of fishes where one is bigger than the other, the suspension of IBC would also affect the mergers and acquisitions in the coming time. It would necessarily preclude financially-stable companies to rescue the distressed companies by pumping-in the funds to keep the operations moving. This defeats the very purpose of the IBC which aims resolution and rather liquidation of the companies.
Going by the concerns mentioned above, a complete suspension of IBC does not seem to be a legitimate idea in the presence of an already provided increased threshold by the government which is going to turn out against the interests of the creditors, operational creditors in specific. Having said that, there are other jurisdictions that have brought transformations in their insolvency laws, however, India remains to be the only country to suspend the IBC, in its entirety.
Talking about the position in developed countries, Australia while increasing the threshold limit to initiate CIRP from $2000 to $20,000, has increased the statutory time to respond to a demand to six months from 21 days. This move will provide a healthy window to the debtor to settle the debt and would also not hamper the capital flow. Likewise, Singapore has also enacted similar provisions like Australia, more specifically enshrined in its COVID19 (Temporary Measures) Act, 2020.
In addition to that, France has amended its insolvency laws based on the state of cash-flow for the initiation of CIRP against a debtor. While declaring a medical emergency till October 2020, it aims to assess a debtor\'s position on the state he had as of 12, March 2020. Thereby, mandating the initiation on CIRP against a debtor only when he reaches a cash-flow position as was before COVID-19. This move will keep the business of the debtor in operation and will provide an opportunity to generate capital flow and settle his dues in the market. Furthermore, Germany in its newly amended insolvency laws aims for initiating CIRP only against disputes which are first, not COVID-19 related, and secondly, if there lies no prospect of existing cash-flow insolvency.
Looking at the various amendments brought out by these countries makes one thing important to observe that they have stressed on providing a healthy time-window to the companies to settle its debt with the lenders to keep the capital flow, in motion. Additionally, the intention of the government would have been to formulate a strategy to prevent unnecessary insolvency proceedings, making the segregation on the basis that if the company facing a temporary cash crunch then it could be prevented from liquidation. However, the author hopes that the pre-pack restructuring mechanism, which aims at a consensual resolution between creditor and debtor under the supervision and approval of the court, will be introduced by the government, particularly for the MSMEs which will aim at achieving cost-effective resolutions during the crisis.
While the blanket-ban would pose larger problems than the problems it will solve. The problem solving is also going to be temporary in nature because after the completion of the suspension, it is going to create an influx of CIRPs to the overly burdened judicial system of India.