COVID-19 slowing down IBC By: Jayesh Dolia and Geethanjali T. (Jayesh Dolia and Geethanjali T. are Advocates practicing in Madras High Court.) The Insolvency and Bankruptcy Code, 2016 was enacted with a view to consolidate the existing framework into unified compendious code for insolvency and bankruptcy and balance the interest of all stakeholders and for matter connected thereto
By: Jayesh Dolia and Geethanjali T.
(Jayesh Dolia and Geethanjali T. are Advocates practicing in Madras High Court.)
The Insolvency and Bankruptcy Code, 2016 was enacted with a view to consolidate the existing framework into unified compendious code for insolvency and bankruptcy and balance the interest of all stakeholders and for matter connected thereto. A prominent feature of the Code is its specific timeline set forth for the Corporate Insolvency Resolution Process (CIRP) with a maximum of 330 days failing which order of liquidation shall ensue. This enables the National Company Law Tribunals to effectively adjudicate upon the cases without unreasonable delay. Since enactment of the Code, there has been tremendous increase in the insolvency cases. With a low threshold of Rs. 1 Lakh as the pecuniary limit of default to trigger the code, more than genuine insolvency proceedings, the Code served as efficient mode of recovery as it is both economical and time saving for the creditors, be it financial or operational and give knee jerk to all erring defaulters.
The Code had undergone several amendments within four years of enactment, with the intention to balance and protect the interest of all stakeholders. The Central Government has increased the default threshold to Rs. 1 Crore for the purpose of invoking Section 7 (by Financial Creditor), 9 (by Operational Creditor) and Section 10 (by Corporate Persons) of the Code. Considering prospective applicability of the notification, it has no effect on the Companies against which insolvency proceedings have been initiated/pending.
With the national lockdown due to COVID-19 in effect, the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 was amended to introduce special provision relating to timeline. The period of lockdown shall be excluded for the purpose of Corporate Insolvency Resolution Process (CIRP) timeline.
Considering the present global economic crisis due to the COVID-19 pandemic, the Cabinet had approved suspension of fresh filings under I & B Code for a period of 6 months or till the time the Government may deem fit. According to this notification, the operation of Section(s) 7, 9 and 10 shall be suspended for the time period set by the Government. Such a thoughtful step for suspension of fresh filings is a breather for Companies trying to get back on track after the national lockdown. The unprecedented pandemic coupled with the national lockdown has heavily distressed the commerce activities, non-essential services and had caused stagnation of economy. The suspension of fresh insolvency filings will enable Companies to continue with its business affairs without any threat insolvency proceedings during this unexpected financial crisis. The pendulum to swing back to better economy will take time.
If and when lifting of suspension of fresh filing under the I & B Code is notified,
The proactive step to suspend the insolvency filings under Section 7 of the Code by a financial creditor for a certain period is very prudent. The Reserve Bank of India had already notified rescheduling of payments in respect of all term loans with a moratorium for three months on payment of all instalments falling due between March 1, 2020 and May 31, 2020, though interest continues to accrue. What happens to defaults prior to 1st March 2020 is not considered.
However, the suspension of Section 10 of the Code which permits the Operational Creditor to initiate Corporate Insolvency Resolution Process shall serve no purpose. The Companies, which had already identified its financial situation as debilitated and its inability to pay the dues, ought to be permitted to proceed with the insolvency filings instead of delaying the resolution process further.
On the other hand, the suspension of insolvency filings under Section 8 of the Code by operational creditors‚ in our opinion‚ will entail serious repercussions. An operational debt being towards supply of goods and services, the operational creditors are on a completely different footing from financial creditors. With the prevalent critical economic conditions, the resumption of commerce activities and for the cash to flow-in will be slow paced. Suspension of fresh insolvency filings by the operation creditors may lead to delay in payments and thus in-turn impact their ability to discharge financial commitments to their creditors in time, thus leading to cascading of defaults. This effect is more pronounced when the business deals with fast moving commodities that require unrestricted liquidity. There is a further possibility that the business of such operational creditors might get impacted thus leading to further crisis in the supply chain. The whole situation will have no operative solution but have a grave domino effect. However, though the operational creditors cannot initiate insolvency proceedings under the I & B Code, they always have the recourse to initiate recovery proceedings against the defaulting Company before Civil Court.
The Operational Creditor may be a Corporate Debtor to a Financial Institution/Bank and if there is delay in recovery, the said Operational Creditor will face proceeding under IBC and it will have a chain reaction and domino effect. Many automobile companies are losing millions due to lockdown and due to stoppage of export and stoppage of shipping, air, rail as well. The entire world is in limbo, where the Bank can postpone recovery, however, the salary and workmen and staff payments by operational creditor cannot be delayed for a long time.
The Hon’ble Supreme Court suo motu ordered that the period of limitation with regard to all proceedings before Courts/Tribunals irrespective of the limitation prescribed under the general law or special laws, whether condonable or not, shall stand extended w.e.f. 15th March 2020 till further order. However, once the end date is notified by the Hon’ble Supreme Court, period of limitation ought to be considered for initiating legal proceedings. With regard to defaults existing prior to the lockdown, though the fresh insolvency filings under the Code are suspended, the period of limitation shall continue to run, unless otherwise specified. The creditors can always initiate recovery proceedings which shall be an alternative resort, however it will be time consuming and not cost effective.
Furthermore, the Banks are considering proposal for suspension of all pending insolvency proceedings for a period of atleast 2 years in view of the present economic crisis due to COVID-19 pandemic with sharp fall in valuations and lack of demand for bankrupt companies. Though proposal and approval of resolution plans for Corporate Debtors in the next few years will be ineffective and may lead to liquidation of several companies within short period of time, on the other hand prolonging the present situation might not serve any purpose in revival of companies on the brink of insolvency. The Government must take into consideration all the pros and cons before taking any decision on suspension of pending cases, if proposed.
The real financial effect of the disaster due to the pandemic will be felt only after lifting of the lockdown and normalcy is restored.
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