Suspension Of Insolvency And Bankruptcy Code (IBC)

An ordinance was recently approved to amend the IBC in order to provide relief for the businesses and corporates after the pandemic and subsequent lockdown significantly impacted most of their economic activities.

Section 10A was introduced in the Code which suspended the following sections 7, 9 and 10 of the provision. Section 7 provided for initiation of insolvency proceedings by financial creditors, Section 9 provided the same creditors and Section 10 for a corporate applicant.  The introducing provision suspended filing for initiation of corporate insolvency resolution process of a corporate debtor for any default for a period of six months extendable up to a year.

The Economic stress because of the ongoing pandemic COVID-19 led to the various losses in the different sectors. The Industries are grappling with continuous supply chain breakdown, trouble handling the slowdown in demand, face unavailability of labour and ultimately, finding themselves in positions with inabilities to complete the contracts. Moreover, the service sectors such as aviation or hospitality are also facing reluctance of the customers because of the precautionary lockdown. The entire by-product increased stress and number of debt-laden Indian corporates.

There is also a concern over the value money as currently under IBC there are around 220 unresolved cases which means that only 44 per cent amount of the total debt has been recovered yet since the commencement of this mentioned law in 2016. Moreover, for every one case which is left resolved there are four cases which would end up in liquidation, hence a situation where the recovery falls down to 15-25% sharply. Specifically guiding that the creditors would have to undergo large cuts on their loans.

The litigation pressure on judiciary has also then increased since the judicial system, already as burdened as such, would have to handle a huge influx of cases after the suspension of IBC.

In addition to that there is also a ballooning of liabilities without resolution. When a corporate applicant or creditors themselves cannot initiate the insolvency proceedings, it consequently restrict the exiting of a business and also lock-up its following assets. Therefore, only further deteriorating their position in terms of value and only leading to losses.

The suspension of this specific law will also negate the two states objectives. The objective of faster resolutions and the objective of value maximization under IBC.  The creditors will thus be forced to turn to older mechanisms to help them address defaults. This diversion from the Code to other methods may alternatively result in innumerable recovery cases. Along with it there can also be a flow of various security enforcement cases being filed, thereby only further burdening the courts.

The decision also the potential to hamper the economy in the long run if there is any absence of definite and timely resolution. In a case where the NPAs of banking sector may rise and increment their lending rates. Hence, hampering the investment and of course credit cycle, most probably lowering investor the confidence.

As the introducing provision required the proceedings under IBC to never be able file for default occurring in the suspension period, so:

  1.  The Promoters of the companies that may have the capacity to repay dues could intentionally force a default during this period and get safe from never to be held accountable under the IBC.
  2. While only the pandemic-related cases should get the benefit of this absolution, it will particularly be very much tough to pinpoint why only a pandemic serves as the reason for the non-servicing of loans.
  3. Furthermore, it can adversely affect operational creditors, such as the suppliers and the vendors. They would not be able to file insolvency proceedings which may go on to lead to artificial delays in payments done by corporate debtors on them.  

Also there has been no suspension against personal guarantors of a company. That is, the directors or promoters of any company who have provided personal guarantees to its lenders, might still find a position in the insolvency court under IBC. The ordinance in addition to that, does not grant any relief to applicants whose resolution plans got approved of late.

The ability to implement the said plans will be undoubtedly be directly impacted by such interruptions going forward.