The global pandemic is incessant and proven to be a fatal one. The worldwide COVID-19 pandemic and its weighty lockdown are having an economic ripple influence on the economic activities of Indian residents. In the battle against COVID-19, the organizations ceased, disrupting the performance of agreements and payments. This turns into a trigger occasion for lenders, both budgetary and operational, to start bankruptcy against corporate account holders. If these procedures are started at a mass scale, it can have a devastating effect on the economy. Hence the legislature of India concocted rules under IBC for defending the interest of MSMEs and forestalling economic interruption and further halting flooding of indebtedness cases post lockdown.
The article aims to understand various changes brought in to alleviate the small business need for such provisions and does the provisions provide the required benefits.
The world is at a standstill, the virus has taken lives and all types of livelihood. The pandemic has forced countries to impose lockdown to break the chain of the novel coronavirus. Even India is affected by the virus, India is amongst the top 5 worst-affected countries. India was quick to impose lockdown and because of which all the economic activities were forced to cease. The economies have been struck in all areas including corporate execution, banking, liquidity crisis, debt management, and business defaults. To endeavor to take the economy back to ordinary (or close to typical) Central Government has come up with a financial package worth Rs. 20 lakh crore
While business & people are suffering, the growing uncertainties amid COVID-19, there’s hardly any space of law that isn’t stricken by this global pandemic. Recently the finance minister proclaimed Government reforms to promote ease of doing business for companies. In light of similar happenings, certain changes are projected in IBC that since its inception has been a talk of the town. A number of the key announcements for ease of doing business include:
- A Special Resolution framework to be notified under S.240 A.
- Minimum threshold to initiate fresh insolvency proceedings raised to Rs. 1 Crore from Rs. 1 Lakh for the sole reason of protecting MSMEs.
- Suspension of fresh insolvency proceedings further extended up to 1 year which was earlier 6 months
- Altering the insolvency law to exclude debt relating to Covid-19 from the definition of “default” under the code.
- Changes have been made by inserting Section 10A in the Code, which says, “Notwithstanding anything contained in Sections 7, 9 an 10, no application for initiation of corporate insolvency resolution the procedure of a corporate borrower will be documented, for any default emerging on or after 25th March 2020
Section 7 of the IBC Act permits a financial creditor to file for a corporate indebtedness resolution process against a corporate borrower. Section 9 accommodates for application of bankruptcy by an operational creditor, while Section 10 is for the commencement of indebtedness procedures by a corporate applicant
The other measures stated which indirectly aim at easing out corporate’s concern include measures by way of liquidity support, conceding of pending refunds, funds to non-banking finance companies (NBFCs), moratorium allowed to banks leading to enhanced liquidity to borrowers, steps taken to boost demand and domestic production as well as consumption, etc. Collateral free loans, participation by way of equity for small businesses, partial guarantee for NBFCs, etc are some of the other measures which would help in doing business and prevent liquidity crisis and eventually bankruptcy.
The increased threshold to institute insolvency proceedings is driven to protect the interest of MSMEs from being pushed into insolvency during these trying times is accompanied by the suspension of fresh proceedings. Shortly after this announcement, there have been market speculations that there’ll be an embargo on contemporary insolvency proceedings below Section 10 of IBC similarly. This section permits a company debtor to choose voluntary solvency if its monetary & operational viability isn’t any longer secure. The ordinance ought to rather take into thought the very fact that it’s well inside the right of a company to shut down its business because the right to carry on with such a business, this section can not be incised out. If the ordinance doesn’t exclude S.10 from its ambit can force unviable businesses to continue that successively will have negative consequences for all the stakeholders involved as the business will run in losses which will affect their future growth.
The much-awaited ordinance ought to specify a timeline with the correct demarcation of proceedings wherever IRP is appointed or previous proceedings wherever IRP isn’t appointed. In that case, it will cover not only fresh proceedings but also some old ones.
A complete ban on proceedings by monetary creditors got to be dealt with caution as there’s been an economic disruption for a substantial time & the strain has already been mounting. In the wake of similar, ‘zombie companies’ are prevailing for quite a while which currently doesn’t have any reference to the virus. Earlier a proceeding below IBC was an effective mechanism fearing that the defaulters either united for restructuring or a one-time settlement. Though excluding contemporary defaults may be a welcome move however a whole ban on recoveries can end in new NPAs post the crisis & can compromise capital adequacy. It’s expected that the ordinance addresses the matter of lower valuation for future resolutions and lesser interest from bidders amid the growing uncertainty across sectors that might end in higher haircuts for the accomplished conclusion of resolution.
There is huge uncertainty regarding the position of Operational Creditors as they’re already thought-about as ‘second class’ creditors by the Code. currently amidst the lockdown, these small creditors would have wanted to recover their debts from the debtors or would have demanded protection within the current transactions, so that if there return a state of affairs of emergency, thanks to the tough times their debt doesn’t stay nonreciprocal. simply the way COVID- 19 has had its most impact on the MSME sector, small creditors also will be wedged as their debt comes later in line as per the water mechanism. it’s thus necessary that the ordinance not solely focuses on the safeguard of the small and little enterprises however conjointly of the operational creditors so that their transactions are maintained with the company debtor with as little disruptions as attainable.
Despite the imposition of a blanket ban on renewed IBC proceedings, noteworthy restructuring is certain to happen to the balance sheets of the debtors, and also the sale of certain assets may get hit by some provisions regarding discriminatory or undervalued transactions. It, therefore, remains pertinent to spot whether or not the transactions that were entered amid the lockdown are to be included as ones entered into throughout the standard course of business. It is necessary that the ordinance, that is probably going to impose a blanket ban ought to take into account this facet, on how these transactions are treated, and the way it facilitates company debtors to reorganize his affairs to stand back on his feet.
Furthermore, there exists an obligation upon the administrators of an organization that, once the corporate is close to becoming insolvent, and the directors have information of a similar, they’re to conduct necessary due diligence and attempt to minimize the loss to the creditors during that period. Here arises a significant question once it’s aforesaid that the administrators had such information, because the facet of shunning of CIRP doesn’t exist any longer. It therefore becomes necessary to notice how NCLT approaches such problems.
The promoters of the Companies will be targeted during the suspension of segments 7, 9, and 10 of the Code. It has been found in a catena of events where the chiefs and promoters of the Companies stretch out their assurances to its moneylenders and in these cases, they can be arraigned under Part III of the IBC.
Disturbance in the capital progression of the economy can be a potential result from the suspension of IBC as the denial would limit the creditors from accepting any cash from the organizations which would go about as an impetus to the creditors making further defaults to their moneylenders. This can make a circular disturbance to the capital progression of the economy and can bring unforeseen economic interruptions during COVID-19 where the economy ought to preferably focus to get the capital stream going.
Considering the Indian corporate market as a tremendous sea, figuratively, loaded with fishes where one is greater than the other, the suspension of IBC would likewise influence mergers and acquisitions in the coming time. It would fundamentally preclude monetarily stable organizations to safeguard the distressed organizations by siphoning in the assets to keep the tasks moving. This nullifies the very point of the IBC which aims resolution and rather liquidation of the organizations.
Going by the worries referenced over, a total suspension of IBC doesn’t appear to be an authentic thought within the sight of a previously given expanded limit by the administration which is going to turn out against the interests of the creditors, operational banks in particular. Having said that, other jurisdictions have brought transformations in their insolvency laws, notwithstanding, India stays to be the only nation to suspend the IBC, completely.
Discussing the steps taken in developed nations, Australia, while expanding as far as possible to start CIRP from $2000 to $20,000, has expanded the statutory time to respond to a demand to six months from 21 days. This move will give a solid window to the indebted person to settle the liability and would likewise not hamper the capital stream. Similarly, Singapore has also authorized comparative arrangements like Australia, all the more explicitly revered in its COVID19 (Temporary Measures) Act, 2020.
Conclusion
There are no confusions that the challenges posed by the COVID pandemic are mammoth and out of the ordinary. All across the globe in varied jurisdictions, countries have attempted to amend varied aspects of commercial laws, including Contract Law, insolvency law, securities law, as they look forward to restarting their economies the solution doesn’t exist in sweeping IBC aside, rather in encouraging its application and development. During this time of economic distress, it can not be controversial that the absolute liability regime is to be suspended for a particular time as the business is going to face a cash flow problem for some time. However, the ordinance that sought to evoke these changes ought to be kind of the consideration for all the company players. Ensuring certain gentle credit supply remains a necessity for India’s continued economic process, however not at the expense of those that are maintaining this flow.
The Code has undergone many amendments and has emerged as an effective tool for resolution mechanism. Therefore, what the country requires is certain relief for companies whose businesses are hit by COVID-19 and not a dismantlement of the hard gains from the Insolvency & Bankruptcy Code over the last 3 years.
While the blanket ban would present bigger issues than the issues it will illuminate. The problem solving is going to be transitory because, after the conclusion of the suspension, it will make a convergence of CIRPs to the excessively troubled legal framework of India. Suspension of new insolvency proceedings for a time of one year would guarantee help to the companies that are seriously affected by the Covid-19 pandemic and can’t meet payments to their creditors. The problem is the government has only shown concern towards the MSMEs, they have not considered the well being of the creditor. The banks will have more NPAs punching holes in their balance sheets. It will worsen the banking system. Thus, this blanket ban and amendments made can hamper the economic system of the country in the coming future.
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