Changes in the insolvency and bankruptcy code, in the wake of the COVID-19 pandemic

SYNOPSIS:

1. The article talks about:
   1. Current economic situation of India with a reference to the global economy.
   2. Slow down of work in factories, manufacturing and supply chain industries.
   3. The measures taken by the Union Finance Minister of the country.
   4. Suspension of sections 7, 9 and 10 of the Insolvency and Bankruptcy Code, 2016 in order to prevent mass insolvency proceedings if disruption of economic life continues beyond April 30, 2020.
2. What is the reasoning behind such a move?
   1. This move would ensure that no one in the country would be able to initiate any insolvency proceedings for a period of six months.
   2. These extreme measures have been taken in order to prevent the economy from collapsing in the wake of the pandemic.
   3. Most of the companies have seen their cash flows dry up overnight since the cash circulation has come to a halt due to the lockdown and companies are failing to conduct even the day-to-day operations.
   4. the government has also increased the threshold of Rupees one lakh for triggering insolvency, to Rupees one crore.
3. What is the lacuna in this particular measure?
   1. The government’s move does not necessarily consider that some lenders, including operational creditors, may not be able to absorb the fallout of this high magnitude of bad debts.
   2. Many financial institutions may already be facing stress on their balance sheets, which they cannot absorb.
   3. Denying such lenders, the right to invoke the IBC proceedings will deny them the right to recourse to the most timely and efficient debt resolution mechanism present in the country today
4. Conclusion:
   1. Though commendable, the government shall come up with a more intricate and nuanced policy rather than completely denying any recourse under the Insolvency and Bankruptcy Code on a blanket basis.
   2. The acting President of the National Company Law Tribunal (NCLT) has notified all the benches across the nation that they shall only hear inevitable and urgent cases with prior notifications on email from applicants.

INTRODUCTION:

The country is going through economic and financial turmoil in the wake of the COVID-19 pandemic which has hit, not just India, but nations all across the globe. A report by the United Nations has stated that the effect of COVID-19 on the Indian economy would be close to $348 million. The report has further gone onto mention that India, currently, features among the top 15 global economies which has been adversely impacted by the manufacturing slowdown in China. Factories are shutting down because of which the manufacturing activities have come to a standstill and consequently the supply chains are getting affected and companies are facing a negative pressure on their cash flows. Due to these varied reasons, the times ahead are extremely crucial and challenging of the economy of India. Also keeping in mind the fact that the economic condition of the country has not been in the best of its shape in the previous and present quarter, hence whatever measure the government takes will have a long term effect on the financial health of the nation.

The Union Finance Minister Nirmala Sitharaman is taking a plethora measures to combat COVID-19, from a financial perspective. While releasing several schemes in order benefit the poorer strata of the country, the Union Minister has taken several note-worthy steps for the businesses also. One such step has been that on March 24, 2020 it was announced by the Finance Minister that the government is considering the suspension of sections 7, 9 and 10 of the Insolvency and Bankruptcy Code, 2016 in order to prevent mass insolvency proceedings if disruption of economic life continues beyond April 30, 2020. This move would ensure that no one in the country would be able to initiate any insolvency proceedings for a period of six months. These extreme measures have been taken in order to prevent the economy from collapsing in the wake of the pandemic.

Once the country starts recovering from the virus, many companies would want to initiate the insolvency proceedings as they may have defaulted on their loans due to the lockdown. This is premised on the notion that insolvency proceedings are debt enforcement proceedings that companies would not want to resort to.While on the face of it, such a suspension may not seem legally plausible, this measure is specifically aimed on those companies which might default in their loans. The impact of COVID-19, in general, is going to be highly disruptive for the insolvency industry. Under India’s Insolvency and Bankruptcy Code (IBC), bankrupt firms get up to 330 days to complete the resolution process. More than 1,900 companies are currently undergoing the resolution process. While this waiver might help some of the companies to meet their deadlines, the lockdown will prove to be a tough time for most of the other companies because the viability of their businesses has taken a hit. Most of the companies have seen their cash flows dry up overnight since the cash circulation has come to a halt due to the lockdown and companies are failing to conduct even the day-to-day operations. Some of the companies that were already struggling may not even survive a prolonged business and liquidity crunch.

Other than this measure, the government has also increased the threshold of Rupees one lakh for triggering insolvency, to Rupees one crore.

Another sector largely benefiting from such measures are the MSMEs which are struggling the most during the lockdown.

WHAT IS THE LACUNA?

The government’s move does not necessarily consider that some lenders, including operational creditors, may not be able to absorb the fallout of this high magnitude of bad debts. For example, individual operational debtors may themselves go under if they are not paid for goods and services they provide to companies (most of which are organized, large-scale enterprises) in a timely manner. Similarly, many financial institutions may already be facing stress on their balance sheets, which they cannot control and will spiral out soon enough. Reserve Bank of India appears to have admitted that in certain cases, financial institutions shall be allowed to recover debts owed to them. Denying such lenders, the right to invoke the IBC proceedings will deny them the right to recourse to the most timely and efficient debt resolution mechanism present in the country today. As a matter of fact, it will only prolong their struggle to enforce debt and may increase their stress on the already struggling financial system with debt prior to the breakout of COVID-19, and on individual lenders themselves.

CONCLUSION:

While such measures are commendable, considering the tough time our country is facing and the number COVID-19 cases increasing in hundreds every day, the government needs to come up with a more intricate and nuanced policy rather than completely denying any recourse under the Insolvency and Bankruptcy Code on a blanket basis. If insolvency proceedings are initiated at a mass scale, then it can have devasting and dilapidating effect on the economy of the country. It will be rather interesting to see the aftereffects of the lockdown as the question over the suspension of sections 7, 9 and 10 still looms over the government. Questions such as, the criteria of such suspension, the scale and long-term effects and who all will be the most and least benefitted from such a move. MSMEs are certainly going to be the most benefited from such a measure. But to see what effects such a measure will have on other industries and companies; one will have to wait and watch. Currently, amidst the nationwide lockdown, the acting President of the National Company Law Tribunal (NCLT) has notified all the benches across the nation that they shall only hear inevitable and urgent cases with prior notifications on email from applicants.