Since the outbreak of the COVID-19 pandemic in India, there has been call-out in relation to whether the government of India would alter the operation of the Insolvency and Bankruptcy Code, 2016 (“IBC”). On March 24, 2020, the Union Finance Minister announced that the central government is considering the suspension of Sections 7, 9 and 10 of the IBC which deals with initiation of insolvency proceedings against corporate debtors by financial and operational creditors, in an attempt to prevent companies from being forced into insolvency proceedings for defaults owing to the pandemic. It is now heard that the Union Cabinet has cleared a proposal from the Corporate Affairs Ministry to give companies relief from insolvency for the next six months IBC which shall be notified shortly.
Please see below our views on the proposed amendment:
- The proposed suspension of insolvency proceedings for six months will hit both financial and operational creditors. In fact, the government should consider suspending insolvency against companies which have defaulted during the lockdown period and thereafter for a period of six months. A blanket suspension shall impact cases which are chronic in nature. It may be noted that the government has already rightly raised the threshold for invoking insolvency under the IBC to Rs 1 crore from the current Rs 1 lakh with a view to prevent triggering of such proceedings against small and medium enterprises that are facing currently the heat of coronavirus pandemic.
- The IBC is not just a enforcement tool, it is also the only way and binding mechanism that a company can go to in case it wants to restructure its debts and get a breathing period during which debt enforcement against it.
- The Government should also consider, after the suspension period, amending section 29A of the IBC for allowing the Promoters to participate in the resolution plan otherthan willful defaulters as this section prevents existing promoters, who may have defaulted due to the conditions caused by Covid-19, from retaining control of the debtor.
- In fact, suspension of Section 9 (Operational Creditor) may still be fine but suspension of Section 7 will be a bad call as it may impact financial institutions badly which eventually involves public money.
- In fact, the government should work with RBI for issuing guidelines to the financial institutions for calling insolvency against any corporate debtor to factor in the impact of Covid 19 rather than a blanket ban.
- A blanket ban on recourse through the IBC process will hurt genuinely affected lenders from recovering the debt owed to them.
Author: Prashant Jain, Co-Founder & Partner.
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Updated as on April 23, 2020
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