The Covid-19 pandemic has created havoc not only in the health sector but also in the economy of various countries. Multiple disruptions in supply chains and the global economic slowdown have the tendency to push various otherwise viable companies to file for insolvency. The medium and small enterprises are presumed to be the worst affected by such a crisis. India, like other countries, started by increasing the threshold for what constitutes a default to prevent several companies from being pushed into insolvency.
But as an extreme measure, the Insolvency and Bankruptcy Code (IBC) was amended and no fresh insolvency proceedings could be filed for a period of six months starting 25 March 2020. This was extended by another three months last week. This step has been criticised both at national and international levels, perhaps for the right reasons. The IBC has several protective provisions that aid in the functioning of distressed businesses.
One such provision is the moratorium, which essentially envisages putting a stay on the institution of any claim against the corporate debtor’s assets with the main aim of preserving their value. Since there will not be any admission of fresh applications, it will lead to stripping the businesses off the protection of moratorium and add to their agony. Another provision for interim financing, which helped the businesses still act as a going concern by funding the ongoing works and operations after the application was admitted by the National Company Law Tribunal (NCLT), will also not be available now.
Businesses would no longer be able to restructure under the IBC nor will they be able to function normally, which will lead to the problem of loss of value of assets. This is against the principle of maximisation of value of assets of the corporate debtor.The spirit and ideology of the IBC was to move from the ‘debtor-in-possession’ to the ‘creditor-in-possession’ regime, but this amendment marks a shift from this approach.
It is also suggested by the policymakers that they are looking at pre-packs as a method for resolution of distressed businesses; however, the modalities of the same have not yet been worked out. Pre-packs will be a new process for India to adopt and may even not be viable in such an environment. Moreover, it again shifts to the regime of debtor-in-possession. If this is an acceptable solution, then DIP Financing should have been the go-to option for the government.One of the main hindrances was also the functioning of the NCLT and overburdening of the cases for which the legislature did not take any measures. We continue to see NCLTs work only on matters that are treated as urgent. India already faces a crunch on the appointments of judges in both tribunals and courts.
The Centre had an opportunity to increase the strength of the Benches and function online, but it chose not to do the same. Rather, it drove the businesses away from the opportunity to save themselves.
Various regulators such as the RBI and SEBI have time and again been relaxing their compliance requirements in these times. This inevitably leads to restructuring of businesses. Hence, in the end, the firms are ending up getting restructured but without any interference from the courts/tribunals.
This measure does not only harm corporate debtors but also various classes of creditors and most importantly the banks that form the backbone of any economy. These measures not only delay the adoption of the UNCITRAL Model Law on Cross Border Insolvency—which has not been adopted yet by India and has posed its own problems (as can be seen in the Jet Airways case)—but will also push India down in the Ease of Doing Business rankings. India jumped up in the last rankings because of the enactment of IBC. However, this measure will have a significant impact on the next rankings.
Alternative dispute resolution mechanisms have started to be accepted in cases of insolvency and at least this legislation should have paved the way for that. Moreover, if corporate debtors and the creditors are suggested to renegotiate the terms of the facilities provided, it again leads to restructuring of the debt or the operations. India should have looked at other systems of law such as the UK and Singapore that have a new insolvency act for such times; none have suspended the filing of fresh cases.
These Acts focus on saving otherwise viable businesses and give impetus to restructuring and moratorium reforms and suspension of wrongful trading in these times, instead of depriving businesses of the opportunity to restructure and reorganise. Therefore, India should have first taken certain facilitative measures to work out a mechanism best suitable for the environment, taking into consideration the interests of all the stakeholders ranging from financial creditors to the workers of the enterprise before adopting such an extreme measure.
Kavya Lalchandani
Legal Researcher based out of Delhi
(lalchandani.kavya@gmail.com)