Insolvency and Bankruptcy Code: Delay in passing ordinance adds to confusion

Insolvency and Bankruptcy Code: Delay in passing ordinance adds to confusion

Apart from suspension of the insolvency law, the government also announced a slew of other insolvency-related measures

There is growing unease among different stakeholders of the insolvency and bankruptcy regime as the government delays promulgation of the ordinance required to amend the insolvency law to bring about a few changes announced recently.

It's been more than 15 days since the government announced the suspension of insolvency and bankruptcy law for a year as part of the relief measures for businesses and corporate impacted by coronavirus pandemic. So far there is no sign of the ordinance even though the cabinet has approved it. Even officials from Ministry of Corporate Affairs seem to have no clue about the timing of the promulgation of the ordinance. When contacted, a corporate affairs ministry official said he did not know when the ordinance would be passed.

Apart from suspension of the insolvency law, the government also announced a slew of other insolvency-related measures. These include raising the minimum threshold to initiate insolvency proceedings from Rs 1 lakh to Rs 1 crore, largely to 'insulate'  MSMEs from insolvency proceedings, special insolvency resolution framework for MSMEs and exclusion of COVID-19 related debt from the definition of default for the purpose of triggering insolvency proceedings.

Even as many see some of these announcements as contradictory in nature, others speculate the exact nature of the changes. Some say these changes are not in line with the basic character of insolvency laws. Shardul Shroff, executive chairman of law firm Shardul Amarchand Mangaldas & Co, says: "Suspension of Section 7, 9 and 10 is like changing the creditor in possession theory to the debtor in possession, which is like 360 degree change. This is more like the DRT and SARFAESI. The IBC model is in tune with the basis creditor in possession theory. So, it's a complete mismatch between a debtor in possession theory, which they want to do by suspending Section 7, 9 and 10."

Others like Sanjeev Ahuja, founding director of Ensemble Resolution Professionals Pvt Ltd, an insolvency professional entity, see contradictions in the recently announced measures. "I still have doubts about the new threshold of Rs 1 crore. If the IBC is suspended for a year, the new threshold itself becomes infructuous. You can't be saying two things together," he argues.

He further says that the increased threshold for initiating insolvency proceeding would harm MSMEs more than benefitting them. "When someone justifies the increase in threshold saying this will protect the MSMEs, he/she is only viewing MSMEs as debtors and not operational creditors," he says.

Many believe MSMEs with unpaid dues below Rs 1 crore would not be able to initiate proceedings against larger firms. The insolvency law has been used by these firms as a recovery mechanism. "Without the insolvency law for a year, these firms will have to go back and initiate civil suits, which could take ages to recover money," says Sonam Chandwani, managing partner in law firm KS Legal. Experts are also questioning the rationale for suspending Section 10 of the insolvency law, which allows promoters to declare their company insolvent and seek resolution under the insolvency law.

Manisha Rawat, an insolvency professional, asks why suspend Section 10 which allows promoters of a distressed company to seek resolution on their own. She says let that provision be used by the promoters, especially in Covid-19 situation where many are finding it difficult to run their business.

There are also confusions about the exact time the suspension should come into effect from. Should it come from the date of notification or should it apply from the date of lockdown? People are not sure how would the government determine Covid-19 defaults. Unless the government comes out with the ordinance and the necessary details of changes, these confusions would only confound.

Also read: Coronavirus crisis: All that's bad about a 'Bad Bank'

Published on: Jun 03, 2020, 1:27 PM IST
Posted by: intern five, Jun 03, 2020, 1:27 PM IST