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Suspended Ammunition

With the insolvency and bankruptcy law suspended, the ecosystem of professionals around it faces disruption and uncertainty
twitter-logoDipak Mondal | Print Edition: June 28, 2020
Suspended Ammunition
Illustration by Raj Verma

The governments move to suspend the insolvency and bankruptcy law for six months to one year has put stakeholders of the insolvency regime in a bind. Many of them - insolvency professionals (IPs), insolvency professional entities (IPEs), valuers, lawyers and others - face uncertain times.

An IPE is a legal entity of IPs, who are its partners/directors. Its objective is to provide support services to IPs, who run companies under insolvency and are appointed by the Committee of Creditors. Many of these professionals/entities have invested a lot in creating infrastructure, systems and networks to deal with insolvency cases. Over the last four years - the Insolvency and Bankruptcy Code (IBC) came into effect in June 2016 - thousands of professionals, including chartered accountants (CAs), company secretaries, lawyers and other professionals, have launched exclusive insolvency law-related practices. Many accountancy, company secretary and law firms have also created wings to deal with insolvency matters.

In fact, India has 3,009 registered IPs, around 69 IPEs, 3,030 registered valuers and 29 valuer entities. Besides, there is an Information Utility, which collects financial information about a corporate entity and gets it authenticated by various sources, and a host of lawyers, auditors and other professionals directly or indirectly linked to the IBC.

This entire ecosystem is staring at a disruption in case the insolvency law is suspended for a year.

The Fineprint

The government has announced suspension of Section 7, Section 9 and Section 10 of the IBC as part of measures to help businesses fight the impact of the lockdown. This effectively means no new cases will be initiated under IBC for a year from the date of notification of the change.

Section 7 allows financial creditors such as banks, and Section 9 allows operational creditors, including vendors, suppliers and employees, to initiate insolvency proceedings against corporate loan defaulters. Section 10 allows promoters to initiate insolvency proceedings against their own firms.

Apart from suspension of the IBC, the government also announced a couple of more relief measures for businesses. These include raising the minimum threshold to initiate insolvency proceedings from Rs 1 lakh to Rs 1 crore, largely to insulate micro, small and medium industries (MSMEs) from the process, a special insolvency resolution framework for MSMEs and exclusion of Covid-related debt from definition of default.

While legal experts and insolvency professionals say there are contradictions in these announcements - for example, if the IBC is suspended for a year, what is the need for increasing the threshold for insolvency proceedings? - they admit these exemptions will help businesses in general, even if they cause temporary distress among insolvency and bankruptcy professionals.

"I am certainly one among the 3,000 people who will be left high and dry, but then, 3,000 is not a large enough number compared to lakhs of jobs involved in companies that may get protection from insolvency. There will be some collateral damage," says Sanjeev Ahuja, Founding Director, Ensemble Resolution Professionals - an IPE.

But then, not everyone is equally optimistic.

There are concerns about drying up of revenue streams and breaking up of professional networks and associations. Indrajit Mukherjee, a Mumbai-based insolvency professional and a lawyer, says even if the suspension comes into effect immediately, it will be six-seven months before cases dry up and the lean phase sets in. "Even if the ordinance comes and no new fresh (insolvency) cases are allowed, by the time the backlog (of pending cases) is cleared, six to seven months will lapse. So, the effect of the suspension will be felt only later," he says.

The backlog can happen in two scenarios - First, due to ongoing insolvency cases, and second, because of thousands of applications filed before the National Company Law Tribunal (NCLT), the adjudicating authority.

According to data compiled by different branches of NCLTs - there are 15 such branches across the country - over 2,000 ongoing insolvency cases are being heard by different benches, and thousands of applications for initiating insolvency proceedings are awaiting nod. It typically takes the NCLT six months to one year to admit a case.

This huge pendency will ensure no immediate impact on workflow for professionals associated with insolvency practices, says Mukherjee, but there will be a decline in number of cases not just due to the suspension but also because of increase in threshold for initiating the proceedings from Rs 1 lakh to Rs 1 crore. "There are many cases in the range of Rs 25 lakh to Rs 50 lakh. There are many IPs who handle such cases. These cases will go out of the system for the moment," he adds.

Breaking the Chain

This one-year hiatus will break many networks and associations. Professionals from different backgrounds - CAs, company secretaries and lawyers - have cleared exams to become IPs. Also, many lawyers and CAs, who are not IPs but provide legal and audit services associated with insolvency proceedings, will see weakening of their networks. Many may have to go back to their old practices to survive the lean period. The relationship between IPs, CAs and lawyers will be halted, says Sonam Chandwani, Managing Partner, KS Legal, a law firm.

In a standard IBC case, which is not very complex and does not involve a very large firm, an IP takes help of five to seven other professionals -auditors, valuers and lawyers. Similarly, a lawyer working on a particular case may seek help from other professionals.

Chandwani says when her firm works on a particular case, it also hires a CA or an IP. "Now, we won't be able to give them any work. Not that they are on our payrolls, but their income depends on work assigned to them. For example, if I have to do a forensic audit, I have to approach a CA or a company secretary. That is how it works in our industry," says Chandwani.

IPEs, law firms and audit firms have all built infrastructure and manpower around bankruptcy resolution. For example, many law firms have hired a lot of in-house IPs, people have given IP exams, and many have resigned from their previous work to become IPs. All those investments and efforts will go waste for a year or so. Some people may even lose jobs.

Says Chandwani: "Our revenues will be affected as we get a number of recovery suits. The IBC is used by many operational creditors as a recovery tool. Now, with its suspension, creditors will have to go through civil suits, which will take a lot of time."

Disruption of Ecosystem

So, even if temporarily, many professionals engaged in insolvency-related work may have to seek alternative sources of revenue to withstand a likely lean business phase. This will break the chain, and rebuilding could take time.

"As professionals, we have alternatives. Our job is to advise companies on restructuring, mergers and acquisitions (M&As), buying and selling. Whether the IBC is there or not, you cannot stop M&As, you cannot stop buying and selling. These things will continue. As professionals, we have a number of roles to play," says Sutanu Sinha, IP, and Partner, Business Restructuring Practice, BDO Restructuring Advisory.

Insolvency professionals are mostly CAs, cost accountants, company secretaries and lawyers, and many have other practices running in parallel. But, as Mukherjee puts it, most of those who work on insolvency practices focus only on this area. So, going back to old practices from their current jobs may not be that easy.

Though the proposed suspension and other changes in the insolvency law were announced to provide relief to businesses unsettled by the lockdown, they could well end up unsettling the entire ecosystem built around the IBC.

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