COVID-19 has retarded the momentum of wheels of the Indian economy, the corporates. The All India Association of Industries had estimated a loss of Rs 2,00,000 crore ($26.35 bn) by March 31, 2020 due to pan India lockdown.
In order to prevent and absorb the effect of such huge losses and to respond to the dynamics of the business environment, which has been changing every second in the wake of the globally-spread WHO-declared pandemic, the central government seems to be responding in a structured manner by providing various sops, relaxation, extensions and amendments to the existing legal framework in the country.
Across the globe, it is observed that the corporates which were in the pink of financial conditions have witnessed a sharp decline due to COVID-19.
Supply chains are disrupted, valuation of the stocks on bourses have substantially decreased amidst global down selling, and the valuation of businesses have fallen steeply.
In such a scenario, it was viewed that insolvency resolution processes under the (Indian) Insolvency and Bankruptcy Code, 2016 (IBC) also needed added layers of cushion from different viewpoints.
Due to the standstill caused by the lockdown in the country, the performance of contracts and payments thereof is manifestly disrupted. This is a trigger event for creditors, both financial and operational, to initiate insolvency against such corporate debtors.
If insolvency proceedings are initiated at a mass scale, then it can have a devastating impact on the economy, because, during the corporate insolvency resolution process (CIRP), the management of the corporate debtor switches hands with the resolution professional and he/she only carries out such activities that are essential for running the businesses as a going concern.
Value addition to the businesses, which is a key driving force behind any economy, is stunted during the CIRP. Also, it has been largely observed that CIRP has become a tool, especially in the hands of the operational creditors, to recover the debt instead of resolving the insolvency of the corporate debtor.
In order to avoid such a situation where corporates are forced into insolvency proceedings, the Finance Minister Nirmala Sitharaman has announced that if the current situation continues beyond April 30, 2020, then it may consider suspending Sections 7, 9 and 10 of the IBC for a period of six months, thereby disabling the financial creditors, operational creditors and promoters from initiating insolvency proceedings against companies.
It will be very interesting to watch out for what happens next, especially if and when the lockdown is lifted, either fully or partially, on April 1, 2020, and these will be questions that will float around for the government to answer and action--How likely is it that there will be a suspension and what will be the criteria for such suspension? What about the large scale and long term impacts such suspension will create? Who all will be most benefitted? Will this end up benefitting only specific sects like the promoters, lenders, or contractors?
Currently, the government has taken certain steps to prevent the initiation of CIRP at a large scale and to avoid any frivolous filings. The Ministry of Corporate Affairs vide a notification dated March 24, 2020, has increased the threshold for initiating the insolvency resolution process from Rs 1,00,000 ($1,300) to Rs 1,00,00,000 ($130,000) under Section 4 of the IBC.
This amendment is likely to also help medium and small industries who have been hit the hardest by COVID-19. However, on the flip side, this amendment will adversely impact the ability of operational creditors to initiate CIRP, since the minimum default amount is now ten times higher than the previous minimum default limit. Once the economy sails through the slowdown caused by COVID-19, the government should ponder upon reducing the limit to a lower amount, so that IBC does not merely remain as a toothless tool at the hands of operational creditors.
Amidst the nationwide lockdown on account of COVID-19, the acting president of the National Company Law Tribunal (NCLT) notified that all benches of the NCLT shall hear only inevitable urgent cases with prior notification on email from applicants.
Insofar as matters not construed as urgent, e.g. pertaining to the extension of time, approval of resolution plan and liquidation under IBC, the Insolvency Bankruptcy Board of India (IBBI) has, vide notification dated March 29, 2020, amended the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 granting certain relaxations.
Pursuant to the amendment, Regulation 40C has been inserted, which is a special provision in relation to meeting of the timelines in pursuance of CIRP.
According to Regulation 40C, the period of lockdown shall not be counted for the purposes of calculation of timeline for any activity that could not be completed due to such lockdown, in relation to a CIRP.
Such an amendment was the need of the hour, as the common investor sentiment amidst the lockdown is to protect the liquidity, impacting and stalling the bids under the CIRP, causing delays in the bid process and posing challenges to the CIRP, the insolvent companies and their resolution professionals.
This relaxation also helps avert negative consequences and follow-on actions due to non-compliance which also leads to additional expenditure by the parties involved. However, this amendment is effective from March 29, 2020, thereby looming confusion around the period that shall be excluded for the purpose of calculation of timelines pursuant to CIRP. The intelligible differentia for exclusion of the period of lockdown from March 25, 2020 to March 28, 2020, for calculation of timelines is unclear. It is imperative for IBBI to issue a corrigendum, explicitly affirming that the aforementioned period of three days shall be excluded from the calculation of CIRP timelines.
The Insolvency and Bankruptcy Code (Amendment) Act, 2020 (Amendment Act), (notified on March 13, 2020, by the Ministry of Law & Justice by way of an amendment with retrospective effect from December 28, 2019, due to a prior Ordinance), vide amending Section 5(15) of IBC, authorised the government to notify any debt as interim finance, which means such debts as may be notified by the government shall be considered as priority loans for repayment purposes.
In the wake of COVID-19, various banks have already extended emergency credit lines to ease the liquidity crisis of the borrowers. Once the lockdown is removed and businesses are resumed, if borrowers default in repayment of the emergency credit, the banks may face immense liquidity crisis. In order to keep the banks afloat post resumption of normal economic setup, the government should consider exercising its power under Section 5(15) of IBC and thereby, notifying these emergency credit lines as interim finance, so that any unnecessary defaults in repayment of emergency credit are prevented.
An insight into the 2020 amendment:
Prior to the aforementioned amendments in response to COVID-19, the IBC was revamped vide Amendment Act, to make the resolution process more effective and to promote ease of doing business. Key insights on the Amendment Act have been summarised below:
- Section 32A: Liability for offences committed prior to CIRP
Section 32A has been introduced with the aim to protect the successful bidders, the corporate debtor and its assets from any action against offences committed by previous promoters or officers in charge of management or control of the affairs of a corporate debtor, prior to commencement of corporate insolvency resolution process (Management Offences).
This amendment grants immunity to the corporate debtor against the management offences and the corporate debtor shall stand discharged from the date of approval of the resolution plan. This benefit shall be available only if the management or control of the corporate debtor changes, which means that the defaulting management and promoters or the abettors of offence (as identified by the investigating authority) shall no more be in charge of managing or controlling the affairs of the corporate debtor. However, this immunity is not provided to the persons who committed default, hence, the officers of the corporate debtors, such as designated partner of an LLP, officer in default of a company, officer in charge of or responsible for the conduct of the business of the corporate debtor and officer associated with the corporate debtor in any manner, shall continue to be prosecuted and punished.
Subject to the change in management or control of the corporate debtor, the property of the corporate debtor covered under the resolution plan is also protected from any action, such as seizure, attachment, retention or confiscation, that otherwise may be taken against such property in relation to the offence committed prior to the commencement of CIRP. Such immunity shall also be provided to the persons who may acquire the property under the CIRP process or liquidation or liquidation process under IBC.
- Section 14: Government authorisations and essential supplies during moratorium
According to amendment in Section 14: (a) if the payments are duly made for the use or continuation of any license, permit, quota, concession, registration, clearances or a similar grant or right during the moratorium period then such license, permit, quota, concession, registration or clearances shall not be suspended or terminated on account of insolvency; (b) moratorium shall not be applicable such transactions, agreements or arrangements as may be notified by the central government in consultation with financial sector regulator or any other authority; and (c) IRP and the resolution professional, if consider supply of any goods or services to be essential for preserving the value of the corporate debtor and managing its operations as a going concern, then supply of such goods and services shall not be interrupted in any manner, subject to IRP or RP making payment towards such essential supply.
The objective of this amendment is to smoothen the CIRP and ensure that the resolution plan or management of the corporate debtor is not hampered for want of government authorisations or essential goods and services.
- Section 5(15): Power of central government to notify interim finance
According to amendment in section 5(15), any debt notified by the central government can also be included in the definition of interim finance. In pursuance of this amendment, the central government vide notification dated March 18, 2020, has notified debts raised from the Special window for Affordable and Middle-Income Housing Investment Fund I to be included within the meaning of interim finance.
Interim finance is the debt which is treated as a priority loan for the purposes of repayment. The effect of this amendment is that the central government may notify any debt as interim finance, wherein such debt shall be repaid before all other debts of the corporate debtor.
- Section 7: Increase in amount of minimum default for initiating CIRP
In addition to the criteria of the minimum amount of default being Rs 1,00,00,000 (increased from Rs 1,00,000, vide notification dated March 24, 2020), certain additional requirements are to be adhered to by the following financial creditors: (a) real estate allottees; and (b) security or deposit holders represented by a trustee or agent, prior to initiating CIRP against a corporate debtor. Applications by these financial creditors should be filed jointly by at least 100 such creditors or 10% of their number, whichever is lower.
The objective behind this amendment is to avoid frivolous litigations against corporate debtors. As of September 2019, of the 10,860 IBC cases pending with NCLT, 1,821 cases (17%) have been filed by homebuyers. However, this amendment may also impede the redressal of grievances of the genuine real estate allottees. The operation of part of the enactment pertaining to the real estate allottees has been stayed by the Supreme Court vide its order dated January 13, 2020.
Keeping up with the needs of the fast-changing business environment, IBC has been amended for the fourth time since 2016 with multiple amendments under corollary laws in order to ensure a relentless spin of the wheels of the Indian economy.
It will be a great wait and watch if the government eventually relents to industry demands for suspension of key provisions of the IBC for as long as six months. Irrespective, these amendments are likely to smoothen the insolvency resolution process and may prevent the corporates from sailing close to the wind during this period of recession that India Inc. is set to face amidst the lockdown.
(Dipti Lavya Swain is an IBC expert and partner at HSA Advocates and Ketaki Dandiya is an associate at HSA Advocates.)