Are Changes Made To IBC Enough To Safeguard Businesses Form The Effect Of COVID-19?
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As companies continue to stay afloat with the aid and assistance from the government, the road to sustenance in growth in the near future is riddled with challenges. Subsequently, the finance ministry announced a slew of economic relief packages aimed at businesses, especially MSMEs in the lowest rung of the pyramid, to provide fiscal stimulus, ramp up production, and ultimately enhance liquidity.
Some of the major changes to the Insolvency And Bankruptcy Code, 2016 (IBC) include an embargo on the initiation of fresh insolvency proceedings under Sections 7, 9, and 10 along with an increased threshold value of INR 1 Crore from the previous INR 1 Lakh. The principal rationale was the insulation of MSMEs from colossal loan defaults and business closures during the virus-induced economic downturn. A more effective solution envisaged would be the explicit exemption of MSMEs from insolvency cases for a year, over the absolute suspension of some sections, and raising the threshold value by 10,000 per cent. An exemption tailored for MSMEs would be more in sync with the objective of the changes ushered in, rather than the current blanket suspension impacting businesses at large.
Collectively, both moves are likely to have detrimental effects on financial and operational creditors having outstanding debts less than INR 1 crore, tipping the scales of leverage in favor of small-scale borrowers. This creates hindrances in resolving the debt-issues and recuperating the credit. Undeniably, this suspension will place the banks in desperate monetary emergency, as in spite of easing of the lockdown, they will stay remediless for in any event a time of at least a half year, simply after which they may look for redressal under the IBC, which will additionally take 330 days to recoup the credit from the corporate debtors.
As a result, markets may experience a rise in fraudulent activities by debtors trying to get away without repayment on the pretext of the pandemic. Therefore, more financial institutions such as banks, NBFCs, HFCs, and MFIs are expected to utilize the restructuring route a lot more over the coming year to notch up recoveries.
The suspension over section 10 applications for voluntary liquidations for 6 months (and many experts hinting at an extension of about 1 year) would have gargantuan implications on companies aiming for a graceful exit. This move lacks much rationale in stopping companies from filing for voluntary liquidation for reasons owing to the pandemic or otherwise. In a cash-strapped economy, timely if not speedy resolutions will be an essential part of gaining fiscal momentum. Unfortunately, increased threshold and blanket suspensions are likely to thwart a large quantum of smaller ticket size lenders in the dark hole of virus-induced financial coma.
Another ingredient to the cauldron is the recent introduction of section 32A under the Insolvency and Bankruptcy Code (Amendment) Bill, 2020. Section 32A accords immunity to a corporate debtor and its assets from any prosecution, action, attachment, seizure, retention, or confiscation upon approval of a resolution plan if the resolution plan results in the change in the management or control of the corporate debtor. This gives solace and impetus to acquirers to secure assets under IBC, instead of some other system since 'legacy' or chronicled issues are diminished to a great extent.
While this may result in the assets or properties being purchased illegally and subsequently being legalized in the hands of the successful resolution applicant with an added immunity against any and all future action against such illegally acquired property. The far-reaching implications of such unlawful enjoyment and exemption remain to be tested judicially, but it can be conjectured the change is in the right direction.
The attempt at clearing the logjam of various challenges posed before companies during such challenging times is commendable and could provide certainty to the acquirer and support the overall intention of timely, faster, and efficient resolution of NPAs in India.
The finance ministry’s objective to reduce litigation may fail with several legal recourses of debt recovery including, right to sell immovable properties of debtors and take over management from the debtor under SARFAESI Act, 2002, file summary suit under Order XXXVII (37) of the Code of Civil Procedure, 1908, or a standard commercial suit under the Commercial Court Act, 2015.
It can be conjectured that changes to the IBC solely intend to revive the supply side of the economy thereby compelling financial institutions and other lenders to take massive haircuts and opt for out- of- court-settlements and ODR mechanisms to recover monies in an economy starved for revenues. Changes made to the IBC must be supported by similar changes in other recovery mechanisms available to lenders. Consequently, there must be a system of checks and balances to ensure intended positive effects and to ensure business continuity of MSMEs as well as financial institutions to circumvent the otherwise lopsided sustenance and growth of the economy.