How the Recent Suspension Of IBC Impact M&A Deals
The current critical situation would increase the out-of-court M&A deals for distressed assets
COVID-19 knocked the wind out of merger and acquisition (M&A) deals in India. It has already and shall continue to create a large pool of distressed assets, has caused and shall cause the stock valuation to decline alarmingly, impact the performance of contract and corresponding payment obligations and make it difficult to find adequate number of resolution applicants to rescue the insolvency applicants. In the wake of the aforesaid, the regulators took several crucial steps to address the situation and, most importantly the following three, to stop the possibility of increase in the number of insolvency and bankruptcy (IB) proceedings.
Firstly, in March, the default cap was increased to INR 1 crore and beyond for initiating proceedings under Insolvency and Bankruptcy Code of 2016 (Code).
Secondly, the Supreme Court of India held that the lockdown period should be excluded for the purpose of counting the timeline prompting the Insolvency and Bankruptcy Board of India and the National Company Law Appellate Tribunal to come up with guidelines stating that the lockdown period would not be calculated in the corporate insolvency resolution process.
Thirdly, the application of Section 7, 9 and 10 of the Code was suspended for a year to prevent the initiation of insolvency proceedings for COVID-related defaults and no application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the said default occurring during the said period. The banks continue to function under the mounting pressure of resolving bad loans and there is an urgent need to have a revive plan that seeks more divestment options.
While the number of insolvency cases will fall in the current financial year, lenders may also have to take bigger haircuts. The current critical situation would increase the out-of-court M&A deals for distressed assets and push the innovative promoters to opt for a one-time settlement and negotiate with banks or markets to raise debt at affordable rates. While some of the companies with healthy balance sheets will go out for inexpensive and smart acquisitions others would indulge in restructuring or sale of non-core businesses. The halt in IB proceedings would lead to accumulation of liabilities and depletion of the value of the companies. One cannot predict that after the suspension is lifted, there would be surge in IB cases as the ongoing or future IB cases in most likely would see limited interest from bidders due to the uncertainty across many sectors. Investors will naturally be attracted to jurisdictions where there is certainty.
IBC has been emphatically positioned as an instrument for restructuring rather than for recovery. This is echoed from the fact that while the steps above ensured safeguard for the borrowers, there remains to be seen how the lenders’ interest would be secured in these times. It is well understood that the postponement of Code does not solve the problem for any default prior to March 25, 2020 but puts them on a back-burner providing them a safeguard and buys time. So, it is more important to understand what should be done in that time to address the concerns that will emerge post-COVID. Pursuant to the recommendations of the Sunil Mehta Committee in 2018 for NPA resolution called Project Sashakt, on one hand the government set up a Sashakt India AMC, which never got operationalized, on the other hand, it is yet to notify the announced special insolvency resolution framework for MSMEs.