IBC: Only Insolvency matters precipitated by COVID-19 on hold

The Coronavirus pandemic has led to countries all over the world to bring in such measures that would help sustain the economy without plundering into a total catastrophe.

The coronavirus pandemic has led to countries all over the world to bring in such measures that would help sustain the economy without plundering into a total catastrophe. In view of the same, India too has brought about innumerable changes for ensuring the smooth functioning of the economy and avoiding a situation of mass insolvency for companies due to the present force majeure situation. Various decisions to combat the economic challenges have been laid down within the Insolvency and Bankruptcy Code, 2016 (the "IBC, 2016"). This has been done to empower growth and increase the ease of doing business despite the current distress caused within the economy. However, it is important to note that the changes brought in are applicable to organizations and entities affected profusely by the lockdown and the pandemic. Every other schedules matter under the IBC, 2016 is currently on schedule and in consonance with the normal procedure of the law.

Some of the changes brought about within the Insolvency and Bankruptcy Code, 2016 (IBC, 2016) to combat the threat that this virus imposes, have been illustrated below, highlighting that these are applicable subject to the fact that they have been directly or indirectly affected by the onset of this lockdown:-

  • Increasing of threshold to Rs. 1 crore for Covid struck enterprises

In exercise of its powers under Section 4 of the IBC, the Central Government has raised the threshold for invoking insolvency to Rs 1 crore from the prior amount of Rs 1 lakh.

This amendment has been introduced to mainly prevent triggering off insolvency against micro, small, and medium enterprises (MSMEs), which are struck by the nationwide lockdown. The government shall also notify the special insolvency resolution frameworks for MSMEs under the Act.

  • Changes in the Corporate Insolvency Resolution Process ("CIRP")

In order to provide much needed relief, the Insolvency and Bankruptcy Board of India (IBBI), has amended the regulations governing IBC, 2016 by introducing the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2020 also known as the "Amended CIRP Regulations, 2020" which came into effect from March 29, 2020. The Amended CIRP Regulations, 2020 provide that the period from the date of the announcement of the nation-wide lockdown till the said lockdown is in force by the Central Government shall not be taken into account for the calculation of time-lines for any activity in relation to a corporate insolvency resolution process, which could not have been fulfilled by any persons or entities due to the present lockdown. This waiver has been extended to the overall period of 330 days which has been given as the overall time limit under IBC, 2020, as well. Thus it can exceed beyond the given period of 330 days. Furthermore, the period of lockdown has been excluded by IBBI for counting any time-lines for any activity in relation to the process of liquidation which could not have been completed by the authorised persons due to the lockdown.

  • Exclusion of COVID-19 related debt from the definition of "default"

With an idea to promote business and prevent any triggering insolvency processes, the Central Government has excluded COVID-19 related debt from the definition of "default" under the IBC. This measure, too, has been undertaken with an idea to promote further business and avoid any sudden insolvency proceedings occurring due to the pandemic and the subsequent lockdown. Covid-19 has been treated as a force majeure event thus and excluding it from the definition of defaults is one of the major supports provided by the government to companies across the nation.

  • Other COVID- related amendments

Furthermore, for computation of the time-limits for activities related to CIRP and liquidation, the period of lockdown has been excluded by inserting Regulation 40C to CIRP Regulations, 2016, and Regulation 47A to the Liquidation Regulations, 2016.

The NCLT and NCLAT have introduced procedural reforms to mitigate the impact of the lockdown. They only hear urgent matters even during the lockdown with prior email notifications for the same. They have further extended the interim orders till the next date of hearing and the limitation has been extended for all proceedings till the courts reopen again.

  • Insolvency & Bankruptcy (Amendment) Act, 2020 promulgated ("IBC 2020")

The government has come up with IBC 2020 to streamline the CIRP, protect last-mile funding and to boost investments within financially distressed sectors. These changes put a threshold condition for initiating the CIRP by the financial creditors, who are primarily allottees under any real estate project. These amendments have also introduced a requirement to ensure the maintenance of a supply of essential goods and services and further protection from the suspension or termination of critical business licenses, registrations and government permits during the moratorium. It also imports safeguards for successful bidders, the corporate debtors and its assets from the offenses of the former promoters or management. Now, the central government may notify any debt to include it within the definition of interim finance.

Conclusion:

The directives of the Central Government to tide over these trying times are laudable but most of these changes are myopic and will end up creating problems for most stakeholders in the long run. In these circumstances, the adjudicating authorities, who are not only adjudicating disputes arising out of the IBC but also under the company law and the competition law disputes, must institutionalise technology and proceed to work over all aspects. This one reform can singularly disburden the courts, optimize resources, curtail delays, and reduce operational costs as well. India took decades to implement such an effective insolvency regime and improve its global ranking of doing business. This pandemic must not rewind the clock and start all over again. Furthermore, the above mentioned reliefs are available for entities who are affected by the lockdown caused due to Covid-19, making it profusely clear that the ordinary recourse is still very much governing all other entities for insolvency proceedings.

To conclude, there will be tough times ahead not only for already distressed companies but also for various suppliers, lenders and resolution professionals, etc. Covid-19 will lead us to qualms on many levels, including the struggle of entities to run as a going concern, liquidity crunch at financial institutions level and limited options for revival plans for corporate entities.