Proposed IBC changes to benefit MSMEs, but delay resolutions of stressed firms

The New Indian Express | May 17

NEW DELHI: Extending relaxations to companies, Finance Minister Nirmala Sitharaman on Sunday said no fresh insolvency will be initiated for one year and coronavirus-related debt will be excluded from definition of ‘default’ under the Insolvency and Bankruptcy Code (IBC). That apart, the minister also announced decriminalisation of the Companies Act violations involving minor and procedural defaults — shortcomings in CSR reporting, inadequacies in board report, filing defaults, delay in holding AGM as part of ease of doing business, while delivering the fifth and final tranche of the Rs 20 lakh crore economic stimulus.

“The Ministry of Corporate Affairs (MCA) has already extended the minimum threshold to initiate insolvency proceeding by six months and we intend to extend this by another six months. To bring these changes in the IBC immediately, an ordinance will be promulgated,” Sitharaman said, adding a special insolvency framework will also be notified under section 240-A of IBC for small businesses which are among the hardest hit due to the COVID-19 induced lockdown. 

While many companies can breathe easy to an extent as several misses have been decriminalised and the threshold for filing insolvency proceedings has been increased from Rs. 1 lakh to Rs. 1 crore, resolution of stressed assets is set to take a beating due to blanket suspension of defaults, say experts.

“The blanket ban defeats the objective of IBC. What happens to the entities that were bad or doubtful prior to the pandemic. The unscrupulous borrowers who have also got relief following the MCA notification should be dealt differently. Such blanket ban may throw the wrong signal on performance of contractual obligations by parties and the legal protection available to the aggrieved party. The already stressed banking industry shall face more heat and disadvantage,” said Rajesh Narain Gupta, managing partner, SNG & Partners. Gupta suggested it would have been a better move if banks were directed to decide whether to initiate any legal action or not under IBC on the basis of performance of the borrower and provide a reasoned note if the default is attributable to COVID-19.

Similarly, it would have been wise to have the ‘Section 10’ option, which allows a company to opt for an insolvency on their own, still available, said Dinkar Venkatasubramanian, partner and leader, restructuring and turnaround services, Ernst & Young. “Also, for the recovery of businesses, the recent announcements will have to be accompanied by an effective mechanism from the government to solve the debt overhang – perhaps a one-time debt restructuring mechanism or a pre-pack regulation. It would also need clarity on aspects like what can be termed as ‘COVID-19 related debt’,” he added.

Veena Sivaramakrishnan, partner, Shardul Amarchand Mangaldas & Co also warned that the suspension of proceedings for a year will lead to delay in resolution process.

“While the MSME amendments have given some breathing space to the sector, a few questions like why should an entity not refer itself to insolvency, what is the parallel regime of resolution, what is the framework for creditors to come up with a viable resolution plan outside IBC, continue to remain unanswered,” she observed.

Experts also believe that there could be a sudden surge in cases being referred under IBC after an year. “The one-year time frame appears adequate for the entities to sort out any temporary cash flow mismatches, but if the severity of the pandemic were to increase, thereby increasing the longevity of the lockdown or even fresh lockdowns later delaying economic revival, then we could see a sudden surge in cases being referred under the IBC after the one-year period. This could be detrimental to the resolution process, which is already facing challenges from over-burdened tribunals, pointed out Abhishek Dafria, vice-president, ICRA. 

In fact, future resolutions are likely to suffer from lower valuations and possible lesser interest from bidders due to the uncertainty across sectors, which in turn, could result in creditors having to agree on higher haircuts to successfully conclude the resolutions.