IBC SUSPENSION

The initiation of new cases under the Insolvency and Bankruptcy Code, 2016 (“IBC” or “Code”) had been suspended by virtue of Section 10A in the Code from 25.03.2020 till 24.03.2021. The suspension was only meant for the defaults that occurred during this period, i.e., the Covid-19 period, and these cases were not eligible to be treated as default. The impact of the suspension has been seen differently by each stakeholder, especially by businesses.

AMA View – from a practical angle for Businesses to consider

• The word “ever” here is intriguing and is somewhat misleading as it may give an incorrect understanding that any Company can get away with a billion-dollar default if it has occurred during the Covid period. It is impossible to ascertain that this was the legislative intent and rather compels us to believe that this is a result of poor drafting or the Government has come up with these measures in a hurried manner. This leaves scope for interpretation, especially by the defaulters, and will have to be ultimately decided by the courts.
• Surprisingly, everyone has been in constant discussion about the default and suspension of the Code, however not much discussion about the interpretation of the word “ever” has been made, which might become the bigger issue.
• There will be various permutations and combinations in the interpretation of the word “ever”, on one side it can mean that IBC proceedings can never be initiated on these defaults and other proceedings may have to be explored; mainly the Corporate Debtors and defaulters will take this stand. On the other side the creditors especially the Financial Creditors will uphold that even if it was a default during this period, being a continuing default, this can cause the trigger off proceedings under IBC after the suspension.
• Alternatively various lenders, financial institutions and regulated institutions are contemplating options of creating new ‘event of default’ by exploring their contractual documents to overcome this challenge at a further date.
• There is however, a clear understanding from the notification that the defaults pre-Covid period are not barred and cases can continue to be filed for those defaults. When this entire euphoria both in the lenders segment as well as in the media over filing of heavy number of cases only shows that everyone has assumed that cases can be filed for defaults during this period and has discounted the fact that there is a catch in this word “ever” and is further subject to interpretation. Our views on this have already been expressed above.
• The wording of the instant proviso could lure even the usually prompt promoters who aren’t prone to defaulting to maybe commit a default in the specified period, just so as to ensure that an eternal protection of sorts could be achieved and to enable the Corporate Debtor to be shielded from being taken to task under the contours of the IBC. Such an occurrence would leave the creditors in a limbo and place the Corporate Debtors in a debtors’ paradise of sorts, which does not benefit the economy in any manner whatsoever.
• IBC is even more relevant now for the business community for defaults that have occurred in the past one year. More creditors are desperate to initiate NCLT proceedings and are willing to take a chance as eventually someone has to lay the law. Hence it is expected that there is going to be a heavy surge in the number of filings, however it would be lesser comparatively after the raise in threshold of filings from INR 1 lakh to INR 1 crore.
• Therefore, multiple small and mid sized creditors, operational creditors and unorganized lenders, NBFCs etc. whose threshold is less than INR 1 crore will have to choose alternate forums instead of approaching the Hon’ble NCLT to initiate IBC proceedings.
• As the law evolves, with the issues surrounding the settlement agreements not being a factor to initiate insolvency proceedings and the moratorium being applicable for Corporate Debtors in cheque bounce cases, the creditors and lenders will have to be careful and cautious while doing business.
• IBC proceedings will not be an easy route as it was in the first three years and also somewhat misused. Hence each stakeholder will have to weigh its options carefully with reasonable diligence and if need be obtain professional guidance.
• Amidst these issues, the burden on the Benches of the Hon’ble NCLT has been increasing and with the various branches to this law involving personal guarantor and pre-pack etc. on the line, the infrastructure and the number of members in this forum has been a continuous issue. The Government has to take appropriate measures to ensure that sufficient infrastructure is provided and the manpower is expanded to cope with the existing number of cases and the likely surge yet to happen.
• There has also been a laid back view on pre-pack insolvency although a report on the same had come way back in October 2020, and once it has been notified, it will help out the MSME and other companies, willing to resolve defaults in four categories as mentioned in the report:
  • Default ranging from INR.1 lakh to INR. 1 crore and COVID-19 defaults,
  • Default above INR.1 crore,
  • Default from INR.1 to INR.1 lakh, and
  • Pre-default stress. (with 75% creditors approval)
• In the light of these the MSME companies, suppliers, traders, manufacturers and even large corporations will have to plan their business operations in accordance to the new mantra which is to may be play safe rather than be overambitious and take larger risks.