Context: The Government has decided to amend the insolvency law to suspend up to one year the IBC provisions that trigger insolvency proceedings against defaulters.
- The coronavirus outbreak and the nationwide lockdown to curb spreading of infections have significantly impacted economic activities across the country.
- As per existing norms, if a payment default exceeds 90 days then the lender concerned has to refer the account for resolution under IBC or any other mechanism permitted by the Reserve Bank of India (RBI).
- The lender does not have the option to restructure the loan.
- Currently, RBI norms prohibit restructuring of loans and resolution has to be done under IBC.
More on the news:
- An ordinance would be promulgated to suspend three sections of the IBC namely sections 7,9, and 10.
- Sections 7, 9 and 10 of the IBC would be suspended for six months and the suspension time can be extended by up to one year.
- Suspension of these provisions could be extended up to one year based on the economic situation going down the line.
- Section 7 and 9 pertain to initiation of corporate insolvency proceedings by a financial creditor and an operational creditor, respectively.
- On the other hand, Section 10 relates to filing of an application for insolvency resolution by a corporate.
Significance of such a move
- The amendments to the IBC (Insolvency and Bankruptcy Code) would pave the way for banks to restructure loans.
- It provides more leeway for corporate borrowers in repaying their loans.
Case against suspension of IBC rules
- For debtors, The IBC is not just a debt enforcement tool, it is also the only formal and binding mechanism that a company can resort to restructure its debts and get a breathing period to stop debt enforcement against it.
- By completely stopping recourse to the IBC, companies would be denied the chance to access this mechanism for resolution, and may lead to piecemeal debt enforcement that could result in the closure of businesses.
- Some lenders, including operational creditors, may not be able to absorb the fallout of a high magnitude of bad debts.
- For example, individual operational debtors may themselves go under stress if they are not paid for goods and services they provide to organised, large-scale enterprises in due time.
- Similarly, many financial institutions may already be facing stress due to bad loans on their balance sheets, which they cannot absorb.
- Even RBI’s decision to not mandate a moratorium on debt enforcement has recognised some exceptional cases, in which financial institutions need to recover debts owed to them.
The government needs to come up with more nuanced policy measures, rather than stopping recourse to the IBC on a blanket basis.
- The government should revisit Section 29A of the IBC, which prevents the incumbent management and promoters from proposing a resolution plan in insolvency resolution proceedings.
- This section will unfairly prevent existing promoters who may have defaulted due to the conditions caused by Covid-19, from retaining control of the debtor while taking recourse to the IBC.
- Thus, restricting the applicability of Section 29A, potentially only to wilful defaulters, would ensure that the distress of firms will get resolved in an orderly and efficient manner, and not impose burdens on promoters who are victims of the economic downturn.
Section 29A of IBC prevents promoters of defaulting companies from bidding for stressed assets.
- Further, the government should focus on enhancing the infrastructure, particularly the e-court infrastructure for the NCLTs.
- It also can consider exemptions from some dispensable process-related requirements to prevent the system from piling up with a larger number of insolvency resolution cases.
- Lastly, the RBI may consider issuing guidelines on the basis of which financial institutions may consider recourse to the IBC.
- These guidelines may identify situations in which lenders could generally forbear from enforcement, keeping in mind the state of their balance sheets as well as that of the larger economy.
These measures will go a long way in ensuring that debt enforcement and insolvency resolution in the wake of Covid-19 is done in a humane yet financially sustainable manner.
Salient Features of IBC
- It applies to both individuals and companies.
- Earlier it provided for a 180-270 days period to resolve insolvency but now the deadline of 330 days has been set for completion of the corporate insolvency resolution process (CIRP), including litigation and other judicial processes.
- It provides immunity to the debtors from claims of resolution by creditors during this period of resolution.
- It provides for a common platform of debtors and creditors of all classes to resolve insolvency.
- The Code gives the highest priority to those who have brought interim finance to meet the costs of resolution or liquidation, followed by dues to workers for the past two years and dues to secured creditors in equal priority.
- Employees other than workmen, and unsecured creditors and operational creditors are further down the line in the priority of receiving resolution or liquidation proceeds.
Laws prior to IBC
Some of the insolvency laws which failed to make an impact.
- Sick Industrial Companies (Special Provisions) Act, 1985 (SICA)
- The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI)
Image Source: Financial Express