Despite new measures to revive economy, govt's steps on Insolvency and Bankruptcy Code needs clarity

With India entering into phase four of the nationwide lockdown from 18 May, the announcements being made by Finance Minister Nirmala Sitharaman were being looked at with hope. After all, the finance minister was ensuring that the policy of Prime Minister Narendra Modi’s government would help minimise the impact of the possible post-COVID-19 meltdown, if not slowdown, that is being predicted by economists the world over.

 Despite new measures to revive economy, govts steps on Insolvency and Bankruptcy Code needs clarity

File image of Union Finance Minister Nirmala Sitharaman. Screengrab from finance ministry live stream

Ever since the announcement of the first lockdown shortly after the Janata Curfew in March this year, the whole country had come to a sudden standstill. The Government of India seems to have realised that it has a responsibility to protect not just the lives of its citizens, but also their livelihoods -- a sentiment that has been oft-repeated by the opposition parties.

The slew of measures that have been announced recently point to this. The government seems to be in welcome reforms mode presently. And this in the middle of a nationwide lockdown.

As Sitharaman touched upon the new changes that will be made to the Insolvency and Bankruptcy Code (IBC), it was announced that the minimum threshold for initiating insolvency proceedings would be extended to Rs 1 crore from the earlier threshold of Rs 1 lakh. This move will largely benefit smaller businesses since for the larger ones, the new threshold may also have already been breached.

Since the IBC came into force, there have been numerous proceedings that have been filed in the past where financial creditors and operational creditors would try to claim their monies by initiating IBC proceedings against the entity for payments even of Rs 1 lakh.

The practice has in several cases been a cause of concern to several quarters including industry itself. Reports in the media have been hinting at the raising of the threshold for initiating insolvency proceedings since October last year. The finance minister officially announced it on Sunday. Critics can argue that it took a pandemic for the official announcement to be made – not a cause of comfort for several quarters.

The government announced, as expected, that debts related to COVID-19 would not be included in defaults in IBC proceedings. However, this announcement may require clarifications (several, unfortunately) of their own since presently no definition or framework has been announced to clarify what the phrase ‘debts related to COVID’ could possibly include. Your guess today is as good as mine.

It is going to require astute drafting to ensure that there is no ambiguity that would arise as a result of the definition of the phrase. Courts should not be left to examine the words in detail and spend their time seeking to understand what the intended meaning is – not at a time when the courts will already have such a massive backlog of work to get back to upon easing of the lockdown or lifting of it, whichever results in courts getting back to work with their full strength.

Additionally, it has also been announced that no fresh insolvency proceedings can be initiated for until a period of one year, which it seems has now replaced the period of six months as specified by the Ministry of Corporate Affairs. While it could be argued that the announcements are seeking to protect Indian businesses, alternatively it can also be argued that the overall debts in the country would rise exponentially, and there would be no recourse for at least a one-year period, given the announcement. There has been very little to no talk as to how lenders can effectively sustain themselves for this period.

Interestingly, in the presser addressed by the finance minister on Sunday, it was mentioned that several portions of the Companies Act, 2013 that deal about minor offences and procedural irregularities would be decriminalised. The intricacies are still awaited. The motive attributed to this was that it would de-clog the criminal courts and the National Company Law Tribunals (NCLT), which is rather ironic since just last week, eight members of the NCLT were transferred with immediate effect. At a time when there are demands from several quarters to increase the strengths of the NCLT, this move seems to have caught several observers by surprise since possibly not many saw this coming – the reasoning either.

While the government has undertaken a slew of measures to help kickstart and revive the economy post-COVID-19, the announcements made on Sunday in relation to the IBC are not very clear. They have unfortunately raised more questions than answers.

There have been recent reports in certain sections of the media that the government is also trying to bring in pre-packaged IBC schemes that already exist in jurisdictions like the United States of America, the United Kingdom, France and others. From an Indian context, the move, if true, maybe a little tricky given that a substantial chunk of the companies in India is promoter-driven. If this proposal does go through, we could see a lot of time saved, but at the same time, ensuring maximisation of assets and their value that is contemplated by the IBC could possibly be lost.

The impact that the changes to the IBC will result in could possibly only come to light several months from today. For now, we all await the exact amendments and the ordinances that are likely to be brought forth.

Probably it would have been wiser to increase the strength of the NCLT benches, rather than seeking to de-clog it.

The writer is an advocate at the Bombay High Court with a keen interest in international law, global politics and investments.

Updated Date: May 18, 2020 16:46:13 IST



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