Pre-Covid-19

At the outset, let me give the brief on IBC, 2016 and the scenario which was at the pre-covid 2019 time.

• Insolvency and Bankruptcy code, 2016 has been one of the options for a creditor in case of non-payment of dues which are accrued from corporate debtor (CD).
• Financial creditors prefer filing of petition under IBC, 2016 when they found minimal chance of recovery from the available secured assets (as they have edge under SARFESIA act if CD has good assets ) or when they found that, all the other options are not suitable for recovery looking to the percentage of recovery by FCs thorough IBC, 2016.
• At, Pre-covid time, the petition filing limit was Rs. 100000/- as per section 4 of the Code. So, in case of any default at least of the amount of Rs 1 lakh, the creditor has all the power under the act to file a petition which may lead to corporate insolvency resolution process. (CIRP)
• As established by Insolvency Law committee and by various pronouncements, the purpose of IBC, 2016 is not at all recovery but to have resolution, to maintain business as going concern and finally to protect assets of CD & thereby to protect interest of the stakeholders.

During Covid-19

Covid-19 is the scenario, where business and economy is literally in a shut done mode. Indian Boarders are closed – State wise and District wise social distancing is forced. It is needless to state here that, procurement, production, dispatch, sale, recovery etc. is currently at a halt. Due to long period closure, the liquidity has been hampered and hence, it is most likely that, business may not be in a position to repay the “Debt” in time.

Considering the present situation, Finance ministry has made the following actions:

(1) Threshold limit of application for IBC, 2016 has been increased to Rs 1 Crores by Finance Ministry. The Central Government vide Notification No. S.O. 1205(E) dated 24th March, 2020, in exercise of the powers conferred by the proviso to Section 4 of the Code has increased the said limit. And as per the Code, CG has the power to enhance the limit upto Rs 1 Crore ..which government has enhanced. (beyond Rs. 1 crores, CG has no authority but to pass the same before the parliament ).

Intention of Honorable FM was to prevent MSME going under IBC, 2016.

Previously, this threshold was only Rs 1 Lacs. Meaning there by that, any person whether supplier or financer, had pending recovery of more than Rs 1 Lacs and for which there was default by the Corporate Debtor, he had the power to apply under IBC, 2016 before NCLT.

My views in favor:

Legislature like IBC, 2016 is backing up the creditors who lend money/goods/services to the business.

IBC, 2016 is a sward or a Stick which is providing a shield, disheartens the negative intent of business and hence, the very purpose is to have a Shield and not to Hit anybody!!

Triggering event is a “Default”. A meager amount of default of debt which is only Rs 1 lacs, should not be used as a recovery mechanism during / after the lockdown period considering the impact of covid-19. Covid-19 is a pandemic which is unprecedented and due to the same, business across the world including India are closed down. Naturally, there will be “default” which will trigger unnecessary cases under IBC, 2019.

To curb small cases, the Government has dealt with this default threshold so that, due to Covid-19, large number of cases does not go to NCLTs.  The Government expects to have so many petitions at the NCLT under IBC, 2016 if the present limit of Rs 1 lakh persists. The fantastic move is only to save a situation where, NCLTs are not jammed with small cases and to save over crowded situation before the adjudicating authority. It’s a “Capacity to process” issue that has resulted into increase of threshold limit to Rs. 1 Crore.

My views against:

In India, more than 85% of the business are in category of SME/MSME. Normally looking to their size of business, we all know that, per head / per vendor outstanding is generally lower than Rs. 1 Crores dur to their limited liquidity.

Taking a situation of an Operational Creditor who is SME/MSME, due to the recent increase in the threshold limit to Rs 1 Crores, they will not be in position to file any application under IBC,2016 for default of their collectibles.

To put it differently, if post covid-19, any business is not paying to such creditors having lower outstanding balance than the threshold limit of Rs 1 Crore, they will have the only option to have recovery outside IBC, 2016. This can definitely ruin the working capital of small and medium business units!!

Let me clarify on the applicability of this recent clarification of finance ministry that, as it is due to Covid-19, all the petitions, which are already filed and are pending before various NCLTs, will be heard as it is and will not be impacted. So, petitions already filed by FC/OCs before this notification, where the default amount is lower than Rs 1 Crores (new threshold) but higher than Rs 1 Lac, the same should be heard and will not be per se rejected.

(2) RBI’s move for Moratorium for Installments and Interest payment:

This has provided a BIG relief to field of IBC, 2016. Moratorium has saved the cases to go to IBC. As we all know, that overdue accounts are classified as regular and non performing, considering the period of non-payment or considering the period of default. RBI has suggested to give moratorium from 1^st March 2020 to 1^st June 2020 i.e. 3 full months wherein, no installment and no interest will be due and accrued.

Due to this move of RBI, business accounts which are unable to pay due to liquidity crunch will not be treated as NPA and hence, there won’t be a pressure on the Banks for recovery and filing of petition under IBC, 2016. In my view, this is a welcome indirect relief considering IBC, 2016.

(3)Moratorium of 3 months for CIRP period:

IBC, 2016 is a time bound legislature. Wherein, insolvency resolution professional has to observe the hanging sward of “timeline” which is not otherwise binding for any judiciaries.

Due to preserving “social distancing” and close down, NCLT suo moto ordered for extension of CIRP by the moratorium period of 3 months i.e. time of covid-19 close down has been given as moratorium by treating the same as blackout period. This has taken away the timeline issue of a resolution professional.

But, real challenge of a resolution professional is how to protect assets of the CD which is a main and utmost responsibility.

• Challenge will be for the followings-
• How to have going concern of CD’s business during / post lockdown?
• How to manage Liquidity and inventory management?
• How to protect employees from threat of corona virus and to manage robust safety? – a social responsibility too.
• The unanswered question is that, whether this moratorium of 3 month for Covid-19 will be over and above the total maximum available timeline of 330 days which also includes the time of proceedings and litigation time?  In my view yes.

But, it may be a matter of litigation, due to the latest Honorable SC ruling: M/s Manibhadra Polycot & Ors. Civil appeal no. 4392-4393 of 2019- wherein, honorable SC has specifically denied for any relaxation of timeline if demanded “time of extension” is not towards litigation.

(4) Finance minister has also announced a possible temporary suspension of section 7,9 and 10 of the IBC,2016.

This must be the learning from the China economy, were it is heard that, there are more than 200000 IBC cases filed post covid-19!

Nobody knows the real impact of covid-19 but considering vision of our government, it seems that, ministry is expecting a bad time of economy due to the pandemic. And for that, it has given us hint that, if situation demands, ministry will think for suspension of section 7-9-10, so that no more IBC, 2016 petitions can be filed before NCLT and NCLT can function smoothly with the existing cases.

Of course, if such a prohibition comes, it will be a terrible time for creditors who are facing issues with defaults. Banks and FIs have to make the accounts NPA as per the norms of RBI, but they can’t opt for IBC and again the old and time consuming options for recovery will be left out for them to recovery money which results into deterioration of assets of CD as in non-IBC regime, “Control is with CD and not with Creditors”!!

(5) What about the Fees of Insolvency resolution professionals?  

There is a common question across RPs and the CoCs for payment of professional fees of a resolution professional which is generally on a monthly basis.

My views:

There is no doubt that, the lockdown has totally stopped the unit and business of corporate debtor. But the challenges for an RP is on many fronts which we have already understood in para 3 above. The RPs are even working from home and taking care of “protecting assets of CD” for the stakeholders.  Needless to say that at least professional fees as agreed on monthly basis must be paid to them which they surely deserve!!

(6) Resolution Applicant where his plan is agreed by the CoC and also approved by the AA?

We all know that IBC, 2016 focuses on the “Resolution and Reconstruction” of a corporate debtor. In the process of CIRP, the interested resolution applicants are bidding for the company/unit for fresh infusion of the funds and providing a going concern status to the ailing corporate debtor. The decision of the RA is based on the internal assessment and the same carry the perspective of business valuation if the same is merged with the existing business and/or considering synergy impacts.

The issue is that post-covid 19 there are high chances that, valuation of such ailing business and units may fall drastically or may loose market. So, for a successful resolution applicant, who is not been handed over the unit, he has to infuse funds and complete the legal formalities under IBC, 2016, may think about the potential loss due to covid-19 being unforeseen event. So, the question is, whether he can disown the quote/bid or can he apply for the reduction of quote (for the potential loss due to covid-19) even after the resolution plan is approved and RA is selected?

My views:

At present, the situation is that Resolution applicant has to honor the resolution plan fully if the same is approved by the Adjudicating authority. There is no clarification till date on this issue.

(7) Valuation to be reconsidered with the impact of Covid-19 on the Corporate debtors under IBC.

I think, one of the most badly impacted area under IBC,2016 is the Valuation. As we know, all the Corporate debtors who are under IBC,2016 need to be valued by two independent valuers – who give fair value and liquidation value for the CD.  Any case which is at stage of preparation of information memorandum etc, it the responsibility of RP to reconsider the valuation aspects and he can not shut his eyes.

Probably, resolution applicants may demand re-valuation of the corporate debtor considering impact of covid-19. And in my view, this may result into severe delay, additional valuation cost.

(8) “Market for Stressed assets” will be the need of an hour and will a real challenge for Resolution applicants during post Covid-19 era. I expect there will be huge reduction in number of resolution applicants due to rough time of liquidity crises. When the business itself is struggling with the liquidity, one should not expect them as the resolution applicants!

In my view, after Covid-19, government should dilute section 29A to a great extent, which basically deals with ineligibility of a resolution applicant and try to push and develop a platform which can be used by RPs for resolution.  

• Pre-Pack chapter under IBC,2016 for Resolution of stressed assets before the admission of CIRP – a very likely scenario in near future.

A Pre-packs procedure is a preplanned insolvency in which, corporate debtor arranges necessary finance by selling its assets or business units prior to filing of insolvency and shareholder and Creditors file reorganization plan of Pre-packs before the respective adjudicating authority or a forum for pre-packs. Currently, pre-packs are popular in UK, Germany, Japan and US and are successfully operated under Bankruptcy Law.

My view in favour: Pre-packs can definitely result into speedy recovery with continuation of business and without hinderance. The same is expected at very low cost of resolution and saves time of government machinery like NCLT and litigation pain. I think, before CIRP process, corporate debtors would be having more power to bargain as they are having full controls at the stage of going concern. While under IBC, 2016 once the petition is admitted, creditors have the right of control.

My view against:  It will be having negative impact on the unsecure creditors and Operational creditors as the pre-package result into reduction of available assets of the corporate debtors. The reorganization normally result into solving secured creditors first. This will have impact of reducing assets available for other creditors and OCs.

I have tried to analyze the impact of Covid-19 and the government actions w.r.t areas of Insolvency and Bankruptcy Code, 2016. CA Darshan Patel, is a practicing FCA, IP, RV(SFA) and active in the field of IBC and valuations.

Disclaimer: These are my own views and should not be construed as any advice or promotion.

An Article by CA Darshan Patel – Senior Partner at B J Patel & J L Shah, FCA, DISA (ICAI), IP and RV

https://ipdarshan.home.blog/