The Insolvency system in India has made considerable progress since its inception. The COVID-19 Pandemic has gravely wounded the Indian economy. To overcome a highly distressed market scenario and prevent companies from being forced into insolvency proceedings due to debt default triggered by the Covid-19 crisis, the Indian Government has introduced various economic relief packages and regulatory measures, the latest being the suspension of the insolvency resolution proceedings for a period of six months.

On June 5, 2020, the President of India had promulgated the Insolvency and Bankruptcy (Amendment) Ordinance, 2020 in furtherance of the economic measures announced by the Ministry of Finance to support Indian businesses impacted by the outbreak of the Covid-19 pandemic. The Ordinance suspended operation of Sections 7, 9 & 10 of IBC concerning default arising on or after March 25 for 6 months, extendable up to maximum of one year from such date as may be notified. Suspension of these provisions of the Code means that for 6 months from 25th March 2020 lenders will not be able to initiate proceedings against borrowers for insolvency. Similarly, debtors cannot legally declare themselves insolvent or bankrupt for this period. The move was aimed to act as a one-time measure specifically designed to provide relief to companies facing an insolvency crisis due to factors attributable to the pandemic. Due to the suspension of these provisions, no new proceedings could be initiated under these Sections.‌

COVID-19 Debts No Longer Under 'defaults'; Fresh Insolvency Proceedings Suspended For 1 Year, Republic World

A new Section 10(A) was inserted to enforce the suspension. After the recent amendment made in Insolvency and Bankruptcy Code, 2016, no application shall ever be filed for initiation of CIRP of a corporate debtor for the said default occurring during the Specified Period. A non-obstante clause has been inserted into section 66 (Fraudulent trading or wrongful trading) of the IBC to give protection to the directors of a corporate debtor. Accordingly, no application can be filed by a resolution professional under sub-section 66(2), in respect of such defaults against which initiation of CIRP is suspended under Section 10A of the IBC. This deferment period would be helpful especially for Micro, Small, and Medium Enterprises (MSMEs). MSMEs tend to face increased pressures of insolvency shortly and finding new financiers/buyers etc. may prove to be difficult in a stressed economy. The deferment period would allow the management of these companies to remain in control of the assets and administration of the company while they take key decisions to recover from setbacks of the COVID-19 lockdown. In the absence of such suspension of IBC, these troubled enterprises will face liquidation.

Small businesses were seeking an extension of the protection given to them from bankruptcy proceedings for defaults during the pandemic beyond nine months. Therefore, the government has extended the suspension of fresh proceedings under the insolvency law by three more months amid the disruptions caused by the coronavirus pandemic. A notification for a three-month extension of the suspension, which was to end on December 24, is issued by the Corporate Affairs Ministry. The three-month period would be from December 25 i.e., the suspension will end on March 24, 2021.

Suspension is simply a coping mechanism to etch out temporary relief to delinquent and insolvent firms. It cannot last forever and neither can our institutional fatigue. The Government must contemplate other measures such as debt restructuring or debt solidification (based on the state of every individual company’s finances), which are tried and tested mechanisms shown to have yielded success in the West.  They could also contemplate enforcing the ‘pre-packaged’ insolvency and bankruptcy deals, which can go a long way in reducing the traffic in judicial corridors. Much like Arbitration clauses, these pre-packs are a set of previously agreed-upon insolvency/bankruptcy processes to be adopted in cases of default. It can be safely inferred that the creditors, both financial creditors and the operational creditors, are bereft of an efficacious remedy, which was made available to them through the IBC. However, the legal regime of India provides them with certain alternative remedies for recovering the debt in cases of defaults, especially at present time when the operation of IBC is suspended.‌‌

Civil Suit for Recovery under the Code of Civil Procedure, 1908:

An effective alternative remedy, for recovery under the Code of Civil Procedure, available with the corporate creditors is filing a civil suit for recovery of their debt amount owed by the concerned corporate debtors. The financial/operational creditors have the option to approach the civil court, having appropriate jurisdiction, under Order IV of the Code of Civil Procedure, 1908 for recovering their debts on the occasion of defaults by the corporate debtors.  In cases, where the creditors have a clear/undisputable case of default and the consequent, express inability of the corporate debtors in paying off its liability owed to the creditor, then such concerned creditor has the legal remedy to approach the civil court for the summary procedure under Order XXXVII of the Code of Civil Procedure, 1908.

Commercial Suit under the Commercial Courts Act, 2015:

Another effective alternative remedy is enumerated in Section 2 (1) (c) of the Commercial Courts Act, 2015. The financial/operational creditors have the legal right to institute proceedings under the Commercial Courts Act, 2015 against the corporate debtors. The financial/operational creditors also have the option to expedite the procedure under the said Act by invoking the provisions of Summary Judgment under Order 13A of the Code of Civil Procedure, 1908. However, the initiation of proceedings under the Commercial Courts Act, 2015 suffers from a drawback. In order to institute a commercial suit, the plaintiff i.e. creditor is required to pay ad valorem court fees, as enumerated under the Court Fees Act, which is approximately 1% of the value of the suit. The said amount is obviously on the higher side for a financial/operational creditor, when compared to that in remedy available under IBC. Thus, such a financial barrier might act as a deterrent for many corporate creditors to avail of this legal remedy.

Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI):

SARFAESI Act is the most viable alternative legal remedy for financial secured creditors like the banking sector and NBFCs as it allows the secured creditors to sell the mortgaged properties of the defaulter to recover the rightful dues owed to such creditors. However, this remedy is not available for operational or unsecured creditors.

Concluding Remarks

In this global crisis, it is an indisputable fact that companies are unable to pay off their debt because of no production or financial stability.  The suspension of Section 7, 9, and 10 of the Insolvency and Bankruptcy Code was necessary. Stretching the IBC’s abeyance, for one, does not square up with the government’s proclamations of a firm, V-shaped economic recovery. The government, by now, should know which sectors continue to remain in trouble. And if it is concerned about small and medium businesses, it could tweak the default threshold limit a tad higher, while letting bankruptcy processes function again for larger loan accounts. Delaying the inevitable would mean greater financial stress ahead, as the restructuring and recovery of bad loans shall get tardier and future growth momentum would be punctured at the cost of understating present systemic stress.

To know more about the current position of MSMEs under the IBC regime, PUFE transactions, we recommend you read:

Unravelling IBC Ordiance.

•  Arbitration of Insolvency Disputes: A Case Study of Indus Biotech Private Ltd. v.     Kotak India Venture Fund-I

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