The stakeholders had already expressed their opinion, anticipating the suspension of the Insolvency Bankruptcy Code, against removing the company’s ability to start insolvency proceedings.
An Ordinance prohibiting the initiation of the corporate insolvency resolution process for defaults committed within six months (extendable up to one year) from March 25 was enacted on June 5, 2020. The Ordinance also explains that no application may ever be lodged for such defaults, thereby granting, under the Insolvency And Bankruptcy Act, permanent immunity to individual defaulting businesses.
Firstly, the default threshold under the Insolvency And Bankruptcy Code (IBC)was extended from Rs 1 lakh to Rs 1 crore as soon as the lockdown was enforced to help make sure that insolvency hearings for minor defaults were not initiated. The FM had given indications at the time of raising the default threshold that if the pandemic situation does not enhance, the Insolvency And Bankruptcy Code (IBC)may be suspended.
Quite lately, the FM explicitly announced that new insolvency proceedings for Covid-19 related debts would continue to be suspended. There was much speculation about this official statement. The Ordinance is in line with expectations, but one would have anticipated a much more specific guideline to suspend the Insolvency And Bankruptcy Code procedure rather than a general time-specific economic blockade.
The Insolvency And Bankruptcy Code (IBC)has been reasonably successful since its beginnings in 2016. It resulted in the resolution of 221 cases with a recovery of 44%. Instead of establishing a set of criteria on the basis of which relaxations could have been granted, the government has entirely suspended the structure.
The lack of guidelines and its connection to the suspension of the insolvency proceedings may obviously end up doing more harm to businesses, as the Insolvency And Bankruptcy Code (IBC)will no longer be available for restructuring. In the absence of relaxations, the corporate debtor will be more susceptible to creditors, who will seek to initiate other legal remedies to claim their debt.
The pandemic has already caused debt holders to face financial hardship, which could lead to defaults. The time-specific framework also raises doubts: first, if a company relies extensively on global demand as well as, as a result, faces pandemic-related anxiety before the lockdown, there’ll be no immune response for such a company.
Conversely, if an organization had been under stress and began making defaults in the normal course after March 25, it would be able to take refuge under the newly formed Ordinance of the Insolvency And Bankruptcy Codeeven though the root cause of the default might not be linked to the global pandemic. The government might have considered granting an effect-or influence immunity.
In another prominent judgment of the year, the Supreme Court ruled on the matter of K. Sashidhar vs. Indian Overseas Bank has reduced the jurisdiction of the Adjudicating Body, i.e., The National Company Law Tribunal (NCLT) observes that the NCLT has no power and authority to analyze or assess the commercial judgment of the Creditors’ Committee (‘CoC’) and to examine the validity of the denial of the resolution plan by dissident financial creditors. Apart from stressing the economic wisdom of the (CoC) under the Insolvency And Bankruptcy Code (IBC), this decision may also be expected to minimize excessive litigation and the subsequent delays.
In consideration of the suspension of the Insolvency And Bankruptcy Act, the parties had already expressed their opinion against withdrawing the company’s ability to initiate insolvency proceedings. In its decisions, the SC categorically claimed that the freedom to start and conclude business is a fundamental right and thus cannot be excluded.
However, the Ordinance waives the right of a corporation to commence insolvency proceedings on itself, thereby enabling the very same company to begin voluntary liquidation procedures under the Insolvency And Bankruptcy Code, which may also be the consequences of pandemic-related pressure.
What will be the real and qualitative effect of the suspension of the Insolvency And Bankruptcy Code? Could the effect be organized? Failure to pay leads inevitably to default under the Insolvency And Bankruptcy Code, and thus lenders may extend a moratorium to assure that the duty to pay and the subsequent default does not occur before the operation of the Ordinance of the Insolvency Bankruptcy Code. Such moratoriums were also recommended by the Reserve Bank of India, originally for three months, with a further three-month extension.
We should also bear in mind that creditors will also have access to other ways and means of recovering or suing defaulting firms, such as security interest compliance under regulations such as the Securitization and Rehabilitation of Financial Assets and Enforcement of Security Interest Act (SARFAESI) or the initiation of litigation or other legal proceedings.
Therefore, the government should also consider enforcing special legislation on pandemics through which immunization, similar to the moratorium issued under the Insolvency And Bankruptcy Code (IBC), is granted to businesses that can demonstrate pandemic stress. However, it was necessary for the government to provide relief to companies that have been deeply affected by the pandemic and are still in the midst of the global crisis. However, there is space for more fine-tuning, impact-based clarity and objective stimulation or immunity.
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