Impact of COVID-19 on bankruptcy code

The ongoing COVID-19 pandemic has dealt a crushing blow to the world economy, and has placed businesses in almost all jurisdictions under severe financial strain. At the time of writing this article, India is under a nationwide lockdown, which has raised several legal and operational issues with respect to the implementation of the Insolvency and Bankruptcy Code, 2016 (code).

To shield medium and small enterprises, the finance minister, Nirmala Sitharaman, announced on 24 March 2020 that the threshold of default required for initiating proceedings under the code shall be raised from the existing ₹100,000 to ₹10 million (US$1,320 to US$132,000). Following swiftly on that announcement, a gazette notification was published on the same day in exercise of powers under section 4 of the code.

The revised threshold came into immediate effect and, unlike the lockdown, the notification increasing the threshold has no sunset clause and will continue in effect until reversed. The immediate impact would be that the number of insolvency petitions filed is expected to drastically reduce, specifically on account of protection against insolvency petitions filed by smaller operational creditors.

This revision of threshold is also in line with the demands of industry to revise the threshold even in the pre-COVID-19 situation, as the threshold of ₹100,000 default was pretty low.

Section 4 of the code empowers the central government to increase the threshold default amount only up to a maximum amount of ₹10 million. To raise the threshold any higher, the code would itself need to be amended.

It is probably keeping this handicap in mind that Sitharaman, also declared: “If the current situation continues beyond 30 April 2020, we may consider suspending sections 7, 9 and 10 of the code for a period of six months so as to stop companies at large from being forced into insolvency proceedings in such force majeure causes of default.”

While the reason for contemplating suspension of sections 7 and 9 of the code, which allow a financial creditor or an operational creditor to initiate proceedings, seems obvious, it is not entirely clear why the provisions of section 10, which allow the corporate debtor itself to initiate the process, need to be suspended.

It may perhaps be a measure to allow some breathing room for financial institutions, which are already under stress, and large-scale initiation by corporate debtors may compound the problem. In ideal circumstances, the provisions of section 10 need not be suspended, as it enables the debtor to voluntarily seek resolution in circumstances where the debt is not sustainable, or where the business itself may have become unviable, or where it may actually be counter-productive to force continuation of the enterprise.

It is likely that the government will pay attention to all such factors before going ahead and putting a complete embargo on initiation of the insolvency resolution process under the code.

The processes that were currently underway are also severely impacted by the global pandemic. The functioning of the adjudicating authorities under the code itself has been suspended from 15 March, and the filing counters have been closed since 19 March. Similarly, the appellate authority has also not been functioning since 21 March.

With the adjudicating authorities not functioning, stakeholders are unable to approach any forums for any immediate relief, including but not limited to seeking extension of the corporate insolvency resolution (CIR) process, approval of resolution plans, liquidation of the corporate debtor, or for any legitimate assistance in continuation of the corporate insolvency resolution process. There have also been frantic requests by resolution applicants seeking more time for submission of plans, as due diligence, site visits and investor meetings are all severely impacted.

Keeping in mind the strict timelines contemplated under the code, and stakeholders’ concerns regarding the same, the insolvency regulator, the Insolvency and Bankruptcy Board of India, has by amendment of the regulations provided that the period of lockdown shall not be counted for the purposes of the timeframe of any activity in the CIR process prescribed under the regulations that could not be completed due to such lockdown. The amendment by the regulator, however, does not extend the statutorily mandatory timeline of 180 days (extendable to up to 270 days) for completion of the CIR process.

Going a step further, the appellate authority, the National Company Law Appellate Tribunal, in suo motu exercise of its inherent powers, by its 30 March 2020 order, has directed that the period of lockdown be excluded from the mandatory period of 180/270 days of the CIR process. This would put several concerns of stakeholders in the CIR process at rest, at least temporarily.

In conclusion, the present pandemic has severely impacted future and present insolvency proceedings. The essence of the code was the time-bound resolution of the debts, which is bound to be most severely impacted in view of the lockdown.

Misha is a partner in the insolvency and bankruptcy practice and Vaijayant Paliwal is a senior associate at Shardul Amarchand Mangaldas & Co.

Shardul Amarchand Mangaldas & Co
Amarchand Towers, 216 Okhla Industrial Estate
Phase III, New Delhi, 110020, India
www.amsshardul.com
Contact details:
Tel: +91 98185 98427
Email: misha@AMSShardul.com
Tel: +91 85276 96008
Email: vaijayant.paliwal@AMSShardul.com