Effect of COVID 19 ON INSOLVENCY AND BANKCRUPTCY CODE

Author – Aayush Mulchandani

Introduction

In the present scenario of such a parademic disease normally known as Novel Corona Virus or the Covid-19 as it can be seen the entire world is facing various issues. The whole of India is also facing various problems and as every one of us have seen and even followed the nation-wide lockdown of more than 30 Days. It has given a serious impact on the World Economy including Indian Economy. Various companies are running into losses, production is at a stake and laborers are facing a big issue of non-payment of wages and migration. In such a situation where Economy is falling apart if various companies gets insolvent a big question will rise on the employment of the employees of that company.

Economy of India in recent past

In India we saw Demonetization in 2016 when the entire country was in a deep shock and a wave of chaos was started as the major currency notes of 500 and 1000 were no longer to be used and were to be returned to the banks and had to get new notes in return of that. Just after sometime in 2017 “ONE NATION ONE TAX” came into the operation in the name of GST (Goods & services tax) which in return took away all the other various sort of taxes applicable within the country. These sudden changes that the Government brought in the nation were too disturbing for everyone as everyone would not be able to adapt such changes.

In the meantime, the government brought in the new set of rules for the insolvency and bankruptcy popularly known as the “Insolvency and bankruptcy code”2016. As here we are now talking on insolvency and bankruptcy, we need to look onto a term known as NPA/S and who are they?

NPA (Non-Performing Assets/Loans).

NPA’s are those persons who are no more able to repay the Emi’s for morethan 90 days and are possibly going bank corrupt within few span of time. Nitin Gadkari, a Union Minister and a businessman in Maharashtra once speaking on NPA in his interview said, according to him

“A person or a company who goes insolvent or bank corrupt due to some of the problems faced by the company or the business firm/unit, instead of shutting it up and creating employment issues and other problems for company and its stakeholders, the record of past years should be checked and if it can be seen that they had done pretty well in the past then they must be provided a second chance and should be provided with some more finance and it can result that the company may grow positively”.

Our Former Finance Minister Late Shri Arun Jaitley in the sessions of parliament have clearly said about the implications, the jurisdiction and what each word in the “Insolvency and Bankruptcy Code 2016” says.

The IBC has enabled debt recovery, managing the NPA crisis and credit availability. For the government, the next step is to evolve an effective debt recovery process and enhance credit availability in order to balance the interests of all stakeholders.

NPA has been at the pinnacle for small and medium-sized business industry. From the struggles in paying salaries to the employees to seeking deferment of repayment of loans & GST, the same has been mirroring the effects of the pandemic over the industry. Consideration of the prevailing unprecedented scenario wherein the spread of pandemic has created a situation of hue and cry globally, the Legislature, Executive and the Judiciary, in order to mitigate its adverse consequences, are consistently aiming to bring amendments in-laws, orders, notifications, and circulars.

Insolvency and Bankruptcy Code.

The Insolvency and Bankruptcy Code, 2016 (‘Code’) reconceptualised the framework for insolvency resolution in India. It provides a mechanism for the insolvency resolution of debtors. The Code separates commercial aspects of insolvency and bankruptcy proceedings from judicial aspects and empowers and facilitates the stakeholders and Adjudicating Authority to decide matters within their respective domain expeditiously

The National Company Law Tribunals, the National Company Law Appellate Tribunal, the High Courts and the Supreme Court have adjudicated upon matters under the Code with unprecedented speed, and have provided certainty on interpretation of key concepts under it. The code provides with the timelines to follow the procedure in the court if the matter goes to the court.it solves the Disputes in the corporate sector.

Effect of Covid-19 leading to Amendments in the Insolvency and Bankruptcy Code.

Amendments in corporate laws brought changes to S. 4 of the Insolvency and Bankruptcy Code, 2016 (IBC). The proposed move to suspend S. 7, 9 and 10 is detrimental to the business environment which is already stressed due to the pre-COVID global downturn.

The ministry of corporate affairs raised the threshold of default to Rs 1 crore from Rs 1 lakh as a response to the financial challenges arising from COVID-19. The move to increase the default threshold to Rs 1 crore by the corporate debtor could be to prevent companies, especially those within micro small and medium enterprises (MSME) category, from being dragged to the National Company Law Tribunal for settlement of debts. This could be a breather for companies that are already struggling with business losses.

Similarly, the RBI in its notification dated 27.03.2020, mitigated the burden of debt by deferment of repayment of EMIs and Loan amount for a period of three months after the moratorium period from March 1, 2020, to May 31, 2020, on their outstanding amid the corona virus outbreak.

Furthermore, NCLT in its order dated 30.03.2020 in “Suo Moto – Company Appeal (AT) (Insolvency) No. 01 of 2020” taking reference of the dictum in “Quinn Logistics India Pvt. Ltd. vs. Mack Soft-Tech Pvt. Ltd” held that the period of lockdown shall be excluded for the purposes of CIRP (Corporate Insolvency Resolution Process) and has ordered the continuance of the interim/stay order in any appeal under Companies Act, 2013 or Competition Act, 2002 passed by the Tribunal until the next hearing.

In another helpful move, the Supreme Court “suo moto” passed an order extending limitation period for all matters with effect from March 15, 2020 till further orders. This will bring much needed relief to a litigant for whom limitation period was to expire during this shut-down period.

While the changes introduced are much needed and welcome, few more aspects, as noted below, may need to be considered to deal with the crisis holistically:

1. Priority Financing: Section 5(15) of the IBC was recently amended to provide the Government with the ability to identity certain debts of a company which may qualify as ‘super-priority’ loans in the insolvency of the company. The Government recently exercised such a right to identify debts raised from the Special Window for Affordable and Middle-Income Housing Investment Fund I to be a ‘super-priority’ loan. Some news reports suggest that few banks are offering COVID-19 affected borrowers an emergency line of credit to tide over the crisis. The Indian Government should consider whether super-priority status should be provided to such emergency lines of credit.

2. Ongoing Restructurings: Many cases are being considered for restructuring under the guidelines of the Reserve Bank of India dated June 07, 2019 and creditors have signed inter-creditor agreements to agree on the restructuring terms. The guidelines contemplate implementation of the restructuring within 180 days. Therefore, the Indian government may need to consider whether extensions are needed for cases where a restructuring has been agreed upon and is pending implementation. The guidelines also require rating of the company’s debts before restructuring. The credit rating agencies will need to consider if any tweaks are required to the rating rationale in the background of the resilience of the business.

Conclusion

Undoubtedly, the orders passed by the Hon’ble Supreme Court, Hon’ble NCLAT grant the much-needed relief to all the stakeholders by taking measures such as extending the period of limitation and excluding the period of lockdown and also, it shall minimize the hardships which would have otherwise been faced by the Resolution Professional in complying with the various statutory requirements.

With the aim to address this difficulty, the IBBI has amended the CIRP Regulations to provide that the period of lockdown imposed by the Government of India in the wake of Covid-19 outbreak shall not be counted for the purposes of the time-line for any activity that could not be completed due to the lockdown, in relation to a corporate insolvency resolution process. This would, however, be subject to the overall time-limit provided in the Insolvency and Bankruptcy Code (“IBC”). Overall, this is an unprecedented and tough period for businesses and the insolvency regime needs to show flexibility to take into account such factors.

And now as the government has granted the reliefs let us wait for the ministries to do their jobs so that needy gets the monetary benefits as declared by government and the packages that are now introduced and will be provided in future.