How is Covid 19 effecting Insolvency & Bankruptcy Code of India?

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This post is written by Kavya Agrawal a student of Gujrat National Law University, Gandhinagar.

The covid 19 pandemic is certainly a health crisis all over the world but it has also had an almighty smash on the economic, political and social aspects of the world. Employees are getting fired from their workplaces without any reason and without any notice period. Employers are firing employees just because of their “inability to pay remuneration”. Then, we can see it’s political effect in the sense that  there have been delays in the process of legislation  in certain countries, and  even deaths of various politicians, which is a tragic, tremendous loss for any country. There has been a huge impact on the social life of people. People are expected to practise social distancing, which has resulted in closing of malls, movie theatres, educational institutions, religious institutions and many other things which require public gatherings. The most important and significant impact of covid 19 has been on the business i.e. economic impact. This is not just the case with Indian companies, but all over the world. Such an impact on the economy due to this pandemic was last observed only during the Great Depression in 1933, with an unemployment rate of 24.9% and Global GDP decline of 26.7%. The government is trying its best to provide relief packages to all the sectors of the economy which are facing an economic crisis. The major sectors hit by this pandemic are- MSME’s, aviation, tourism, real estate, automobile and hospitality sector. There was a great need to increase the insolvency limit of the sectors from 1 lakh to 1 crore and this happened recently on 25th March 2020 when a new amendment was added to IBC, 2016.  To prevent the further spreading of Coronavirus in the community, India has been in lockdown since 24th March and today, is the 67th day since the lockdown has been imposed. Business are experiencing a major cash crunch and financial distress as they are unable to operate efficiently and do not have enough money to pay salaries to their employees. There are many cases of job losses and unpaid leaves from all the sectors on a regular basis. The judicial system of the country has also come to a screeching halt, as the courts all the over the country are non-functional and kaput and only the important cases are being heard, which is again a very subjective matter.

IBC is the insolvency and  bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy, which is regulated by a single organisation called insolvency and bankruptcy board of India(IBBI). The IBC is “An Act to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto”. All the businesses are at the saturating point of an economic meltdown at this time, which is resulting in a huge number of cases coming before the courts. However, the courts cannot handle such a large number of cases currently and hence there is an urgent need to alter and redraft the insolvency and bankruptcy code of 2016. It is important to change the point of convergence of the code from insolvency of the debtor’s companies to the protection of their interests during this exceptional time period. The inventories of businesses are lying idle in the warehouses due to the lockdown, the values of stocks have declined at a breakneck pace, due to the shortage of demand. The shareholders of those companies are also facing a huge loss. The outbreak of COVID-19 has lead to a loss of a whopping and mammoth Rs. 2 lakh crores, according to the All India Association of Industries (AIAI). There is an economic turmoil as the corporate debtors are unable to repay their debts as their businesses are not operational during this period and the financial and operational creditors are regularly approaching the National Company Law Tribunal (NCLT) to resolve their IBC matters and to get their dues back. If all these creditors start insolvency proceedings together at a huge scale, this will be a great retrogression for the companies as they would then be handled by the resolution professional, who is appointed by the NCLT to manage the operations of the corporate debtors. The government of India has come up with certain amendments in order to protect the interests of corporate debtors, and to reduce the number of cases of insolvency of businesses. Most importantly, it is important to protect the Ministry of Micro, Small and Medium Enterprises, which deals with micro, medium and small enterprises of India, and has two of the most essential functions i.e. manufacturing and exports. The government can employ measures to bring the situation under control whereas the businesses can employ better cost management so as to plan, monitor and control the budget of a business effectively and efficiently so that there is no loss to either of the parties. There are broadly three changes that are made by the Government in the IBC, 2016 so as to protect the corporate debtors and creditors.

Firstly, the notification issued by the Ministry Of Corporate Affairs on 25th March, 2020 made amendments to section 4(1) of IBC,2016. Earlier it stated that in order to start an insolvency proceedings against a debtor, the amount of debt should be Rs. 1 Lakh or more. Now, this threshold limit has been raised to Rs. 1 crore.

Secondly, on 23rd March, the Supreme court passed an order declaring the period of lockdown due to the coronavirus pandemic should be excluded from the number of days in which a corporate debtor needs to repay his debt or any activity which could not be fulfilled due to the lockdown imposed in the nation.

Lastly, sections 7, 9 and 10 of the Code are suspended for a period of six months.

The first amendment reduced the workload of the resolution insolvency professional as the number of cases of IBC reduced due to increase in the threshold limit from Rs. 1 Lakh to Rs.1 Crore. This change had a devastating effect on the employees of the companies as they would have to wait for companies to reach an amount of Rs. 1 Crore in their wages and remuneration, which is a great amount. This threshold limit was a positive change for the corporate debtors and MSME’s. Financial creditor is any person to whom a financial debt is owned and includes a person to whom such debt has been legally assigned or transferred to. ‘financial debt’ as a debt along with interest, if any, which is disbursed against the consideration for the time value of money. Operational creditor as a person to whom an operational debt is owed including the debt that has been legally assigned or transferred. ‘operational debt’ means “a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority. Hence, for the operational creditors it is evidently pretty difficult to reach the threshold value of Rs. 1 crore to prove the default of payment of debt. The operational creditors would be left with the earlier remedies they had and cannot bring a joint action against a debtor and start insolvency proceedings legally. Whereas, in case of a financial creditor, the threshold value of Rs. 1 crore can be reached easily as the debt is measured in terms of money, including the interest payment too. Our finance minister Ms. Nirmala Sitharaman stated that “the threshold limit has been increased so as to prevent the triggering of defaults against MSME’s”. The amendment is a very beneficial step for the small scale industries as they were at the greatest risk of facing insolvency proceedings during this time. The only thing which the government is unclear about in this scheme is whether these amendments will be effective after the coronavirus comes to an end or not.

Personally, I feel these changes in the insolvency and bankruptcy code have been very effective and should be valid even post covid-19. However, some points would need further clarity, such as the filing of complaints by the operational creditor and by the employees and workmen of companies as their threshold limit would not easily reach the value of Rs. 1 crore. Hence, the suspension of the section 7,9 and 10 is not an effective and successful amendment made according me. But in the end, everything boils down to the fact that protecting the interests of the shareholders is very essential as this reflects the economy of the nation in a huge way.

References

  1. https://www.mca.gov.in/Ministry/pdf/TheInsolvencyandBankruptcyofIndia.pdf
  2. https://www.mondaq.com/india/operational-impacts-and-strategy/924674/covid-19-and-ibc-proceedings-10-key-considerations
  3. https://www.mca.gov.in/Ministry/pdf/TheInsolvencyandBankruptcyofIndia.pdf
  4. https://economictimes.indiatimes.com/small-biz/legal/governments-covid-19-insolvency-relief-may-be-a-double-edged-sword/articleshow/76103653.cms
  5. https://www.ibbi.gov.in/uploads/whatsnew/be2e7697e91a349bc55033b58d249cef.pdf
  6. https://www.mondaq.com/india/operational-impacts-and-strategy/942062/covid-19-and-ibc-unfolding-the-loopholes-in-the-recent-amendments

Image from: Financial Express

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