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Measures Taken In Relation to Insolvency And Bankruptcy Code, in The Wake Of COVID-19

Article by Anant Pratap Singh Chauhan, Edited by Chinmay Jain.

The COVID-19 pandemic has brought the world on its knees. 

The global economy is at the risk of a severe recession as the pandemic has locked people in their houses and thus disallowed them to perform economic activities. India as well is at the risk of a recession, way more severe than the ones facing its worst recession since 1979. 

Goldman Sachs has predicted that Indian Economy is likely to shrink by 45% on an annualized basis this quarter. Further, there may be up to a 5% drop in real GDP this fiscal year.  

The situation as of now is very severe. 

The Government in a series of press conferences announced various policy changes for providing a stimulus to the dying businesses of the country. This paper primarily focuses on the measures taken in relation to the Insolvency and Bankruptcy Code.

Finance Minister Nirmala Sitharaman, on 17th May 2020, announced several measures to provide relief to companies, facing insolvency due to the coronavirus pandemic.


Changes in Insolvency and Bankruptcy code during covid-19

Increase in the minimum threshold to initiate Insolvency proceedings

Under the powers of the Central Government under the proviso to Section 4 of the Insolvency and Bankruptcy Code, the minimum threshold amount, under Section 4 of the Insolvency and Bankruptcy Code, 2016, has been increased from Rs. 1 lakh to Rs. 1 crore for the purpose of initiating corporate insolvency resolution process.


Section 4 of the IBC reads as –
This Part shall apply to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of the default is one lakh rupees: Provided that the Central Government may, by notification, specify the minimum amount of default of higher value which shall not be more than one crore rupees.
The object of this increase is to benefit the Micro Small Medium Enterprises (MSMEs), who are unable to carry on their business functions due to the lockdown imposed and thus are at risk of being insolvent.

Procedure followed in Corporate Insolvency Resolution Process

Presently, corporate insolvencies are resolved through a two-step process.

The first stage is known as Corporate Insolvency Resolution Process, while the stage deals with liquidation of the assets of the firm in case the firm cannot be revived. 

The process of resolving insolvency is discussed below –

#1. Filing of Corporate Insolvency Resolution Process (CIRP) Petition in the National Company Law Tribunal (NCLT)

How to file for bankruptcy during covid-19

In case of a minimum default of Rs. 1 lakh (presently Rs. 1 crore due to COVID-19 lockdown), the operational or financial creditors of a company may approach the National Company Law Tribunal and file a petition for the initiation of the Corporate Insolvency Resolution Process (CIRP), as provided under Sections 7 and 8 of the IBC, 2016.

A financial creditor has been defined under Section 5(7) of the IBC, 2016 as –
a person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred.
Whereas, financial debt has been defined under Section 5(8) of the IBC, 2016 as–

"a debt along with interest, if any, which is disbursed against the consideration for time value of money and includes-
  1. Money borrowed against payment of interest;
  2. Any amount raised by acceptance under any acceptance credit facility or its de-materialized equivalent;
  3. Any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;
  4. The amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed;
  5. Receivable sold or discounted other than any receivable sold on non-recourse basis;
  6. Any amount raised under any other transaction, including, any forward sale or purchase agreement, having the commercial effect of borrowing;
  7. Any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution;
  8. The amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause."
An operational creditor has been defined under Section 5(20) of the IBC, 2016 as –
a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.
Whereas, operational debt has been defined under Section 5(21) of the IBC, 2016 as –
a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment 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.
The difference in procedure for a financial and operational creditor is that the operational creditor has to deliver a notice to the corporate debtor which the latter has to reply within 10 days, after which, the insolvency proceedings could be initiated, as provided under Section 8 of the IBC, 2016.

#2. Acceptance / Rejection of the Corporate Insolvency Resolution Process (CIRP) petition by the National Company Law Tribunal (NCLT)

The National Company Law Tribunal (mentioned as the Adjudicating Authority under the Code), may accept or reject the petition within 14 days of its receipt.

If rejected, the proceeding will come to a halt and be dismissed.

If accepted, the proceedings would continue further. The debtor in question would be placed on a moratorium period, during which, the following would be prohibited in connection to the debtor –
  • the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;
  • transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;
  • any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
  • the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.
The moratorium period would continue until the insolvency proceedings are alive.

#3. Appointment of an Interim Insolvency Professional

Upon admission of the petition, the NCLT would appoint an Interim Resolution Professional, within 14 days of the admission of the petition, who would take over the management of the corporate debtor and appoint a Committee of Creditors (CoC), which would include only the financial creditors. 

In the meantime, the directors of the corporate debtor would report to the Interim Resolution Professional and the latter would act in the debtor’s name and may collect information in relation to the functioning of the corporate debtor. The term of the Interim Resolution Professional shall not exceed 30 days.

#4. Appointment of a Resolution Professional by the Committee of Creditors

The Committee of Creditors would, within the 30 days term of the Interim Resolution Professional, may appoint a Resolution Professional. 

The name of such a proposed Resolution Professional would be sent to the NCLT for confirmation, who would in turn, forward it to the Insolvency and Bankruptcy Board of India, after confirmation from which, he would be appointed as the Resolution Professional. 

This Resolution Professional would function in the duration of the Corporate Insolvency Resolution Process.

#5. Preparation and Acceptance of Resolution Plan

There are a lot of terms and conditions in a resolution plan during insolvency or bankruptcy of a company

The resolution plan for the corporate debtor is now to be formulated. The Resolution Professional invites applicants to formulate the resolution plan and the applicant is further confirmed by the Committee of Creditors. 

Any party may be an applicant to file the resolution plan except the corporate debtor or any of its guarantors. 

The Committee of Creditors is to then approve or disapprove the resolution plan.

Submission of the Resolution Plan to the NCLT

After the resolution plan has been accepted by the Committee of Creditors, it is submitted to the National Company Law Tribunal. 

The Committee of Creditors is to submit the resolution plan within 180 days of the commencement of the Corporate Insolvency Resolution Process, which may be extended to 270 days upon the consent of the NCLT. 

In case, the NCLT does not receive a resolution plan within the specified duration or if the resolution plan fails, it may initiate the liquidation procedure immediately.

Suspension of Certain Provisions of the Code

The Central Government expressed the intention to suspend sections 7, 9, and 10 of the Code for a period of six months, which could be increased to a period of one year. 

The intention of the Government of such suspension was expressed by the Finance Minister in a press conference. 

The enabling provision which authorises the Government to extend the time period would be part of an Ordinance, which may be passed after 30th April 2020.

Section 7(1) of the IBC reads as –
A financial creditor either by itself or jointly with other financial creditors may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred.
Section 8(1) of the IBC reads as –
An operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor in such form and manner as may be prescribed.
Section 10(1) of the IBC reads as –
Where a corporate debtor has committed a default, a corporate applicant thereof may file an application for initiating corporate insolvency resolution process with the Adjudicating Authority.
Presently, in case of a default exceeding 90 days, the concerned lender may go for resolution under the IBC or any other mechanism allowed by the RBI.

Exclusion of Lockdown time period for the purpose of Corporate Insolvency Resolution Process

The National Company Law Appellate Tribunal (NCLAT) took suo moto cognizance of the hardships faced by the people due to the pandemic and ordered that the period of lockdown, imposed by the Central and respective State Governments, shall be excluded for the purpose of counting of the period for corporate insolvency resolution process (CIRP) provided under Section 12 of the Code.

Section 12 of the Code provides –
(1) Subject to sub-section (2), the corporate insolvency resolution process shall be completed within a period of one hundred and eighty days from the date of admission of the application to initiate such process.
(2) The resolution professional shall file an application to the Adjudicating Authority to extend the period of the corporate insolvency resolution process beyond one hundred and eighty days, if instructed to do so by a resolution passed at a meeting of the committee of creditors by a vote of seventy-five percent. of the voting shares.
(3) On receipt of an application under sub-section (2), if the Adjudicating Authority is satisfied that the subject matter of the case is such that corporate insolvency resolution  process cannot be completed within one hundred and eighty days, it may by order extend the duration of such process beyond one hundred and eighty days by such further period as it thinks fit, but not exceeding ninety days: 

Provided that any extension of the period of corporate insolvency resolution process under this section shall not be granted more than once.
Thus, the period of lockdown would not be included in 180 or 270 days provided for CIRP.

Insertion of regulation 47A under IBBI (Liquidation Process) Regulation

The Insolvency and Bankruptcy Board of India inserted regulation 47A under the IBBI (Liquidation Process) Regulation. 

The new regulation excluded the time-period of lockdown for any task which could not be completed due to the lockdown, in relation to any liquidation process.

The regulation read as –
47A. Subject to the provisions of the Code, the period of lockdown imposed by the Central Government in the wake of COVID-19 outbreak shall not be counted for the purposes of computation of the time-line for any task that could not be completed due to such lockdown, in relation to any liquidation process.

Impact on businesses due to the COVID-19 pandemic

Businesses have been severely affected by COVID-19

Due to the imposition of lockdown for preventing against the pandemic, businesses and the whole economy, in general, have suffered a lot of damage.

Impact on Start-ups

Particularly, severe damage has been faced by Indian Start-ups with nine out of ten start-ups registering a decline in revenues and over 35% may have to halt operations, either temporarily or permanently. 

The worst-hit sector is B2C, with over 60% of the start-ups are facing closure owing to the pandemic. 92% of the start-ups have reported a decline in the revenue, with around 70% of start-ups facing a cash crunch and expect to have liquidity for a little over three months.

In the travel and tourism sector, 70% of the start-ups have seen a revenue dip by over 40%, while 50% of the start-ups in the logistics sector have seen a similar dip in revenue.

Impact on Retail businesses

The retail business of India has suffered a loss of over Rs. 9 lakh crores in two months of the lockdown and around 24 lakhs of the employees of the sector may lose jobs in the want of government intervention in the next four months.

Due to the further migration of workers back to their respective states, only 5% of the business could resume after the lockdown is over as 80% of the workforce has migrated back to their native places. The revenues are further expected to decline by over 90% in the next six months unless some relief is provided by the Government.

Owing to the losses in the retail business, the Government has lost about Rs. 1.5 lakh crore in tax revenue in the form of Goods and Services Tax (GST).

Impact on real estate sector

India's real estate sector may face a loss exceeding Rs. 1 lakh crore by the end of this financial year (2020-21). The effects of the pandemic are to continue for a period which may extend to 18-24 months, only after which are there any expectations of a rise. The real estate prices are expected to come down by up to 20% in the coming months, thus causing losses to the developers.

Impact on financial institutions

The banks expect to see another wave of non-performing assets or NPAs. 

As has been defined by the RBI under Prudential Norms on Income Recognition, Asset Classification and Provisioning - pertaining to Advances, 2001, NPA is –
An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. A ‘non-performing asset’ (NPA) was defined as a credit facility in respect of which the interest and/ or instalment of principal has remained ‘past due’ for a specified period of time.
The specified period was reduced in a phased manner as under:
Year ending March 31 Specified period
1993 four quarters
1994 three quarters

Banks have been facing the corporate stress cycle over Financial Year 2016-20. The situation has further worsened by the COVID-19 pandemic. Banks are expecting that the non-performing assets may rise up to Rs. 5.5 lakh crores in this round. 

The banking system is already overburdened by the stress of over Rs. 8 lakh crores presently and the subsequent increase of non-performing assets would mean various hardships for the financial system in the coming months.


Related Reads:

Rise of work-from-home business models –

As people are locked in their homes owing to the pandemic, businesses have resorted to work-from-home business model. 

According to a survey by Willis Wilson Towers, 83% of businesses in India would be reviewing their work-from-home policy while 55% of the businesses are functioning flexibly with no fixed-dates.

Conclusion

The reforms made by the Government in the wake of COVID – 19 pandemic could prove to be adequate for the purpose of stabilising the insolvency ecosystem. 

New cases of insolvency based on the economic difficulties which have emerged as an outcome of the pandemic would defeat the object of the Insolvency and Bankruptcy Code as the pandemic is force majeure. 

The suspension of certain provisions of the Code would encourage the borrowers who have been pushed into default due to the lockdown and thus the reforms form an adequate stimulus.



Author Bio: Anant Pratap Singh Chauhan is a BA,LLB(H) student from Aligarh Muslim University and an intern at WinSavvy. Connect with him on LinkedIn.

Editor Bio: Chinmay Jain is a BA.LLB(H) student from Institute of Law, Nirma University, and an intern at WinSavvy. Connect with him on LinkedIn.

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