Economic Relief Package: Changes to the Insolvency and Bankruptcy Code
Finance Minister Nirmala Sitharaman announced certain changes in the Insolvency and Bankruptcy Code (IBC) in the 5th tranche of Covid-19 Economic Relief Package. This article articulates those changes along with its implication and impact on the MSMEs, the lenders and the creditors.
What is IBC?
Insolvency and Bankruptcy Code (IBC), implemented in May 2016 for providing a speedy resolution of debt recovery aimed at controlling the rising NPAs of the banks, allows the creditors to gain control over the assets of the debtor and helps take decision to resolve insolvency. In simple words, when the debtor is not repaying the debt or is unable to repay the debt, the creditor as a claimant can seek redressal through IBC, where the claimant is asking to declare the debtor insolvent, gain control over the debtor’s assets and recover the debt provided to the debtor. The insolvency proceedings are adjudicated by the National Company Law Tribunal (NCLT) in case the debtor is a company, and by the Debt Recovery Tribunal (DRT) in case the debtor is an individual. The respective tribunal appoints respective professionals to take the proceedings further first through restructuring and later, if need be then, liquidating the company in order to repay the debts. For the creditor to be able to seek redressal through the IBC route, the minimum threshold of debt was Rs. 1 lac till the announcement made today by the FM.
Key changes announced by the FM
- No fresh insolvency proceedings will be executed for 1 year (extending the 6 months limit announced by the MCA earlier).
- Minimum threshold for initiating an insolvency proceeding raised from Rs. 1 lac to Rs. 1 crore.
- Suspension of Section 7, 9 and 10 (that talk about the application for the initiation of insolvency proceedings by the creditors) of the IBC for 6 months.
- Amendments to be made to the definition of “default” under IBC for excluding debt due to Covid-19.
- A notification will be issued regarding a special insolvency resolution framework under Section 240 of the code for MSMEs.
The FM announced that an ordinance with the details regarding the changes in the IBC will be issued shortly. There is still ambiguity regarding the suspension of insolvency proceedings for 1 year – whether it is a blanket suspension or not. Blanket suspension means that no insolvency proceedings will be executed (even when the debt exceeds the threshold of Rs. 1 crore) for 1 year. Note: there is no restriction and ambiguity on the application of the insolvency proceeding by the creditor. The ambiguity lies solely on the execution, in simple words, ambiguity on the commencement of the insolvency proceeding. Also, the proceedings that are already underway stay unaffected.
Implication of the key changes to IBC
The changes announced by FM is helpful for the MSMEs’ continuity amidst the pandemic. Raising the threshold limit for seeking IBC redressal gives MSMEs a breathing space. MSMEs had expected a blanket suspension of the code for 6 months or 1 year. However, the ambiguity prevails regarding blanket suspension.
Blanket suspension of the code has its own set of problems. It is important to understand that the code was implemented in 2016 at a time when the banks’ NPAs were rising and the debt recovery process was slow. Suspending the code entirely for 1 year will discourage the banks and lenders, that depend on IBC for debt recovery, to issue fresh loans to MSMEs. This will impede the ability of the MSMEs to revive from the tragic effects of the lockdown when they are generating minuscule revenues. It may thus backfire as the enterprises that could have managed to survive through restructuring within this year, may not be able to do so post the 1 year of suspension. They may be forced to liquidate after 1 year in order to pay off the debts.
In the wake of the rising potential of the Make in India project, liquidation of numerous MSMEs or discouragement to lenders for fresh lending can both encumber the speedy recovery of India from the ramifications of the coronavirus pandemic.
Partial suspension for a short period may be quite beneficial from both, the MSMEs’ and the lenders’ point of view. However, the ordinance will afford clarity on the future of India’s MSMEs.