Business Impact Of Lock-Down – Can Relaxed IBC Guidelines Hold The Wake Of COVID-19 Crisis?

The nationwide lockdown in the wake of COVID-19 outbreak has impacted the business environment due to the suspension of markets resulting in negligent earnings for business communities and revenue losses for the state. At the regulatory level, amendments in Corporate Laws brought changes in the Insolvency and Bankruptcy Code, 2016 (hereinafter to refer as “IBC” or “Code”) as a response to the financial challenges arising from the novel COVID-19.

The Ministry of Corporate Affairs vides its notification dated 24.03.2020 has increased the threshold for invoking corporate insolvency resolution process (“CIRP”) against the corporate debtor under the IBC from the existing Rs. 1,00,000/- (Rupees One Lakh) to Rs. 1,00,00,000/- (Rupees One Crore), 10 (ten) times higher than the previous minimum default limit. This is the maximum threshold which the Central Government can prescribe under Section 4 of the Code. As a consequence, it would be difficult especially for an operational creditor to file an application under Section 9 of the IBC. On the other side, it would help loss-making companies, especially those within micro small and medium enterprises (MSME) category from being away from the ambit of the National Company Law Tribunal as such companies have been hit the hardest by COVID-19.

Further, Finance Minister Nirmala Sitharaman indicated that the government may consider suspending some key provisions of IBC for a period of 6 (six) months in case the current situation following the outbreak of COVID-19 pandemic continued beyond April 30, 2020. Clearly, the proposed move by the Government to suspend filing applications either by financial creditor under Section 7 or operational creditor under Section 9 or a corporate debtor under Section 10 is detrimental to both regulatory environments as well as the business environment which is already stressed due to the pre-COVID global downturn as they will find even more difficult to operate due to diminished business because to the shutdown. Due to the pandemic other industries such as aviation, tourism, hotel, transport, real estate, automotive, construction, manufacturing, financial services, education, oil and gas are some sectors severely affected by the lockdown. Similarly, for the financial creditor, this will seriously affect the debt recovery process, resulting in credit crunch in the market as various banks have already extended emergency credit lines to ease the liquidity crisis of the borrowers.

For the ongoing CIRP of the corporate debtor, it has become difficult for the insolvency professionals to continue to conduct the CIRP in accordance with the timeline specified under the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulation, 2016 (“CIRP Regulation”) during the lockdown period. To address this difficulty, the Insolvency and Bankruptcy Board of India (“IBBI”) amended the CIRP Regulations to provide that the period of lockdown imposed by the Central Government 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 nationwide lockdown, in relation to a CIRP. This would be subject to the overall time-limit provided in the Code. The said amendment is effective from March 29, 2020. Such amendments were the need of the hour. However, the first 21 (twenty) days lockdown period was effective from March 25, 2020. Therefore, it is unclear whether the period from March 25, 2020, to March 28, 2020, will be excluded for the calculation of timelines, there is still ambiguity regarding the same. Further, there is no clarity for those cases where 330 (three hundred and thirty) days have been expired during the Lockdown. It is most likely that the National Company Law Tribunal/ National Company Appellate Tribunal/ Supreme Court will decide the fate of such corporate debtors, in the due course of time.

The COVID-19 outbreak and the nationwide lockdown by the government to curb the spreading of infections have significantly impacted economic activities as a whole. The current scenario also poses a challenge to the successful resolution applicant who is under the process of implementation of the resolution plan. It would be interesting to watch the strategies of such successful bidders.

The amendments under the IBC are likely to smoothen the CIRP post lockdown phase. However, it creates immense pressure on the financial creditors especially banks as there are high chances of increase in the non-performing assets.