NEW DELHI: Extending relaxations to companies, Finance Minister Nirmala Sitharaman on Sunday said no fresh insolvency will be initiated for 1 year and coronavirus-related debt will be excluded from definition of ‘default’ under the Insolvency and Bankruptcy Code (IBC). That apart, the minister also announced decriminalisation of Companies Act violations involving minor and procedural defaults — shortcomings in CSR reporting, inadequacies in board report, filing defaults, delay in holding AGM, while delivering the fifth and final tranche of the Rs 20 lakh crore economic stimulus.

“The Ministry of Corporate Affairs has already extended the minimum threshold to initiate insolvency proceeding by six months and we intend to extend this by another six months. To bring these changes in the IBC immediately, an ordinance will be promulgated,” Sitharaman said, adding a special insolvency framework will also be notified under section 240-A of IBC for small businesses who have been the worst hit due to the Covid-19 induced lockdown.

While companies can breathe easy to an extent as several misses have been decriminalized and the threshold for filing insolvency proceedings has been increased, resolution of stressed assets is set to take a beating because of the blanket suspension of defaults, say experts.

“The blanket ban defeats the objective of IBC. What happens to the entities that were bad or doubtful prior to the pandemic. The unscrupulous borrowers who have also got relief following the MCA notification should be dealt differently. Such blanket ban may throw the wrong signal on performance of contractual obligations by parties and the legal protection available to the aggrieved party. The already stressed banking industry shall face more heat and disadvantage,” said Rajesh Narain Gupta, Managing Partner, SNG & Partners.

Gupta suggested that banks could have been directed to decide whether to initiate any legal action or not under IBC depending on the performance of the borrower as well as putting a reasoned note on whether the default is attributable to Covid-19.

Veena Sivaramakrishnan, partner, Shardul Amarchand Mangaldas & Co also warned that the suspension of proceedings for a year will lead to delay in resolution.

“While the MSME amendments have given some breathing space to the sector, questions like why should an entity not refer itself to insolvency, what is the parallel regime of resolution, what is the framework for creditors to come up with a viable resolution plan outside IBC, continue to remain unanswered,” she observed.

The one-year time frame appears adequate for the entities to sort out any temporary cash flow mismatches, but if the severity of the pandemic were to increase, thereby increasing the longevity of the lockdown or fresh lockdowns later delaying economic revival, then we could see a sudden surge in cases being referred under the IBC after the one-year period.

This could be detrimental to the resolution process, which is already facing challenges from over-burdened tribunals, pointed out Abhishek Dafria, vice-president, ICRA. In fact, future resolutions are likely to suffer from lower valuations and possible lesser interest from bidders due to the uncertainty across sectors, which in turn, could result in creditors having to agree on higher haircuts to successfully conclude the resolution process.