Insolvency and Bankruptcy Code: Insolvency suspension not to be extended beyond March 24

The government has no plan yet to extend a one-year suspension of bankruptcy proceedings against Covid-related defaults once it expires on March 24, sources told FE. However, it will hold a series of review meetings in the coming weeks on the relief under the Insolvency and Bankruptcy Code (IBC) and also gauge the preparedness of the adjudicating system to tackle a potential rise in cases once the breather ends next month, one of the sources said.

“The suspension has served the purpose but an extension now will potentially undermine bad loan resolution process and can create a systemic issue,” the source added. Already, the Economic Survey for 2020-21 has suggested that an asset quality review be undertaken to gauge the actual stress once all Covid-related forbearance come to an end.

Insolvency and Bankruptcy Board of India (IBBI) chairman MS Sahoo told FE last week that although the number of applications for initiating insolvency could increase once the suspension is lifted in late March but “the increase may not be significant”.

“Nevertheless, being fully aware of the need to provide commensurate NCLT capacity, government has proposed in the budget that NCLT framework will be strengthened and e-Courts system shall be implemented,” Sahoo said.

Also, the government has announced its decision to roll out a so-called pre-pack insolvency and a special framework for MSMEs (both envisage a shorter resolution time frame and easier processes) to further bolster the IBC ecosystem.

The Centre had in March 2020 announced the suspension up to a maximum of one year to help thousands of cash-strapped firms tide over the Covid-19 impact without the fears of getting dragged to the National Company Law Tribunal (NCLT).

Accordingly, through the IBC (Second Amendment) Bill, 2020, it obtained Parliamentary approval to suspend up to a year the initiation of insolvency proceedings against new defaults from March 25, 2020. But initially, the suspension was kept valid for six months; it was then extended twice by three months each.

While industry hailed the decision, some analysts, such as former RBI deputy governor Viral Acharya, were critical of the move on ground it would delay the bad debt resolution in the banking system. The relief should have been restricted to a maximum of three months, and not one year, they argued.

However, the IBBI chief had then defended the government’s move, saying the likelihood of finding a “white knight” to rescue failing firms was remote at that time, when every company and every industry was under stress.

According to the IBBI data, as many as 1,942 cases were in the resolution process as of September 2020.

Close to a half of insolvency cases ended in liquidation until September 2020, while only about 14% saw resolution since the IBC came into being in late 2016. However, close to three-fourths of the cases that ended in liquidation were already dead cases, as they were transferred from the earlier BIFR regime.

Explaining the reason as to why there won’t be a massive flood of cases once the suspension is lifted, Sahoo said last week that stakeholders were not barred from invoking the IBC from resolving pre-Covid stress (defaults that occurred before March 25, 2020).

Similarly, other options for stress resolution, including the scheme of compromise or arrangement under the Companies Act, 2013, and the central bank’s prudential framework, are already being tapped by creditors, Sahoo said.