Extension of suspension of CIRP for another three months: Death Blow to Insolvency Regime

Priyanka Jaiswal, a final year student at NUSRL Ranchi

Prelude

After the announcement of the nation-wide lockdown, an ordinance was promulgated which stated that no insolvency proceedings can be initiated by either the corporate debtor or any of its financial creditors for defaults arising during the six months beginning on March 25. The six months’ timeline for the suspension came to an end on September 25 and it is noteworthy to note that the Insolvency and Bankruptcy Code (Second Amendment) Act, 2020 was passed from both the houses and received Presidential assent on September 23, 2020. In exercise of the powers conferred by section 10A of the amended code, the Central Government extended the suspension and curtailed the operation of Section 7, 9, and 10 of the Code for all defaults occurring on or after 25th March 2020 for a period of six months plus three months now. Though these changes have been introduced with the motive to give companies breathing time to recover from the distress and to keep them as a going concern but there are some material shortcomings which may worsen the situation even further.

The issue of complete suspension

Though the present pandemic is particularly unique, the past experiences of such a Global Financial Crisis show that this leaves an everlasting impact on the business sector. An efficient insolvency resolution process is the key driver that helps businesses to maintain stability and a complete suspension on the initiation of insolvency proceedings for a significant period of time may prove to exacerbate the crisis. According to the new change in the insolvency laws, no application can be made for the initiation of Corporate Insolvency Resolution Process (CIRP) either by the corporate debtors or by any of the creditors. On one hand, there is a need to safeguard companies from pushing them prematurely into insolvency and on the other side, a complete suspension on initiation of the insolvency resolution process may scrap off the opportunity of a distressed company to seek recourse under the insolvency regime. The economy is undergoing a huge crisis and it is merely an optimistic assumption that the businesses will be able to thrive during the period of suspension of insolvency proceedings. In fact, the suspension is only postponing the problem and is merely putting off the inevitable.

Restriction on corporate debtors on self-initiation of CIRP –With the new amendments in place, the chance which the defaulting entity had to revive themselves through a resolution of debt is now removed. Most of the distressed companies would have been looking for some sort of resolution plan to keep them as a going concern but this complete suspension tends to do more harm than good. It takes away the remedy available to a corporate debtor who will now have no recourse to the Insolvency and Bankruptcy Code (IBC), despite unbearable financial crunch which may ultimately lead to the liquidation of the company, hence contradicting the very fundamental spirit of the IBC. An alternative remedy available for this blanket suspension is the filing of an application under section 230 of the Companies Act, 2013 where a scheme for compromise and arrangement can be filed in cases of distress. A voluntary and timely initiation of insolvency proceedings could maximize the benefits of the debtor as well as of the creditors. Lessons can be taken from countries like Spain, Germany, and France, where creditor initiated insolvency proceedings is stopped but voluntary insolvency proceedings by the debtor are allowed.This blanket suspension of IBC and a further increase of three more months will set a new wave of failures where the companies will ultimately liquidate and there will be no scope of its revival.

Added misery to the creditors– A perpetual suspension of creditor’s right to file insolvency resolution application in cases of defaults is excessive. This is an added plight to those organizations whose huge credit is stuck in others, especially the operational creditors, who do not have financial viability to continue and they will also be forced into liquidation. A further affliction may be caused due to the presence of other recovery laws. For example, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 can be used if security is involved. Unsecured creditors don’t have recourse to SARFAESI as it provides only secured creditors to initiate action against the borrower. So in such circumstances, the only remedy left for unsecured creditors is the Debt Recovery Tribunal, where the process is painfully time-consuming.

Alternatively, a civil suit for money under Order 37 of the Code of Civil Procedure, 1908 can also be filed. So the suspension of IBC does not mean that corporate persons can continue their business without debt recovery ligation and despite the fact the remedies available are time-consuming and complex, the creditor may still have to use these options. The creditors may be in a much graver position as the value of the assets of corporate debtors will erode during the suspended period. A further extension of the suspension of the initiation of CIRP will provide an added advantage to the unscrupulous borrowers and may deny creditors, the right to initiate CIRP even if subsequently the debtor is in the position to pay but chooses not to pay.

Ignored the prospects of restructuring the debt in the insolvency regime– It cannot be denied that the pandemic has led to a great financial crisis. This leads to another problem, i.e. difficulty in finding an adequate number of resolution applicants during this period which will eventually run the company into liquidation rather than being rescued by sale as a going concern. However, another possible solution to this problem is debt restructuring, where debt obligations are reorganized to resolve insolvency. This kind of remedy has been provided in the United Kingdom, wherein there was an amendment in the insolvency law in June 2020, which provided certain new types of restructuring options for companies that are facing financial difficulty. This process allowed directors to consider the possibilities to restructure the company and prevent it from falling into insolvency. Along the similar lines, RBI has announced a one-time special window for lenders in order to restructure the current loans which can be used as an alternative option to uphold financial health. The restructuring terms will include rescheduling the payment time period for loans, lowering the interest rates, converting interests’ accrued into another credit facility amongst others. 

Other long term consequences– The complete suspension of IBC and its extension for another three months will put India back in the eyes of International Investors. They may not prefer investing in India because in cases of default they will be rendered remediless due to the suspended IBC. Moreover, this blanket suspension of CIRP without any mechanism of circulation of finances and liquidity may contribute towards a further slowdown in the economy. Also, the interpretation of Covid-19 defaults will lead to an increase in the number of litigations. Since the suspension will restrict the flow of credit, this will have a domino effect as the creditors will further make default to the lenders. This can bring unexpected economic disruptions and reach a point of economic standstill.

Concluding Remarks

The complete suspension of the CIRP process and its further extension for three months is an ostrich-like response that has shaken the very foundation of IBC and has dropped us back to the pre-IBC era. Time and again insolvency laws of various countries have faced changes during times of distress but rather than thinking of newer and effective measures, a complete pause is a very abrupt step. Having said that, some lessons should be learnt about the transformation in the insolvency laws from other jurisdictions. Australia has not suspended creditors’ rights but has increased the time to comply with such a demand from 21 days to 6 months. This move thus provides a breathing space to the debtor and is also not hampering the capital flow. On the other hand, France has declared a medical emergency till October 2020 and it will assess the position of the debtor continuously and thereby mandate the initiation of CIRP against the debtor only when he reaches a cash-flow position. This is a smart move to keep the business of the debtor in operation and to generate capital flow to settle the dues. So the aim should be to prevent unnecessary insolvency proceedings of the companies facing a temporary cash crunch. A better option would be taking consent from the creditors. So if creditors can absorb the non-payments of debts and they are ready to give some time to the companies to restart the business, only then should there be a suspension of CIRP, otherwise, recourse to insolvency proceedings should be allowed. Now if the cases of CIRP are higher, it may still be helpful and end on a cheaper insolvency procedure rather than a complete suspension of CIRP, which will ultimately take us to a pre-IBC era.

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