Government Gives Relief through Amendments in Insolvency Law
The year 2020 has been a forgettable year for people throughout the world. The economies around the world are suffering and there is a lot of debt crisis going around in the world. The large economic disruption caused by the COVID-19 Pandemic has led Indian government to stop the insolvency process. Recently in a parliamentary meeting, Finance Minister Nirmala Sitharaman introduced several amendments to the Insolvency and Bankruptcy laws to suspend the recovery of for six months. This was done to provide relief to debtors going through the economic crisis caused by the Lockdown measures.
Rajya Sabha Gives 6 Months Relief
Rajya Sabha recently passed amendments to the insolvency law for suspension of fresh insolvency proceedings for a minimum of six months starting Annunciation amid the coronavirus pandemic, with the minister of finance Nirmala Sitharaman quoting that a decision on extending suspensions of IBC’s relevant provisions is going to be taken after one week considering the economic slowdown caused by COVID.
In the wake of the COVID-19 situation, the govt decided to suspend the provisions ranging from Annunciation for 6 months by promulgating an ordinance in June. The relief also incurred that any Default on repayments from Annunciation which has occurred since the day the nationwide lockdown (to slowdown pandemic) began, wouldn’t be considered for initiating insolvency proceedings for a minimum of six months.
The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2020, which seeks to exchange the ordinance issued in June, was gone by a voice vote after a quick discussion. Replying to the talk, Finance and company Affairs Minister Nirmala Sitharaman said the suspension of provisions will end next week.
“At the instant, the amendment to the Code gives me a provision to only extend till one year. If at all, because it’s coming to an endways September 25 this year, September 24 itself we’ve to form an announcement about what’s getting to happen. But albeit I do, it means by March it should be ending…,” the minister said.
The minister also clarified that insolvency proceedings through insolvency lawyers against corporates defaulting on loans before Annunciation will continue and therefore the amendment won’t stall those cases. A majority of the opposition parties also supported the bill but urged the govt to supply interest waiver on loans to farmers and poor people suffering thanks to the COVID-19 crisis. This was essential to give relief to debtors from process of recovery of bad debt.
During the discussions of the bill in parliament, many members expressed their inhibitions over the possible misuse of the amendments by corporates whilst they hoped that it might help in reviving the economy. On members’ queries regarding the liability of private guarantors within the IBC, Sitharaman said the company debtor often has guarantors.
“So, for comprehensive corporate insolvency resolution and liquidation we felt it had been necessary that the insolvency of the company debtor also as its guarantors are considered together to whatever extent it’s possible,” Sitharaman said.
On queries about the urgency to bring the ordinance within the first place, Sitharaman said that “between sessions, if there’s a requirement for the ordinance because the bottom situation demands it, I might think a responsive government’s duty is to a minimum of using the ordinance to point out that we are there with the people of India.”
“So thereto extent, I’m sure the House will appreciate that as and when the govt decides for ordinance it’s due to that, and whenever subsequent session happens we come,” she said.
Due to the lockdowns effective for the COVID-19 pandemic, the minister said, businesses have faced trouble in the period. So it had been decided “that it had been better to suspend sections 7, 9 and 10 of IBC in order that we will prevent corporate persons, which are experiencing distress on account of the unprecedented situation (engendered by COVID), being pushed into insolvency proceedings”. Sections 7, 9 and 10 affect the initiation of the corporate insolvency resolution process (CIRP) by the financial creditor, operational creditor, and company debtor, respectively. The minister further said the IBC may be a critical part of business now and cited data to point out how the code had performed.
IBC 2016 Stats: Recovery Data
Citing data for NPAs of economic banks during 2018–19, she informed the House that Lok Adalats recovered 5.3 per cent, Debt Recovery Tribunals (DRTs) recovered 3.5 per cent and SARFAESI recovered 14.5 per cent. On the opposite side, IBC ensured 42.5 per cent of recovery. Sitharaman further said that the majority of the resolutions are happening to form the corporate to be an ongoing concern only.
“Priority is to protect the corporate from the ongoing situation of concern instead of liquidating them at the earliest,” she said adding that 258 companies were saved from going bankrupt through the IBC process and 965 debtor firms were liquidated.
“… the 258 companies were rescued and this suggests that employment is back within them. From Companies which were liquidated, 3/4th of them were defunct and were also given the solution of liquidation and thus a minimum of loss of employment was achieved,” she said.
According to her, 258 companies rescued had assets of Rs 96,000 crore and therefore the 965 companies sent for liquidation had assets of Rs 38,000 crore. So in terms of value, the assets rescued through the process were almost 2.5 times the assets that went through the liquidation process, Sitharaman said “the IBC, which came into force in December 2016, has been amended 5 times. This amendment also provides for the suspension of Sections 7, 9, and 10 of the code for a minimum of 6 months and extendable up to at least one year from Annunciation, 2020. A replacement section ’10 A’ has been inserted within the IBC in this regard.
With the crisis that the country is facing, it seems unlikely that proceedings related to debt recovery will find pace even in the next 2–3 months. However, depending on the COVID-19 data, the scenario could change drastically. This is giving all the creditors hope that they won’t lose hard-earned money and will be able to use IBC to recover their money.
