[Ashish Dash is a 2nd year law student at Institute of Law, Nirma University]
As the world is battling on all fronts against the outbreak of the Covid-19 pandemic and its consequential lockdown, Indian businesses have also been considerably affected. The pandemic has left the economy fractured. Therefore in order to ease their agony the government introduced the Insolvency and Bankruptcy Code Ordinance, 2020 for suspension of Corporate Insolvency Resolution Process (CIRP) for default arising during the period of Covid and increasing the threshold limit for initiating CIRP to Rs. one crore. Though the ordinance was introduced with a legitimate aim, it overlooked the ultimate objective of the IBC Code, and was thus criticized on multiple aspects. One of them was failure to incorporate measures for insolvency resolution of MSMEs.
The second wave was far more lethal than the first wave and with the anticipation of the third wave; the implementation of the new ordinance and extension of relief from previous ordinance was much demanded. Although the new ordinance introduced on 4th April 2021 led to introduction of much awaited pre-packs in the Indian insolvency regime, pre-packs are currently introduced only for the MSMEs,but the measures for insolvency resolution of other sectors was not taken into account in the new ordinance. The article critically analyses these measures and explores other measures which should be adopted by the government in the near future.
Prepacks: A way forward
The IBC Ordinance 2021 rectified various pitfalls formulated by the 2020 Ordinance and is surely being welcomed by all sectors. One of the major criticisms faced by the government during the 2020 Ordinance was ignoring the MSME sector by increasing the threshold limit from Rs. One Lakh to Rs. One Crore through which the MSMEs who were operational creditors having claims of less than Rs. One Crore could not initiate CIRP to recover their debt. This issueis resolved in the amendment introduced on April 4, 2021 by introduction of Pre-Packaged Insolvency Resolution Process (PPIRP).
Pre-pack is a deal to sell the assets of a struggling company which is agreed between the parties before the insolvency is commenced. This is a speedier, smoother, cost effective insolvency procedure. Most important feature is that most of the work is done informally because before formal initiation of PPIRP process, the MSME has to reach its creditors with a base resolution-plan for its restructuring and obtain creditors approval to initiate PPIRP. In PPIRP, the debtor remains in possession of the management of the company unlike CIRP where the resolution professional has control over the management and affairs of the business, however the Committee of Creditors can with a minimum vote of 66% initiate CIRP and terminate PPIRP.
The minimum default amount is Rs. Ten Lakh which is the most important requirement keeping into consideration the plight of MSMEs during the devastating two waves of the pandemic. With complete shut-down of businesses and shortfall of the 2020 ordinance to protect the MSMEs, the sector had suffered a huge economic blow, but through the introduction of Pre-Packs, a two-fold goal of protection and revival of MSMEs would be achieved without increasing the burden of the tribunal, by introduction of semi-formal PPIRP procedure.
Out of Court Settlement: Shedding burden of NCLT
One of the major advantages of prepacks is out of court settlement. There has been a huge backlog of cases in NCLT which has resulted in delay in resolution of cases. There are twin reasons for this backlog. First, due to huge losses caused to the businesses because of the pandemic, a large number of firms are pushed into insolvency and second, virtual proceedings being not as efficient as physical court proceedings. Moreover there are merely sixteen NCLT benches to share this burden. Therefore out of court settlement is anticipated to be a great step in shedding some burden off the benches and providing a quicker and cost effective insolvency resolution to the businesses.
Out-of-court settlements are not only speedy but they can also save significant costs for the debtors and creditors. This is also significant as the suspension of CIRP for the default caused during the period of pandemic has also been lifted which will drive many firms for insolvency proceedings. Another pertinent observation for making out-of-court settlement successful is that the company should be economically viable, that means the chances of revival should be more that the chances of being drained into liquidity.
Implication of Ordinance 2021
One of the effective measures for economic recovery will be the efficient movement of capital in the market. Though the economy is recovering faster than the initial estimates, the constant economic recovery will not be possible if there has been pending restructuring of debts under IBC caused due to the distress of the second-wave of the pandemic. IBC suspension for initiation of CIRP was lifted on March 2021, during this suspension, no application for initiation of CIRP of a corporate debtor was to be filed for any default arising after 25th March 2020 for a period of six months, thereafter this suspension was extended for a period of another six months in September 2020 and the suspension was lifted in March 2021.
The 2021 Ordinance gave the approval to file CIRP against corporate debtors for a default limit of one crore even during Covid. This withdrawal is strange as the government suspended the CIRP in the first wave and did not suspend the same during the second wave which was far more lethal than the first wave. Inspite of the manifest impact of second wave, the suspension of CIRP was not extended to the second wave.
The focus has been completely shifted on MSMEs and introduction of Pre-packs. If the government intended to lift up the suspension of CIRP then it should have introduced PPIRP for all the sectors. Various experts suggest that mere suspension of the CIRP is not a good option for all the firms, as there are firms which have no hope for revival and liquidation is the best option available to them. Therefore measures should be adopted for facilitating an easy exit to these firms, so that they are able to start new venture and the assets of such companies would be allocated towards more productive activities that may result in growth rather than being stuck in a dead end.
Indirect State Support: A Hope for Revival
Introduction of Pre-packs is surely a welcome step towards resolution of the critical condition of the MSMEs during the second wave, but with a large number of MSMEs suffering the impactof the nation-wide lockdown, would the revival of all of them or most of them be an easy task even with the introduction of PPIRP mechanism? In the light of this doubt and uncertainty, should not the government take precautionary measures before the peak of third-wave, before it is too late to cope with the failures of the first and the second wave? Injecting liquidity by providing grants and promoting reconstruction of small and medium enterprises would be a great step in furtherance of the objective of reviving the economy and giving a hope of revival to the industries which have suffered such loss that they cannot overcome without a push in the economy by the government.
Indirect support from the government is much required for the hard-hit business sector. These measures should not only include postponement of payment for a particular period of time but it should include permanent relief from the payments for the period of pandemic. These reliefs should include relaxations in tax, direct as well as indirect, utility payments such as gas and water and other fixed costs of companies.
The pandemic has reduced demand for firms’ products, which has indeed disrupted the supply and tightened credit. There are firms which are viable but maybe prematurely pushed into insolvency. There are a high number of firms which would require liquidation and exit from the market in order to start other new ventures. The government while making ordinances has an obligation to inculcate measures to address all the possible challenges.
Moreover, since prepacks are introduced only for MSMEs, a similar new relief scheme inclusive of prepacks and out of court settlement should be created to support sole proprietors and partnerships affected by the COVID-19 pandemic. Till now we have been in the survival phase of the Covid, now it’s time to accept life with covid and focus on the recovery phase. This means a shift from temporary suspension of creditor’s rights and other temporary stays should be made towards other permanent policy measures. More focus on out of court settlements for all the sectors should be made and the community should be made aware of the possible options of revival and of exit as well.