With the exponential increase in the number of Covid-19 cases in the second wave of the pandemic and the overall economic slowdown, demands are being made for further tweaks the insolvency regime equipped to tide over the crisis. During the first wave of the coronavirus pandemic, some measures such as (a) suspension of initiation of corporate insolvency resolution process (CIRP) on the basis of fresh defaults under the Insolvency and Bankruptcy Code, 2016 (IBC); (b) increase in the threshold of the default for the initiation of CIRP under the IBC; and (c) certain measures by the Reserve Bank of India to enable grant of moratorium and facilitate restructuring for distressed assets were announced.
Demand is being made for extension of these measures in the second wave as well. While, the economic distress on account of second wave is certainly substantial, restructuring activity, including under the IBC should not be completely suspended. Instead, greater emphasis should be placed on consensual restructuring.
IBC relaxations announced for MSMEs
Recently, the government introduced a special pre-packaged insolvency resolution process (PPIRP) to deal specifically with distress of MSMEs. PRIRP is expected to be more time and cost efficient than the CIRP under the IBC. Participants should be encouraged to make full use of the new PPIRP framework. The government should consider extending the PPIRP to non-MSME enterprises as well. This should be accompanied with appropriate modifications to the PPIRP to allow out-of-court admissions resulting in a moratorium for a limited period at least, so that NCLTs are not overburdened with applications.
The government may also consider relaxing the need for swiss challenge in all cases where statutory creditor dues are not fully paid out till operational creditors are paid off. This is in line with IBC’s scheme to accept subordination of government debt, as government is expected to benefit from the resolution in the long term and has better capacity to bear short to medium term losses in recovery of defaulter debt owed to it.
Even for CIRP under IBC, certain relaxations to Section 29A, which prevents pre-existing promoters and management from proposing resolution plans, should be contemplated. To facilitate greater comfort of lenders to restructure with existing promoters, the RBI should also consider relaxing some asset classification requirements for such restructuring under the IBC.
More relaxations needed to tide over Covid-19 crisis
Meanwhile, regarding pending restructuring processes under IBC due to the distress caused on account of the second wave of the Covid-19 pandemic, emergency operational measures should be put in place to relax timelines for ongoing insolvency proceedings under the IBC. This will ensure that companies are not forced into liquidation and stakeholders do not suffer for being unable to carry out activities on account of state lockdowns and/or Covid-19, or forced to rush to NCLTs to seek necessary exclusion of time, which adds to costs and causes unpredictability.
Even as infection rates stabilise, Indian economy may continue to see a slump in economic activity and businesses will continue to need liquidity support from the government to prevent redundancy and promote reconstruction, particularly of priority sectors.
Out-of-court settlements the way ahead
Under such circumstances, rather than staging off insolvency resolution and push the problem to future, out-of-court restructuring and one-time settlements will serve the interests of all stakeholders. The Reserve Bank of India can facilitate such out-of-court restructuring by creating another scheme, similar to the August 6 scheme, with potentially more inclusive standards.
Even though domestic enterprises and businesses have been affected by Covid-19, international commercial activity is picking up. In this background, more foreign investment should be attracted, particularly to reduce distress. The newly introduced PPIRP mechanism can be used to attract foreign investors to invest into distressed assets.
There is also a need to make CIRP under the Code to be more attractive. While, IBC framework invoked a lot of interest among international investors, the judicial delays and regulatory uncertainty, dampened the excitement for Indian distressed market over a period of time. Time and cost efficiency and predictability of insolvency resolution outcome under IBC will go a long way in re-enforcing investor confidence.
Need to attract foreign investment
Foreign investments may also be attracted by allowing a greater number of resolution options. For instance, if ‘turnaround and sell’ resolution plans can be proposed and accepted within the framework of the IBC, it will attract specialised distressed funds to participate. Outside the IBC too, foreign investment in stressed loans may be attracted either through the bad bank route or by introducing a more liberal framework for sale of loan exposures. It will also help set up and actualise platforms to fast-track government approvals for the implementation of resolution plans.
Equally, pending reforms in insolvency segment such as legislation to deal with cross-border and group insolvency issues should be introduced. There is a need for better predictability of liquidation outcomes as well. Recent judicial pronouncements have cast a doubt on the manner of implementation of liquidation waterfall; manner and sanctity of regulations allowing for sale of a company as a going concern during liquidation.
All these aspects also need to be settled to bring in predictability in the processes. Similarly, the government should continue to expend resources to build capacity of NCLTs, not merely by increasing benches, but by improving their virtual hearing and case management tools. These changes will be crucial to ensuring that the IBC remains effective in resolving distress in the economy.
(Misha is Partner at Shardul Amarchand Mangaldas & Co.)