Six-month IBC suspension ends today, decision on extension soon

The six-month suspension of insolvency and bankruptcy proceedings against companies comes to an end on Thursday and government sources have hinted that there could be another extension in the light of the economic stress caused by the pandemic.  

The Ministry of Corporate Affairs has received extensive feedback from the industry and is likely to announce a decision on whether or not the corporate insolvency resolution process will be suspended for another six months this week. 

The government, through an ordinance promulgated in June, had amended the Insolvency and Bankruptcy Code (IBC) exempting companies from facing insolvency proceedings against any default arising for at least six months starting March 25. 

The amendment gives permanent protection to companies for default during these six months, and can be extended up to a year through a government notification. The bill passed by Parliament is awaiting the President's signature. 

M S Sahoo, chairman, insolvency and bankruptcy board of India has stressed that rescuing a viable firm in these time is far more important than liquidating an unviable firm. 

Industry is backing an extension on grounds that the economy is still reeling under negative growth. “The resolution process requires its own time and effort and quick-fix solutions may not be feasible, given the regulatory and  administrative requirements of the financial sector, particularly the banks. It (exemption) should be extended for at least three more months,” said Jyoti Prakash Gadia, Managing Director at Resurgent India.

Legal experts differ on whether the investor sentiment will be adversely affected due to the suspension of IBC.

“The underlying premise for the extension will be that the Indian economy needs measures for revival – which by its very nature will also require capital investment. From an investor’s perspective there are and will continue to be attractive opportunities – the IBC only represents a toolkit for such an investment and not the investment opportunity itself,” Abhijeet Das, partner, Cyril Amarchand Mangaldas Das said. 

IBC lawyers said that the extension of suspension could improve the investment sentiment as a positive policy initiative towards the business community.

“There is no point to explore IBC in such a slow economy where the compromise ratio with respect to debts will be more as compared to the economic condition when there will be more Resolution Applicants available,” said Daizy chawla, Senior Partner , Singh & Associates.

However some experts believe that while an extension of the suspension will give some breather for genuinely stressed cases, for private equity investors, non-banking financial companies it could lead to value destruction. “It is important for the regulator to try and strike a balance with the interest of the lenders and investors too. In addition to the banks there could be private and foreign lenders as well as investors who could be adversely impacted due to suspension,” said Anshul Jain, partner, PwC India.

Sonam Chandwani, Managing Partner at KS Legal & Associates said that in the light of rejigs recommended by the government, investor sentiment has definitely taken a hit. "Increase in default exemption for another six months may hurl financial institutions and company promoters off the ledge bringing adversely impacting investor sentiment during virus-induced depressionary forces."