Demand from lenders for suspension of IBC grows amid second Covid wave

As second Covid wave is expected to impact mid-sized, small companies, lenders seek a breather

Indian lenders will not rush to send companies to the NCLT (National Company Law Tribunal) for debt resolution under the IBC (Insolvency and Bankruptcy Code), 2016 -- taking into account the second wave of Covid-19 pandemic. Instead taking a cue from the industry, lenders are planning to ask the government to suspend the IBC process yet again so as to give an opportunity to companies to restructure their finances to cope up with pandemic, say lawyers.

Lawyers said due to restrictions imposed by various state governments in some form or the other, working of the NCLT all over India, NCLAT (National Company Law Appellate Tribunal) in New Delhi and various high courts all over India and Supreme Court of India is limited only to urgent matters and that too via video conference. Lawyers are unable to physically attend office / tribunals / courts. Likewise, even the litigants are unable to attend office and access office records.

“In view of this, it would be most practical if the IBC is suspended for a period of 3-6 months initially from April 2021 onwards. The government can then take a stock sometime around September – October this year to ascertain if India has recovered from the 2nd wave of COVID-19 and if it is possible for tribunals / courts to function normally. Only if the government feels it is practical to restart courts / tribunals normally, can the government consider removal of the suspension on IBC,” said Nirav Shah, Partner, DSK Legal.

Along with suspension of IBC, the government should once again consider coming up with a Covid-19 Regulation part 2 (akin to the regulations introduced by RBI last year) with a view to giving companies and lenders a chance to revive those companies where there is scope of revival. “This will also be a great step in ensuring that companies that deserve to be revived don’t go under the hammer of IBC. Given the big picture of the catastrophe that we are facing, this seems to be most practical,” he said.

The second wave of Covid-19 is expected to hit the mid-sized and smaller companies as demand for products and services slows down. “Lockdowns across key markets like Maharashtra and Karnataka will result in balance-sheets of many companies going for a toss. The lenders are now postponing sending companies to NCLT at least for next two quarters,” said a lawyer who is advising one of the banks.  

In March 2020, the Indian government had suspended IBC till March this year so as to help companies to tide over the problems faced by the companies due to lockdown. In March this year, IBC was reinstated but banks were not very keen to send the companies to NCLT.  The data released by the Insolvency and Bankruptcy Board of India (IBBI) shows that as of December 2020, there were 1,717 ongoing bankruptcy cases -- a drop of almost 12 per cent compared to September 2020.

It’s not only the banks. Industry lobby bodies are also asking the Indian government to suspend IBC till further notice. In mid-April, Assocham asked the government to reimpose moratorium on taking debt-ridden firms to the NCLT till December this year to ensure that pandemic does not create a havoc in the economy. "In view of the altered situation, placing the NCLT resolution process under suspension again till December this year is a critical interim measure, which needs to be expedited, until targeted assistance can be granted, after a comprehensive assessment," it said.