Will lifting of IBC suspension turn out to be a damp squib? : 18-03-2021

The insolvency invocation sections of the Insolvency and Bankruptcy Code (IBC) were suspended by a notification dated 5th June 2020, effective 25th March 2020. It is widely expected that the suspension will be lifted on 24th March 2021.

However, a mere withdrawal of suspension without implementation of additional frameworks that are under discussion i.e., Prepacks and Micro Small & Medium Enterprises (MSME) Regulations under section 240A, will make IBC a toothless tiger; several companies will get excluded from its ambit.

Proviso to Section 10A of the IBC states that, no application shall ever be filed for initiation of corporate insolvency resolution process (CIRP) of a corporate debtor (CD) for defaults during Covid period. Thus, all defaults of Covid period will be outside the purview.

Budget of 2021-22 had provided for establishment of an asset reconstruction company i.e., a bad bank and an asset management company (AMC). Statement of several senior officials in the Government as well as Indian Banks Association (IBA) indicate that loans greater than Rs 500 crore which have not been declared fraudulent will be transferred to the bad bank. It is highly likely that the underlying companies would not be subjected to IBC in the first instance, rather the AMC will try and either revive these companies or package the loans to an investor.

MSME will be outside the scope of IBC pending notification of the designated framework. The revised classification of MSME will preclude a plethora of companies from IBC. Additionally, the new-criterion may result in litigation vis-à-vis MSME that are pending admission at National Company Law Tribunal.

MSME as per definition are enterprises with plant & machinery up to Rs 50 crore and turnover up to Rs 250 crore. It is to be noted that written down value of plant and machinery at the end of previous year is to be considered (not original cost) and definition excludes land, buildings, furniture & fittings. Also, the turnover criterion does not include export sales. More than 99% of companies in India have a turnover of 250 crores or less, albeit the ones where the written down value of  plant and machinery is greater than 50 crores and in distress will be amenable to IBC.

Creditors of several companies had signed the Inter Creditor Agreement (ICA), pre-suspension, under Reserve Bank of India’s (RBI) June 7th Prudential Framework. Some of these corporates will continue negotiation under the framework roping in distressed asset investors. Also, most of the ICA cases will have loans greater than Rs 500 crore, resulting in their exposure being transferred to bad bank.

Finally, Hon’ble Supreme Court order states that “the accounts which were not declared as NPA till 31 August 2020 shall not be declared as such till further orders”. This has enabled several CDs to shift cash flows, from servicing lenders to payment of operational creditors, and thus the risk of a filing by an operational creditor has reduced substantially.

The aforesaid probable exclusions will result in significant reduction of filings under IBC. The endeavour of Insolvency and Bankruptcy Board of India should be to introduce all the frameworks simultaneously on 25th March 2021. A number of judgements from the Hon’ble Supreme Court have lamented about the situation prior to introduction of IBC. Let us not go back to the old ways.

Source : PTI