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Has suspension of IBC proceedings achieved its desired goal?


We all are aware and have discussed at length why the amendments in June 2020 was introduced by Finance Minister Nirmala Sitharaman in the I&B Code 2016, i.e. of increasing the threshold limit of default from Rs 1,00,000 to Rs 1,00,00,000 and of suspending the initiation of the proceedings under the Code for six months with an extension of another six months apart from other amendments made by Insolvency Board from time to time.

The second extension was announced on December 22, 2020, and the suspension of proceedings under I&B code has been extended for another three months. Does this mean the provision of suspension brought about earlier could not achieve the desired result or it has achieved the desired result, but we could achieve more with further suspension? Whether the amendments made could restore the situation, especially of the Banks and the borrower, is a question which now needs a deliberation.

Prima facie, if we look at the present situation there is no major change in distress financial situation except that the burden of judicial forums have been reduced qua filings, which otherwise could have been flooded with fresh filings after lifting of lockdown. As every creditor would have filed for Application (at least for using as a deterrent tactic even though I&B Code is not a recovery proceeding), which because of the suspension and increase in default limit was not the case. The defaulters are still the defaulters, as the slowdown and pandemic have treated them the same way as they have the others. The borrowers cannot do much to improve their situations except retrenching their employees, or closing their units, etc. The small operational creditors who even though don’t want to proceed with CIRP against any corporate debtor in real sense, used the proceedings as a deterrent tool to have their dues settled by mere serving demand notice or few dates before Adjudicating Authority.

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The situation is win-win for those borrowers who have slipped to default during the COVID-19 suspension period i.e. after 25th March 2020, as amendment in Section 10A provides that no application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the said default occurring during the said period. Although clarity is awaited on it, we expect things to get clearer when the suspension period will be over. Having said so, we also require clarity on what will happen to the personal guarantors of such Corporate Debtor as the language only restricts for no proceedings ever against Corporate Debtor.

Besides them, definitely those defaulters who were having default of less than Rs 1,00,00,000, but more than Rs 1,00,000 are at benefit as the sword of insolvency proceedings over them is no more present even though they can be sued under other applicable provisions of law, but at least they have a safeguard of not exiting from their business, which is the ultimate effect of I&B proceedings.

The amendment at one hand given the benefit and a chance of revival (without going through CIRP process) to the defaulting borrowers, have taken away a major deterrent tool from the hands of the bankers (Financial Creditors) as most times the one time settlement with beneficial terms have been achieved by financial creditors during the pending proceedings under the I&B Code.

The creditors will be at loss especially because fresh defaulters during the said period of one year (i.e. from 24th March 2020 till 24th March 2021) are expected to rise significantly. The amendments, especially the suspension of fresh proceeding(s), in a nutshell cannot give the desired result for which it was made and one has to wait now for next three to figure out its effectiveness, as the slowdown brought by the COVID-19 is still in existence not only in India but globally as well.

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When the suspension was proposed in June 2020, no one expected that the pandemic would last for such a long period, and therefore a one year suspension proposed by the amendment seemed to be a good time frame. However, it now seems that nothing less than another year of suspension can give the desired result.

One must keep in mind that the I&B Code 2016, was never intended to be used as a recovery tool and was introduced as a mechanism for a systematic restructuring of the corporate debtor with the aim to protect not only the corporate debtor but also the various stakeholders associated with it.

(The writer is Senior Partner, Singh & Associates)





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