In what could be a big relief for companies hugely impacted by the COVID-19 pandemic and the nationwide lockdown that has followed, Finance Minister Nirmala Sitharaman on Sunday announced several changes proposed to the insolvency and bankruptcy code.
Under the new proposals, debts related to COVID-19 will be excluded from the definition of default. More importantly, no fresh insolvency will be initiated for one year. These steps were a part of the fifth tranche of measures announced by the government in its efforts to give relief to various sections of the society affected by the pandemic and build a ‘self-reliant’ or ‘Atma Nirbhar’ India.
“Many businesses have been severely affected, particularly due to this lockdown and also the COVID-19 pandemic. Any debt that is incurred or indebted situation that comes up for companies because of coronavirus, they shall not be included in the category of default. No fresh insolvency procedures or proceedings will be initiated up to one year. The MCA (ministry of corporate affairs) has extended up to six months, we intend on extending it another six months, because, after all, when the lockdown is lifted, immediately, you are not sure how much business will get restored,” Sitharaman told reporters.
Micro, small and medium enterprises have been hit hard due to the coronavirus outbreak. To ease their concerns, the minimum threshold to initiate insolvency proceedings has been raised to Rs 1 crore from Rs 1 lakh earlier, which would “insulate the MSMEs”, the finance minister said.
“For MSMEs, a special insolvency framework will be notified under Section 240A of the IBC,” she added.
Insolvency and Bankruptcy Code was notified by the Narendra Modi government in the previous term. According to the Insolvency and Bankruptcy Board of India, creditors have realised Rs 1.6 lakh crore through the resolution plan of 160 companies under the IBC, as of 2019 end. The recovery rate has been close to 44 per cent.
“Deferment of fresh insolvency admissions for the next one year is a much needed relief under the amended IBC provisions. COVID-related debt also been put outside the purview of IBC, which is a proactive measure to contain further procedural complications,” said Sandeep Upadhyay, MD, Infrastructure Advisory, Centrum Capital.
Legal experts like Veena Sivaramakrishnan, partner at Shardul Amarchand Mangaldas, said the move would give a breathing space to MSMEs. But, she questioned the move to not initiate any insolvency proceedings due to COVID-19.
“The blanket suspension of defaults on account of COVID-19 could lead to unintended consequences. Questions like why should an entity not refer itself to insolvency, what is the parallel regime of resolution, recovery steps are not curtailed and therefore will continue to rise, what is the framework for creditors to come up with a viable resolution plan outside of IBC, continue to remain unanswered,” said Sivaramakrishnan.
Amongst other measures announced on Sunday, Sitharaman also said that most of the sections under the Companies Act would be decriminalised. The finance minister said that seven compoundable offences would be dropped and five would be dealt with under an alternative framework.
“While larger companies are better equipped to deal with their statutory reporting and compliance requirements while working from home, many of the smaller companies continue to face challenges in compiling information, timely filing and so on. Therefore, decriminalisation of procedural defaults will come as a great relief to many of these companies, especially those who are defaulting due to genuine hardships as differentiated from wilful defaults,” said Sai Venkateshwaran, partner and head, CFO Advisory, KPMG in India.