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Experts Question Suspension Of 'Defaults' Under IBC

Finance Minister said on May 17 that the government is announcing the suspension of fresh initiation of insolvency proceedings up to one year and exclusion of COVID 19 related debt from the definition of “default” under IBC. Experts are not happy.

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With an eye on further enhancement of Ease of Doing Business the FM said the government is announcing the suspension of fresh initiation of insolvency proceedings up to one year and exclusion of COVID 19 related debt from the definition of “default” under IBC.

Commenting on it, Sumit Batra, a Corporate Lawyer said decriminalization of Companies Act defaults involving minor technical and procedural violations and shifting of the majority of the compoundable offences sections to internal adjudication mechanism is in line with measures taken by the government to minimize the impact of prosecution for defaults due to reason of COVID 19. "But this will in no way bring any economic relief to the stressed companies. There are precedents which show that even in past, the Hon’ble courts have been extending such relief in such unprecedented circumstances. In addition, how will the government bring in these amendments is also to be seen," said Batra.

On the proposal to increase the threshold limit to initiate proceedings under IBC from the existing limit of Rs 1 lakh to Rs 1 crore, exclusion of default due to COVID-19 and barring initiation of new insolvency cases for next 1 year will "surely benefit corporate entities who genuinely want to pull themselves out of an economic slump or slowdown", said Batra. "But this will ultimately hamper the recovery prospects of financial institutions in cases of existing defaults by a corporate entity and in those cases as well where the accounts have already been declared as NPAs," said Batra.

Vishesh C. Chandiok, CEO, Grant Thornton India termed the direct listing of securities by Indian public companies in foreign jurisdictions as a "massive benefit for startups, companies in high-tech and biotech, metals and minerals, etc" because these are better understood by investors in specific markets overseas. "This will reverse flight of capital and offshoring of Indian companies. This will also result in growth of such companies from about 50 to 500 in the next five years,” said Chandiok.

Commenting on the 5th tranche of economic stimulus package on IBC amendments, Veena Sivaramakrishnan, Partner, Shardul Amarchand Mangaldas & Co. said: "While the MSME amendments have given some breathing space to the sector, the blanket suspension of defaults on account of COVID 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."

It must be recalled that the IBC was brought in as an alternative to enforcement and as a measure for viable companies to regain its lost glory and survive as a “going concern” with fresh life. Time and again, the preamble and intent has been upheld that the IBC is a means of resolution and not recovery. "Leaving out the option of resolution, automatically opens the door for recovery and this could be a huge unintended consequence of the blanket suspension," said Sivaramakrishnan. The expert pointed out that a binding framework of resolution outside of IBC has found very little success in the Indian market. "Suspending IBC in entirety, while it looks like a relief to corporates, could actually lead to the corporates being in a state of flux, as all creditors coming together without the sword of IBC on them, has never really won the popularity vote," she added.

Meanwhile, on the 5th and final day of announcement of economic stimulus in Covid times, the FM made a slew of announcements. "To provide a fillip to employment, government will now allocate an additional Rs 40,000 crore under MGNREGS. This move will help generate nearly 300 crore person days in total," the FM said. "Government has also committed Rs 15,000 crore for health related measures, so far, for containment of COVID19 which includes Rs 50 lakh insurance per person for health professionals under PMGKY," she said. 

The FM said that government has ensured education of students does not suffer. In this regard, the Swayam Prabha DTH channels have reached those who do not have access to the internet and the DIKSHA platform has had 61 crore hits from March 24, the FM said.

"India is changing and so is our way of education," the FM said while announcing PM eVIDYA - a programme for multi-mode access to digital/online education that will be launched immediately. Under this initiative, the top-100 universities will be permitted to automatically start online courses by May 30th.

To prepare India for any future pandemics, the FM said that the government will increase public expenditure on health and invest in grass root health institutions.