The economic downfall of 2008 prompted some of the most high-profile bankruptcies in U.S. history, including those of Lehman Brothers, General Motors, and Washington Mutual. Taking a look at the 2008 financial crisis faced by the United States of America, restructuring and Chapter 11 played an epic role in aiding the country to recover. U.S. bankruptcy courts and debt restructuring specialists were faced with the largest wave of corporate defaults and bankruptcies in history. In 2008 and 2009, $1.8 trillion worth of public company assets entered Chapter 11 bankruptcy protection – almost 20 times the amount during the prior two years. During the crisis, the amount of debt that needed to be restructured posed a seemingly insurmountable challenge. At one point, a whopping $3.5 trillion of corporate debt was distressed or in default. A significant portion of the private equity industry was widely believed to be on the verge of extinction. Now, in the face of the even larger crisis brought about by the coronavirus, other big companies are bracing for a similar fate. The United States of America in a dire time of stress and economic fallout did not amend or do away with Chapter V, how successful would the Indian government be in saving the economy by suspending section 7, 9 and 10 of IBC.
The impact of the novel coronavirus outbreak on the economy would depend on the gravity, extent and diffusion of the calamity, the Reserve Bank of India said in the minutes of its emergency Monetary Policy Committee (MPC) meeting in March.
Currently, the government has taken certain steps to prevent the initiation of CIRP at a large scale and to avoid any frivolous filings. The Ministry of Corporate Affairs vide a notification dated March 24, 2020, has increased the threshold for initiating the insolvency resolution process from Rs 1,00,000/- to Rs 1,00,00,000/- under Section 4 of the IBC.
This amendment is likely to also help medium and small industries who have been hit the hardest by COVID-19. However, on the flip side, this amendment will adversely impact the ability of operational creditors to initiate CIRP, since the minimum default amount is now ten times higher than the previous minimum default limit. Once the economy sails through the slowdown caused by COVID-19, the government should ponder upon reducing the limit to a lower amount, so that IBC does not merely remain as a toothless tool at the hands of operational creditors.
In the wake of COVID-19, various banks have already extended emergency credit lines to ease the liquidity crisis of the borrowers. Once the lockdown is removed and businesses are resumed, if borrowers default in repayment of the emergency credit, the banks may face an immense liquidity crisis. In order to keep the banks afloat post resumption of normal economic set up there has been an amendment in section 5(15) of IBC, any debt notified by the central government can also be included in the definition of interim finance. In pursuance of this amendment, the central government vide notification dated March 18, 2020, has notified debts raised from the Special window for Affordable and Middle-Income Housing Investment Fund I to be included within the meaning of interim finance. Interim finance is the debt which is treated as a priority loan for the purposes of repayment. The effect of this amendment is that the central government may notify any debt as interim finance, wherein such debt shall be repaid before all other debts of the corporate debtor.
The Finance Minister has said that if the current situation continues beyond 30th of April 2020, the government may consider suspending section 7, 9 and 10 of the IBC 2016 for a period of 6 months so as to stop companies at large from being forced into insolvency proceedings in such force majeure causes of default.
While the hanging insolvency sword on corporates which would have defaulted purely on account of COVID -19 seem to have gained breathing space (6 months), it is equally crucial for a bank that the asset classification and provisioning norms are also duly addressed. Given the financial year end approaching and the usual nature of loan transactions, eyes would now also be on RBI to provide some relaxation to ensure that their capital is healthy and not adversely affected.
IBC should be suspended for a short period for the aviation and hospitality sectors as they are the worst affected. Since a large number of people will stand to lose their jobs especially in the retail, hospitality, travel, construction sector, the government can consider giving incentives for employers to keep the workers, while the coronavirus problem tides over.
How likely is it that there will be a suspension and what will be the criteria for such suspension? What about the large scale and long term impacts such suspension will create? Who all will be most benefitted? Will this end up benefitting only specific sects like the promoters, lenders, or contractors?
Views expressed in this article are the personal opinion of Ajit Kumar, Director, Sun Resolution Professionals Pvt. Ltd. (SRPPL)