Experts unhappy with suspension of IBC for 1 year, say it puts banks at more risk

Finance Minister Nirmala Sitharaman on May 17 presented the fifth tranche of Rs 20 lakh crore package, where the major focus was on healthcare infrastructure, technology-driven education, ease of doing business through IBC related measures, financial support to state governments and public sector enterprise policy.

One of the most important steps was the ease of doing business through Insolvency & Bankruptcy Code (IBC) related measures, which included the suspension of fresh initiation of insolvency proceedings up to one year depending upon the pandemic situation.

Along with that, there is an exclusion of COVID-19 related debt/defaults. The steps seem to be good news for the corporates, but experts are unhappy as it is unfair for the aggrieved party and can create unscrupulous borrowers which can defeat the purpose of IBC.

In fact, it can increase more stressed debt levels at banks which are already under pressure especially PSUs.

“Suspending IBC for one year may not be a good idea as there may be unscrupulous borrowers/promoters. Instead, each bank could have have been directed to form a committee which could decide whether to initiate any legal action or not under IBC depending upon the credentials and performance of the borrower as well as putting a reasoned note whether the default is attributable to COVID-19 situation,” Rajesh Narain Gupta, Managing Partner, SNG & Partners told Moneycontrol.

He feels the blanket ban may give a tool in the hands of unscrupulous borrowers to delay and defeat the objects of IBC. “What happens to the cases which were doubtful or bad before COVID and where the borrower may take undue advantage. What kind of alternate remedy the lender will have is not clear.”

Such blanket ban may throw wrong signal on the performance of contractual obligations by parties and the legal protection available to the aggrieved party, Gupta said, adding the already stressed banking industry shall face more heat and disadvantage.

Dhiraj Relli, MD & CEO at HDFC Securities also feels the suspension of IBC proceedings for 1 year though essential in these times, would postpone the pain for banks and NBFcs and they could see large slippages and lower recoveries post the 1 year period.

Further experts welcomed the step of excluding the COVID-19 related debt defaults, but they found it of no use when there is already a suspension of IBC proceedings for one year.

“The decision to exclude COVID-19 related debt/defaults is a welcome step. The announcement though is not qualified by any timeline. It remains to be seen whether an exact definition of ‘COVID – 19 related debt’ will form part of the fine print. Another key concern is that if these defaults are to be excluded anyway, what was the need for a separate announcement to suspend all IBC proceedings for one year,” Pooja Mahajan, Managing Partner and Head, Insolvency & Restructuring at Chandhiok & Mahajan said.

“If IBC proceedings are suspended even for already existing defaults, we will end up losing a very powerful tool to resolve insolvencies in cases of pre-existing stress. In such companies, the stress will only keep mounting, and after too one year it may be too late to get any meaningful resolution,” she said.

Any blanket suspensions will not only lead to misuse by delinquent corporates but also deprive debtors and creditors of using IBC as a meaningful tool for resolution, she added.

But Makarand Joshi, Partner at MMJC and Associates LLP said instead of relief under IBC, government should have provided an option to those companies to opt for IBC who are not confident of sailing or surviving through this period.

Most of banks already made some provisions due to moratorium period sanctioned for borrowers.

As a part of ease of doing business, Finance Minister also said the special insolvency resolution framework for MSMEs under Section 240A of the Code will be notified soon.

“It is also unclear that if IBC proceedings are to be suspended anyway, why is a special insolvency framework needed for MSMEs. This appears to a long-term measure for MSMEs, perhaps applying after one year. The devil will, of course, be in the details. A more nuanced approach will help companies in dealing with COVID-19 disruptions,” Pooja Mahajan said.