Developments and Implications of Covid-19 on Insolvency Regimes
Originating in the Wuhan city of Republic of China, the COVID-19 Pandemic continues to rise. This pandemic has brought a lot of human suffering and has brought the world to a standstill as more than 175 countries have been hit and there are millions of cases worldwide. Numerous legal questions arose while dealing with the pandemic and directing it towards the new normal but unfortunately the answers were not easy due to the novelty of facts and also due to lot of uncertainty. One of the major areas of concern is the Bankruptcy and Insolvency Legislation. The provisions of this legislation were quite effective under normal circumstances but are proving to be insufficient under the present situation. The businesses are strongly requesting to the particular governments to undertake safety measures with an aim of providing continuity of their businesses and also to sustain their operations after the pandemic.
Key Amendments Brought in IPC in India
The Government of India announced a lockdown in India due to the COVID-19 pandemic with effect from March 25, 2020 which indeed has disrupted many business activities across all sectors of the economy. As per a report, a total number of 3,312 Corporate Insolvency Resolution Processes have commenced until the month of December 2019. Out of the these, 236 cases have been settled and closed, 135 cases have been withdrawn, 780 entities have been ended in liquidation and 190 companies were on hold for approval of their resolution plans. The rest 1,961 entities which were undergoing Corporate Insolvency Resolution Process under the Insolvency and Bankruptcy Code, 2016 were under consideration at various stages as on 31st December, 2019. It should be noted that the total amount of claims admitted were Rs. 4.13 trillion out of which the realizable amount was estimated at Rs. 1.84 trillion. No doubt that the lockdown had made it impossible for all the stakeholders who are involved in the process to actively participate and perform their functions duly with respect to the corporate debtors under the Code of 2016.
The driving force behind the Code is to rescue distressed companies and, if not, then liquidation is the last resort. In light of the above, a few amendments were introduced to the Code and the regulations framed under the Code (Regulations). The quasi-judicial authorities also, after taking into consideration the current state of affairs and also the policy changes, issued directions relating to various aspects relating to timelines for undertaking various actions as mentioned under the Code and the regulations framed thereunder. Thus, in order to curtail the fear of insolvency, the Government brought developments which are detailed below:
i) Increase in the De Minimis Threshold amount for initiating CIRP:
The Finance Minister during a media briefing announced that the monetary threshold of default to initiate a CIRP of a corporate debtor shall be increased from INR 1 Lakh to INR 1 Crore. The announcement was brought into force from immediate effect and the Ministry of Corporate Affairs notified on the same date. As per Section 4 of the Code of 2016, the amount is Rs. 1 Lakh but the section also states the power of the Government to determine any higher value for such a proceeding which must not be more than Rs. 1 Crore and that it can be exercised by the Government by bringing a notification with respect to the same.
It is to be noted that the amendment to Section 4 for increasing the limit has direct implications on Sections 7, 9 and 10 of the Code which deals with filing of the application before the Adjudicating Authority. Hence, the applications of all the respective financial creditors, operational creditors or even corporate debtors will only be admitted if the default amount is equal to or more than Rs. 1 Crore. This step was mainly taken to support the MSMEs sector which have been hit due to the current unforeseen circumstances and that they can focus on stabilizing their businesses rather than fearing inevitable insolvency. Moreover, NCLT would also be relaxed by this notification as it would result in lower cases getting admitted to it.
ii) Suspension of Sections 7, 9 and 10 of the Code for a period:
The novel Coronavirus has forced the Government to introduce a new clause 10A under Section 10 of the Code which aims at suspending Sections 7, 9 and 10. At first the suspension prohibited financial creditors, operational creditors and corporate applicants from initiating a CIRP for a period of six months but not exceeding a year as per the first notification but the Finance Minister then made it clear that the IBC would remain suspended for one whole year from the first notification. The said ordinance aims at safeguarding borrowers from getting into insolvency.
However, it should be noted that the Section 10A read with proviso not only suspends the filing of applications but also extends the prohibition perpetually. It could be argued that no remedy would be available to creditors when a continuing default exists. Hence, it could be seen that a creditor may not be able to seek remedy under the IBC until and unless there is a fresh default which occurs after the suspension period. A buffer time of six months would determine which companies have or are capable of recovering from the lockdown effect and which are not.
iii) No difference between defaults relating to COVID-19 and non-COVID-19:
The Ordinance takes into consideration impact of the novel Coronavirus on the economy as well as the financial markets but Section 10A does not expressly state any difference between defaults which have occurred due to COVID-19 and those because of other factors. Thus, the main aim is to protect the corporate entities from the CIRP proceedings irrespective of the cause.
iv) Alternative remedies:
The Ordinance does not affect other remedies under other statutes such as enforcement, recovery, etc. before the Debt Recovery Tribunal. Similarly, the statutes relating to personal insolvency remains the same and hence the personal recovery proceedings under the IBC would remain available as an alternative remedy. As seen above, it would be possible to proceed against corporate debtor after the suspension period in case of a fresh default and thus involve NCLT and NCLAT in such a situation.
v) Moratorium on term loans:
The Reserve Bank of India had announced that all the banks and NBFCs have been permitted to allow a moratorium period for 3 months on the repayment of term loans. This, in turn, will not lead to a down grading of the credit rating of the borrower. Moreover, the rescheduling of the payments will not be termed as a default.
Global Impact of COVID-19
The outbreak of the novel Coronavirus pandemic has caused trouble for all the sectors globally. The virus has affected everyday life activities at an international level of many businesses. In fact it has started an economic meltdown which has resulted in destruction of many sectors such as tourism, MSMEs, agriculture, etc. No doubt that the Government of various nations have adapted various measures proactively and amended their insolvency and bankruptcy legislations in order to curb insolvency. As seen above, increasing the threshold limit for creditors for filing insolvency cases is the most common one. Nonetheless, there are still a few countries who are yet to make changes in their regimes.
i) United States of America:
In 2008, trillions of dollars of American citizens was torched upon when the financial crisis of 2008 triggered some high profile bankruptcies in the history. A decade post the financial crisis of 2008, the financial order of the world has again tilted due to the existence of novel Coronavirus which lead the big organisations face the similar impact.
The Small Business Reorganization Act (SBRA) became effective of February 19, 2020 when it added a new sub-chapter 5 to the United States Bankruptcy Code. Moreover, it has eliminated some of the Chapter 11 relief which were traditional and costly. Further, it also seeks to provide an economical and faster option for reorganization of total debts – including secured and unsecured – falling within the threshold. The current President Trump also gave his assent to the Coronavirus Aid, Relief and Economic Surety Act (CARES) on 27th March 2020 in light of the pandemic. It is said that this Act is by far the biggest emergency and economic package in their history. It has authorized about $ 2 trillion by the Federal Government and includes loan changes for students, stimulus payments for individuals, unemployment coverage, revised rules for retirement, etc. Furthermore, one of the chapter also allows debtors to modify a plan whenever there is financial hardship including postponement of the payment for seven years.
The Ministry of Law in the nation introduced a bill in the Parliament which offered measures to the businesses as well as individuals who were not able to fulfil their obligations because of the pandemic. The bill seeks to find a method for an organized moratorium so that the obligations are deferred but remain payable at a later date. This provides retailers and SMEs the best way of taking care of cash flows and bouncing back in the business after staying active in this pandemic. The bill has also increased the threshold and time limits which make it difficult for individuals and businesses to be declared bankrupt or insolvent.
One of the most important features in the bill is that the parties will not be allowed to be represented by their lawyers whenever there are disputes between the parties but will be needed to approach via an assessor which would be appointed by the Law Ministry. The accessor would, then, decide the outcome taking into consideration the principle of justness and equitableness without the need for legal fees. Moreover, this decision would be final and not appealable. Furthermore, it also prohibits enforcement of properties, holding insolvency proceedings in the Court, termination of leases, etc. The directors are also relieved from the obligation of preventing their companies from trading when they are declared temporarily insolvent.
iii) United Kingdom:
During the COVID-19 pandemic, the Business Secretary announced package of measures resulting in preservation of businesses and also to extend them support for saving themselves from the disruptions. Indeed it was welcomed by the business sector wherein it ensured revival of efficient entities. The Government has given more weightage to the restructuring aspect under this package. Some of the most important tools is that of giving moratorium for companies for getting some breathing space amidst the pandemic, measures for creditors and suppliers, setting a new restructuring plan, etc.
Moreover, it is expected that the Government would also suspend the provisions relating to wrongful trading temporarily which in turn would give confidence to the directors to continue their trading during this emergency taking into aspect of personal liability. Further, it also gives permission to companies to assess funds from the banks or Government freely.
In light of the Coronavirus pandemic, the German Parliament in the month of March initiated a law in order to curb corporate insolvencies. One of the main measures included implementation of state fund which shall be funded with 400 billion Euros so that it would guarantee the liabilities of the companies. A program for small entrepreneurs and businesses was also available which consisted of liquidity support.
As per the Act, it is not only the duty of the creditors to apply file a case for insolvency but also of managers of a particular company that a case should be filed not later than three weeks once the default has occurred. Another important amendment is that the payments which are made in the course of business during the suspension period is allowed as compared to the pre COVID-19 era wherein the payments that were made by the managers of the defaulted companies were prohibited and they were held liable. Hence, it is of no doubt that this regulation was established for the main purpose of enabling the defaulted companies in ensuring liquidity and continuity in the wake of this pandemic.
As it is rightly said, desperate times require desperate measures. Many lawyers around the globe are preparing themselves. The main priority in today’s world is that of health and welfare when social distancing is the best bet! Moreover, the main aim is to keep the businesses alive who are facing liquidity crisis. It can be seen from the above analysis that the directors are temporarily relieved from their duty of preventing any insolvent trading for any debts which have occurred in the ordinary course of business. The provisions have been relaxed temporarily in order to assure the revival of businesses and to learn from the past.
The economical and legal impacts of the novel Coronavirus is very far reaching. It should be noted that the present unforeseen situation has forced to make various amendments related to the insolvency and bankruptcy aspect. The measures which are adopted by the Government and lawmaking authority of the nation is only a remedy after taking into consideration increasing unemployment, shortage of cash reserves, poverty, disruption in functioning, etc. The underlying goals behind adopting the measures is to not cause any uncertain side effects on the economy and also to protect the interest of various stakeholders as they govern a nation at various levels. The Ordinance, on one hand, provides relief to companies who are affected by the COVID-19 outbreak and the subsequent lockdowns but on the other hand guarantees the proceedings to be held against those corporates who have defaulted before March 25, 2020. Nevertheless, these developments have also given rise to quite a few problems and debates pertaining to the bank guarantee getting invoked during the suspension period, willful defaults on part of the corporate entity not relating to the pandemic, non-fund based activities, non-inclusion of non MSMEs, etc.
It would be safe to say that implications of a particular change are best if observed for a longer period of time due to its nature of uncertainty and unprecedentedness. This can be considered as a second chance or even as a wake-up call for industries to realign themselves and brace for an outcome. One suggestion which can be adopted would be to have a balanced approach that would ensure MSMEs’ future and that the rights of creditors are protected equally. The banking sector of the countries will have to provide for a continuous system of providing liquidity in order to maintain stability for performing their basic functions. If need be, countries may also seek specific interventions from the financial institutions such as the IMF and the World Bank. They can provide loans to distressed corporates. After all it is in our hands to give maximum benefits to the parties and also to negate the effect on the economy of a country.
i) https://www.ibbi.gov.in/ (last assessed on September 04, 2020)
ii) http://www.mca.gov.in/Ministry/pdf/ICLReport_05032020.pdf (last assessed on September 04, 2020)
iii) https://www.shearman.com/perspectives/2020/03/covid-19-changes-announced-to-uk-insolvency-law-and-on-agms (last assessed on September 08, 2020)
iv) https://www.vantageasia.com/singapore-new-insolvency-regime/ (last assessed on September 06, 2020)
v) https://www.mondaq.com/india/operational-impacts-and-strategy/942062/covid-19-and-ibc-unfolding-the-loopholes-in-the-recent-amendments (last assessed on September 08, 2020)
vi) https://www.kirkland.com/publications/kirkland-alert/2020/03/german-covid-19-rescue-law (last assessed on September 06, 2020)
https://www.ideasforindia.in/topics/money-finance/covid-19-right-opportunity-to-strengthen-the-insolvency-and-bankruptcy.html (last assessed on September 05, 2020)  Quarterly newsletter issued by the Insolvency and Bankruptcy Board of India (IBBI) for the quarter October – December 2019  24th March 2020 vide Notification No. REGD.NO.D.L-33004/99  Section 4 provides for the threshold amount which is the minimum amount of default in payment committed by the corporate debtor for it to face a bankruptcy or liquidation proceeding.
 Section 7 allows a financial creditor for initiating a CIRP proceedings; Section 9 provides for a CIRP by an operational creditor and Section 10 refers to a process by the corporate applicant himself
 The IBC Ordinance dated June 05, 2020  In this case, a default which occurred during the suspension period but is still not cured post that period.  Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020  Press Conference dated March 27, 2020  https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&cad=rja&uact=8&ved=2ahUKEwjWiIKI0NnrAhXyzjgGHcXoCnEQFjACegQIBBAB&url=https%3A%2F%2Fwww.restructuring-globalview.com%2Fwp-content%2Fuploads%2Fsites%2F21%2F2020%2F04%2FCOVID-19-Impact-of-Global-Insolvency-Laws-29.04.20.pdf&usg=AOvVaw2icCo5NfXgmEFyNQDOi0Or (last assessed on September 08, 2020)  Chapter 13 of the CARES Act relating to debtors who have already confirmed a plan  https://www.lexisnexis.co.uk/blog/restructuring-and-insolvency/coronavirus-(covid-19)-singapore-insolvency-reforms-covid-19-(temporary-measures)-bill (last assessed on September 04, 2020)  https://www.clydeco.com/en/insights/2020/04/covid-19-uk-prospective-changes-to-insolvency-law (last assessed on September 05, 2020)  Inclusion of short term liquidity support which consisted of non-refundable aids depending upon how many employees were in employment at that particular point of time  Section 15A of the German Insolvency Act  https://iclg.com/briefing/11465-covid-19-update-to-the-amendments-of-the-german-insolvency-act (last assessed on September 04, 2020)
Author Details: Ritwik Potdar (Symbiosis Law School, Pune)