Insolvency proceedings: Surge in cases unlikely after suspension is lifted, says FM Nirmala Sitharaman

Finance minister Nirmala Sitharaman on Monday said a surge in insolvency cases is unlikely once the suspension of such proceedings against Covid-related default is lifted, as other modes of debt resolutions are still operational and a large number of companies are expected to get back on their feet by then.

With the passage of amendments to the Insolvency and Bankruptcy Code (IBC) by the Lok Sabha on Monday, decks have been cleared to suspend, through Parliamentary clearance, insolvency proceedings for up to a maximum of one year against fresh Covid-related defaults from March 25. The Rajya Sabha has already approved the IBC (Second Amendment) Bill, 2020. The Bill was brought in to replace an ordinance that was promulgated in June to protect thousands of firms, ravaged by the Covid-19 pandemic, from being dragged into insolvency proceedings.

Replying to a debate on the Bill in the lower House, Sitharaman defended the promulgation of the Ordinance, saying an immediate relief to companies—large and small–was necessitated due to the exceptionally damaging nature of the pandemic and its enormous scale.

As for other modes of resolution, the RBI has already come out with a one-time debt recast scheme, under which as many as 26 sectors, hit hard by the Covid-19, are being eligible for relief. The government is working on a special resolution framework for MSMEs and the work has started on a pre-pack framework as well. Already, the government has raised the default threshold for initiating insolvency proceedings to Rs one crore from Rs one lakh earlier, which will prevent many MSMEs from being dragged to the NCLT.

On Saturday, speaking on the Bill in the Rajya Sabha, Sitharaman had said the aim of the IBC was to “keep the companies as going concern rather than liquidating them”. Since the pandemic has hit every industry, it’s difficult to find suitors if a large number of companies are put on the block for resolution. Hence without a temporary suspension of the initiation of insolvency for Covid-related default, many companies would have faced the prospect of liquidation. The minister, however, made it clear that insolvency applications filed for default before March 25 (when a national lockdown was imposed) are being entertained.

The government had sought to suspend invocation of three sections –7, 8 and 10—of the IBC for fresh default from March 25. These sections deal with the initiation of the insolvency proceedings by financial and operational creditors and corporate debtors.

Citing RBI data, the finance and corporate affairs minister had said in FY19, the recovery under the IBC was as much as 42.5% of the admitted claims, way better than that through other tools, such as Lok Adalat (5.3%) , Debt Recovery Tribunals 10,574 (3.5%) and the SARFAESI Act Rs 41,876 crore (14.5%).

Opposing the Bill, senior Congress leader said: “I took a serious exception to the way one after another Ordinances are being promulgated on the pretext of Covid. What I would suggest the government is that the promulgation of ordinances shouldn’t be taken as a rule. It should be considered as an exception.” He also cited the inordinate delay in the resolution of several insolvency cases.

Data available with the Insolvency and Bankruptcy Board of India show, of the 2,108 ongoing cases as of June 2020, the resolution of as many as 1, 094 has been dragging on beyond the mandatory 270 days, primarily due to legal hassles.