COVID and Insolvency Reforms – Trends and Expectations - Sikha Bansal Partner, Vinod Kothari & Company [email protected]COVID-19 is already creating a havoc in all spheres, and its long-term adversarial implications on the economy (and the world economy) is not lightly apprehended. The situation becomes all the more peculiar for businesses which, at the time the disaster hit, were already struggling to get through financial stress. Debt recovery and enforcement actions are nightmares for any person – corporate or non-corporate. Though insolvency proceedings undertake a balanced approach, yet the implications might not be too debtor-friendly (especially, in Indian context). Therefore, in such difficult times, it becomes important to save businesses, which can later save the economy. Economies across the globe have called for a stand-still – ‘as is where is’ – that is, the countries have barred enforcement/insolvency actions against defaults during this period. In this article, we examine the reforms/measures undertaken by various countries (BRICS/US/Australia/some European nations) to draw cues as to how we can adapt to such a situation. The intended outcome of this article is to list out views and recommendations in the light of such global reforms. Besides, readers might be interested in other regulatory issues (and response of the authorities to such issues). We have collated our analysis of such regulatory reliefs 1 . 1. Possible effects of COVID-19 on insolvency proceedings 2 Before we discuss what kind of relaxations might be important for us, in the Indian context, we need to identify various ‘problem areas’ – that is, those stages in the insolvency laws which might be adversely affected by the ongoing crisis. The issues can be listed, depending upon at what stage the proceedings are, as below – 1.1. Incipient proceedings before disaster period 1 See: http://vinodkothari.com/covid-19-incorporated-responses/ 2 Under the Insolvency and Bankruptcy Code, 2016 (‘Code’)
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The debtors would have already defaulted. The creditors might have served the debtors with statutory
notices3 requiring the debtors to either pay or face insolvency; and the debtor would have again failed to
pay. Therefore, the creditor had all the essential requirements fulfilled to initiate insolvency proceeding,
but for the disaster, could not do so.
However, there might be cases where the debtor has defaulted, but the creditor so far has not served the
notice and is still intending to initiate insolvency proceedings against the debtor.
1.2. Ongoing proceedings
A proceeding can be said to be ongoing where –
(a) the application for initiation of insolvency has been filed, and the same is pending
admission/rejection by NCLT,
(b) the order for admission of corporate insolvency resolution process has been passed.
Cases as in (b) are the worst affected in several ways, including by practical difficulties arising in the
processes, e.g. –
Resolution proceedings are to be conducted within strict timelines, where each sub-process is
also required to be completed within minimal timelines – total time limit for corporate insolvency
resolution process is 180 days + 90 days (extension) = 270 days. In any cases, including the time
for litigation, etc., the time limit shall not go beyond 330 days. The disaster is cutting short the
time available in hand.
The corporate debtor is to be managed as a going concern during the corporate insolvency
resolution process period. The units which were otherwise operating fine, might have to suffer
halt in operations – that may substantially impact the going concern status of the entity, as well
as pose liquidity crisis in the hands of the resolution professional. Even well-to-do businesses
might need a considerable time to get up on feet and recover from the effects of this disaster,
and the same might be extremely difficult for entities in corporate insolvency resolution process.
The disaster has hit industries across. With an already stressed market for NPAs, and stressed
units, the chances of resolution applicants turning up with resources would be bleak, even after
the disaster ends.
The creditors can be said to be in a situation of ‘no-where to go’ – they cannot enforce their
security (as for moratorium), and they cannot have a resolution plan (at least, for the time being).
Liquidation processes, too, are time-bound – any extension in the timeline of 1 year would require
NCLT approval. The disaster has already taken away a substantial part of this timeframe.
3 The statutory notice is mandatory for operational creditors and not financial creditors; however, generally, the financial creditors also serve the debtors with a final notice. Further, note that the minimum default limit, with effect from 24.03.2020 has already been raised to Rs. 1 crore.
The sale processes in liquidation or even if there had been schemes of arrangement – all have
been severely affected. The processes are to re-run/resume again. Further, the potential buyer-
base of such assets can also reduce substantially.
There might be several cases pending before NCLT/NCLAT, or even SC.
Besides, the insolvency professional would be in dilemma as to how to go about the different functions
involved in the resolution/liquidation processes – for example, claim verification, invitation for sale,
identification of vulnerable transactions, etc.
1.3. Default during/after disaster period
An entity/an individual is amenable to committing
a default during the disaster period. There might be
several reasons for the same, including a systemic
dependence of entities for supplies and payments,
e.g. – financial stress, halt in operations with no
corresponding relief for expenses such as
employee expenses, overrun in expenses to
manage operations during such difficult times, or
even for technical reasons such as difficulties in
administration and processing payments.
One can envisage the following when it comes to
default during/after disaster period –
S. No. Possible scenario Remarks
(i) No default pre-disaster, but the entity
starts failing obligations in the disaster
period. However, the default is cured
after disaster period.
The same is not a problematic issue, as the default is
cured after disaster.
(ii) No default pre-disaster, but the entity
starts failing obligations in the disaster
period, and the same continues after
disaster period
Most probably, this is because of the effect of
disaster.
Here it would be important to define a cooling
period to –
To allow the effects of disaster to cool down,
and
To disallow entities from misusing
relaxations for an unreasonable period
An important consideration here would be the
sector and the industry in which the entity operates.
(iii) No default pre-disaster and during the
disaster. However, the entity starts
defaulting post disaster.
This might be an indication of percolation of disaster
effect. The financial position of the entity might have
been so effected such that initially, it might have
been possible for the entity to repay obligations, but
the same becomes difficult at a later stage.
Therefore, the legislature can consider granting a
‘cure-period’ to all entities, which is over and above
the ‘disaster period’.
(iv) Existence of default pre-disaster,
continuing default during disaster
period.
This cannot be a case where the disaster is a reason
of default. The inability of the entity might have
been magnified because of the disaster, but disaster
is not the cause of failure to pay.
Therefore, it is important to restrict such cases from
taking benefit of relaxations pertaining to disaster.
1.4. Other important considerations
There can be several other areas which might pose practical issues at a later date. Say, a company enters
into certain transactions during this disaster period, where it has to provide its goods/services at lower
rates, or may be, has to trade at unfavourable terms, even after knowing that the company is in incipient
stress. Can such transactions be later challenged by the insolvency professional as undervalued
transactions or wrongful trading, etc.?
Also, there would be resolution proceedings which had been concluded – the resolution plan would have
been sanctioned and the obligations of the resolution applicant under the resolution plan should have
been triggered; however, the present circumstances may limit the capability of the resolution applicant
to meet the obligations under the repayment plan.
2. Measures adopted in India
Pending announcement of a holistic mitigation remedy, the Indian Government and the judiciary have
undertaken several intermittent measures with respect to insolvency regime, besides addressing the issue
of NPAs, as briefly discussed below –
2.1. RBI moratorium on loan repayments/asset deterioration
The Reserve Bank of India announced a regulatory package on 27th March, 20204, and allowed banks and
other financial institutions to grant moratorium upto 3 months beginning from 1st March, 2020. We have
earlier dealt with micro-issues and queries relating to said measure in our FAQs5.
Recently, the RBI Governor announced measures relaxing ageing provisions as well, that there would be
an asset classification standstill on all accounts, which were standard as on 1st March, 2020, i.e. the 90-
day NPA norm shall not apply – see our quick note6.
These provisions will provide relief to borrowers as enforcement/insolvency actions against such debtors
can be avoided for defaults occurring solely because of the disaster7.
2.2. Suo-moto order by Supreme Court
The Hon’ble Supreme Court has taken suo-moto congnizance of the situation arising out of the challenge
faced by the country on account of Covid-19, vide order dated 23rd March, 20208. As per the order, a
period of limitation in all proceedings in various courts/tribunals across country, irrespective of the
limitation prescribed under the general law or special laws, whether condonable or not, shall stand
extended w.e.f. 15th March 2020 till further order/s to be passed by SC in present proceedings.
2.3. Relief by insolvency regulator
The insolvency regulator, viz., the Insolvency and Bankruptcy Board of India (IBBI) too, issued notification
dated 29th March, 20209 so as to envisage that the period of lockdown shall be excluded for the purpose
of computation of timelines under the regulations for corporate insolvency resolution process. For the
exemption, the activity should not have been completed due to lockdown. Vide press release10 of the
same date, it was clarified by IBBI that the relaxation under the said notification would be subject to
overall time limit provided under the Code.
Similar such notification, dated 17th April, 202011, has been issued with respect to liquidation process.
2.4. Suo-moto order by NCLAT
The National Company Law Appellate Tribunal too, took suo moto cognizance of the unprecedented
situation and ordered on 30th March, 202012 that the period of lockdown shall be excluded for the purpose
4 https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11835&Mode=0 5 See FAQs: http://vinodkothari.com/2020/03/moratorium-on-loans-due-to-covid-19-disruption/ 6 http://vinodkothari.com/2020/04/the-great-lockdown-standstill-on-asset-classification/ 7 As a side-note, it may be noted that ineligibility of a resolution applicant to submit resolution plans under section 29A would depend on the length of time for which the account has remained an NPA. 8 Order: https://ibbi.gov.in/uploads/order/ba13679c3c9779782c75ad2dbd7c65ca.pdf 9 Amendment in CIRP Regulations by insertion of regulation 40C- https://ibbi.gov.in/uploads/whatsnew/be2e7697e91a349bc55033b58d249cef.pdf 10 See https://ibbi.gov.in//uploads/press/92797aa5f444ab7215707834d4821409.pdf 11 See: https://ibbi.gov.in/uploads/whatsnew/4697af9d01b6c12c0816f4be28ea6835.pdf 12 See https://ibbi.gov.in/uploads/order/0fd02d6fd104fcdd63936eb4cb23021b.pdf
Law No. 2020-290 of March 23, 2020 to deal with the Covid-19 epidemic)25.The reforms are applicable
until the expiry of 3 months after the date of cessation of the state of health emergency –
the situation of the debtor has to be assessed as on 12th March 2020 – therefore, if a debtor was
not in state of cessation of payments, but such a state has arisen during the period of health crisis,
it cannot be assigned to judicial reorganization;
duration of ongoing conciliation proceedings automatically extended until such period of 3
months;
the duration of the safeguard and reorganization plans shall be extended;
the president of the insolvency court may extend the time limits imposed on the court appointed
administrator;
the periods relating to the observation period, the plan, the maintenance of activity and the
duration of the simplified judicial liquidation are automatically extended until the expiry of such
3 month period.
Luxembourg
The Luxembourg Government issued the Grand-Ducal Regulation of 25 March 202026. The time limits
prescribed in proceedings before the judicial, administrative, military and constitutional courts are
suspended. Consequently, the 1-month period following the date of suspension of payments (i.e. the date
at which the company was unable to meet its obligations) to submit a bankruptcy petition is also
suspended.
Spain
The Spanish Government has enacted Royal Decree-Law 8/202027 and other pieces of law in response to
the pandemic.
Relaxation has been provided to directors of their obligation to commence insolvency proceedings within
two months of the company becoming insolvent. The measure will last until the state of emergency that
was declared on 14th March 2020 remains in place. If a third party commences insolvency proceedings
against the company while the state of emergency is still in place, the proceedings will be stayed until two
months after the state of emergency has ended.
25 https://www.concurrences.com/en/bulletin/news-issues/preview/the-french-parliament-adopts-an-emergency-law-establishing-a-health-state-of. See also https://www.clearygottlieb.com/news-and-insights/publication-listing/covid19-temporary-french-bankruptcy-law-adjustments 26 See: http://www.legilux.lu/eli/etat/leg/rgd/2020/03/25/a185/jo 27 https://www.boe.es/boe/dias/2020/03/18/pdfs/BOE-A-2020-3824.pdf