In a week from now, the Insolvency and Bankruptcy Code will come back to life. The law has been in suspension since March last year due to the Covid-19 pandemic, and so far there’s been no indication by the government of another extension.
To be clear, the suspension applied only for defaults arising post-March 25, 2020. And it prohibited perpetually the initiation of insolvency proceedings on account of default committed by a company during the suspension period.
Besides IBC, there are several existing and proposed routes of debt restructuring for creditors:
- The inter-creditor agreement framework—popularly known as the Reserve Bank of India’s June 7 circular—that allows for the restructuring of stressed loan accounts.
- RBI’s Covid-19 one-time restructuring scheme- for large corporate accounts, the window to avail the scheme ended on Dec 31, 2020. MSME borrowers have until Mar 31, 2021, to restructure their debt under this scheme.
- A proposed bad bank where a struggling financial institution can put assets it wants off its own books to eventually sell or unwind.
- A pre-packaged insolvency option, at the draft stage presently, which will allow creditors and debtors to work on an informal plan and submit it for NCLT approval.
- A special insolvency resolution framework for micro, small and medium enterprises- the contours of this have not been made public as yet.
Will creditors wait for some of these proposals to be operationalised or are they likely to queue up outside National Company Law Tribunals to file fresh insolvency cases post-March 25? BloombergQuint put that question to experts.
‘A Lot Of Situations Have Been Bubbling’, Says Nilang Desai, Partner, AZB & Partners
Later this year, there may well be a number of applications before the NCLTs basis defaults and disputes in the 12 months. We’re involved in a few that may be filed after the suspension is lifted and there are conversations in other cases. But whether these are just pressure tactics and whether they’ll be admitted by NCLTs quickly- is a question mark.
There are a few issues that could arise.
There could be cases where a borrower has defaulted only during the Covid period and they may start paying April onwards. Typically, the loan documentation will say that for any payment by the borrower, the allocation will be at the discretion of lenders. So, let’s say there was a payment default in September 2020 and the next one is due in April 2021. Any payment that’s made in April, the lender will set it off against the first default and say that the April payment is still outstanding. Therefore, you’ve defaulted post-IBC suspension for which insolvency proceedings can be initiated.
Another situation is a simple one- where a borrower defaulted during the suspension period and continues to after March 26 as well. These can easily be taken to IBC.
On the other hand, you may also find borrowers arguing in such cases that while a new default has taken place post suspension, the cause of the default arose during IBC suspension. And hence the same relief should be extended. It will take some time for these issues, if raised, to be sorted out by the court.Nilang Desai, Partner, AZB & Partners
Then there could be defaults that may not have been called out during the IBC suspension period and proceedings can be initiated for those. For instance, say an Indian company has obligations for an offshore group company’s debt. And there’s a payment default by the offshore company during the suspension period. The onshore obligation wasn’t triggered i.e. called out as default. The offshore creditor could call upon that obligation after March 26, 2021, when the suspension is lifted and on non-payment take the Indian company to IBC. So, the default in India will happen on March 26.
These are some of the issues and arguments that may play out in courts.
‘IBC Will Be The Last Resort For Fresh NPAs’, Says RK Bansal, MD And CEO, Edelweiss ARC
Presently, one of the key things banks are waiting for is the Supreme Court decision in the compound interest or interest-on-interest case. Via an interim direction in September, the Supreme Court had restricted declaring those accounts as non-performing assets which were not categorised such prior to Aug. 31.
Even if the Supreme Court allows banks to categorise these accounts as NPAs, practically speaking, it’s not like IBC proceedings will be initiated immediately. Typically banks will give it 6-12 months, try to resolve things with the promoters. It’s possible that by that time the bad bank framework is in place. So, perhaps, IBC will be the last resort for fresh NPAs. In any case, many of the fresh NPAs are in MSME and retail loans space for which IBC may not be the best route.
The cases which need to move under IBC are anyway old NPAs which are either already before courts or are waiting to be admitted. The constraint is with regards to the infrastructure of NCLTs – which got aggravated during the pandemic- and that problem still continues.RK Bansal, MD and CEO, Edelweiss ARC
For smaller cases, defaults between Rs 1 lakh – Rs 1 crore, and Covid defaults, pre pack insolvency will be the preferred option.
‘Where Are The Buyers?’, Asks Abizer Diwanji, Partner, EY
In the immediate future, given the pandemic, there may not be too many buyers in the market for stressed assets. Perhaps that’s why IBC suspension should get extended, because there aren’t maximisers in the market.
If there’s no extension of the suspension, the first thing that’ll happen is cases in the pipeline waiting to be admitted will see light of the day. The government has been cautious as to what should go to IBC– that approach has translated to banks not pushing too much, courts slowing down. So post March 26, the existing cases will be accelerated – no extension of suspension will be a signal to the judiciary to move faster.
Going forward, resolution would be more consensual. A lot will happen under pre-packs once that’s notified. IBC will be used in very rare instances where restructuring negotiations fail. Lenders would rather engage in a shorter, consensual pre-pack conversation than the IBC process which tends to get litigious.Abizer Diwanji, Partner, EY
And the pre-pack framework, as proposed, will also give the new buyer all the benefits of IBC- for instance, section 32A which grants protection to the company and prospective bidder protection from any prior offences.
Finally, the bad bank will change the resolution landscape. Today, the reason why deals are not happening on a consensual basis is because it’s impossible to work with a disparate set of lenders. That hurdle might get taken care of in a bad bank where the buyer will potentially negotiate with one or two lenders.
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