An impending suspension of India’s Insolvency and Bankruptcy Code (IBC) was being widely reported till recently. For businesses pushed into default by the nationwide lockdown, such a suspension made ample sense, but speculation about a blanket suspension of all IBC insolvency admissions fuelled concern in global insolvency circles.
Finance minister Nirmala Sitharaman’s announcements are thus being met with relief, though some ambiguity remains. Her IBC-related statements centred on (i) the impact of the pandemic and lockdown on businesses, and (ii) a revision of the definition of “default” under IBC to suspend the “fresh initiation” of insolvency proceedings based on coronavirus disease (Covid-19)-related defaults. The government’s intent appears to be a limited suspension of “fresh” insolvency cases, disallowing admission based on defaults related to the pandemic. This will avoid potential pitfalls of a blanket suspension, and underscores India’s commitment to credit reforms.
So as not to derail the progress of the reforms, the criteria for suspension of new admissions should not be open to interpretation, or manipulation by debtors. Since an existing default is the central criterion for insolvency admissions under IBC, and given the lockdown’s impact, the government may be contemplating suspension of insolvency admissions based on defaults occurring after the lockdown had been put in place. Such a clear and practicable delineation would keep IBC admissions in check, and yet permit admission based on pre-lockdown defaults.
The announcements also referred to the suspension being for up to one year. Such a fixed-duration waiver is reassuring. It will allow borrowers hurt by the pandemic a chance to recover, or to attempt to restructure outside the unsuitably prescriptive confines of the present IBC process. It will also ease the burden on capacity-constrained insolvency tribunals, and provide an opportunity to refine the Code or regulations to best serve the changing needs of the day.
Meeting the aspirations of Indians — two-thirds of them are below 35 years — requires sustained, and high, economic growth. This hinges crucially on the consistent, and appropriately priced, supply of credit. Since 2015, a series of inspired reform measures have transformed India’s reputation as a credit jurisdiction. Nearly every key player in the effort — the government, the Bankruptcy Law Reform Committee, the Joint Parliamentary Committee for IBC, the Insolvency & Bankruptcy Board, the National Company Law Tribunals, and very notably the Supreme Court — has come through remarkably in remaking India’s pariah credit regime of the past. We now take for granted outcomes that were unthinkable a mere three years ago, such as the IBC transfers of goliaths like Bhushan Steel and Essar Steel.
Notably, though, India’s credit regime transformation is still a victory-in-the-making. Much remains to be done to achieve better insolvency outcomes, including wider participation, and market-driven bids in the insolvency process. In this context, the nuanced approach the government appears to have chosen will bolster India’s reputation as a jurisdiction that takes creditor and investor rights seriously. It will also reinforce the high ground Prime Minister Narendra Modi’s government has gained through its resolute and intelligent reforms.
There are four reasons why the calibrated suspension of IBC, rather than a blanket, across-the-board suspension, is positive.
Source- Hindustan Times.