Fear of Flattening the Business Curve

Context: The blanket suspension of insolvency proceeding pushed through Ordinance for the next 6 months has resurfaced myriads of challenges faced by struggling defaulted companies.

The Ordinance: it suspends the filing of all insolvency petitions (voluntary or by creditors) in respect of any payment default arising on, or after, March 25. 

Arguments supporting the Insolvency and Bankruptcy Code (IBC) Ordinance:

• Unsustainable regime of absolute liability: Payment defaults for reasons entirely beyond the control of corporate entities should not lead to their insolvencies 

• Lack of adequate resolution applicants: to rescue the corporate person who may default in the discharge of their debt obligation.

Arguments against:

• Undermined the salutary purpose of the IBC: in providing resolution in a time-bound manner and maximization of value of an entity’s assets. 

• Negative long term impacts: on the stakeholders and on the creditors if the corporate subsequently goes into insolvency.

• Unclear safeguards for restructuring transactions: Potentially insolvent companies may hurt itself through preferential, undervalued, and extortionate credit transactions out of desperation.

• False sense of security: like nationwide ‘one size fits all’ lockdown has led to the possibility of a surge in insolvency cases with potentially wider consequences.

Recommendations:

• Adopt Rule of Reason:  The Ordinance could have adopted reasoning as a tool to link the actual cause of insolvency with COVID pandemic and exempting those cases from proceedings.

• Suspension of Section 29A of IBC: to allow promoters to participate in the insolvency resolution of their companies. This would ensure the early identification of potential insolvency.