Covid-19 is changing the way the world used to work. The factories are getting closed, manufacturing activities are coming to a standstill, supply chains are getting rapidly depleted and companies are facing negative pressure on their cash-flows. The increasing number of the Covid-19 cases is already creating an existential crisis for the country’s MSME sector which is grappled with the falling domestic consumer demand. The timing of this pandemic couldn’t have been worse where Indian companies were already facing so many problems related to economic slowdown which has already created stress for the banking sector on the account of defaults and Non-Performing Assets(NPAs).
It’s somewhat like The Great Depression, the dot-com bubble, and the 2008 financial crisis. Everyone minds are stuck on the same question – “When will things get back to the normal?” If we talk about India where it has crossed more than 1 lakh cases of the Covid-19, The government has taken various measures under the ‘Atmanirbhar Bharat Abhiyaan’ for aiding and easing down the businesses during the COVID-19 lockdown along with various other majors to protect the economically weaker section of the society. The recent step taken by the government on the same lines is the changes being made in the Indian Bankruptcy Code (IBC). The proposed changes in the IBC are aimed to benefit small businesses, resolutions to see a dip.
The Insolvency and Bankruptcy Code (IBC) in 2016, is seen as landmark legislation because it is providing inter alia for the resolution mechanism and also encouraging entrepreneurship while on the other hand, it is giving a strict mechanism for changing the ownership control and winding up of MSMEs and other big corporate houses. The recent changes made in the IBC is a move made by the government for increasing the threshold of filing insolvency applications and a special resolution framework for small businesses which will give some relaxations to the micro, small and medium enterprise (MSME) sectors. The Finance Minister Nirmala Sitharaman has announced that the government has decided to increase the minimum threshold for the applications under the IBC to RS. 1 crore which was RS. 1 lakh earlier. She also announced that insolvency proceeding against fresh defaulters would remain suspended for up to one year and debts related to Covid-19 will also be excluded from the default IBC code for up to one year. She said in her announcement –
“At the moment Ministry of Corporate Affairs (MCA) has extended this by six months and we wish to extend this by another six months. For MSMEs, a special insolvency framework will be notified under section 240-A of IBC”
The basic summary of Section 240-A of IBC talks about applications to this IBC to micro, small and medium enterprise –
- Contrary to anything contained in this code, The provisions of Clauses (c) and (h) of Section 29A shall not apply to the resolution applicant in respect of corporate insolvency and resolution process of any micro, macro, and medium enterprises.
- The Central Government may in the public interest, by notification direct that any of the provisions of this code- a) Not apply to Micro, Macro, and Medium Enterprises. b) Apply to Micro, Macro, and Medium Enterprises, with such modifications as may be specified in the notifications.
So, As per section 240-A, the central government can use its power to issue notifications for excluding the debts related to Covid-19 for a period of one year for the MSME sector. Once the ordinance will come into force after getting the presidential assent, section 7,9 and 10 of the IBC will remain suspended which means the financial creditors, operational creditors and the borrowers can not file an action under IBC.
This is going to give a big relief-for the cash-starved firms and there is also no doubt that this step of the government will give some breath to so many small businesses that are reeling during the nationwide lockdown and facing severe losses. This initiation of the suspension of the fresh insolvency proceedings for one year will likely increase the provisioning of banks. But even before the Pandemic hit the nation the credit quality of the Indian economy deteriorated due to the economic slowdown. Further, this blanket suspension of debts default due to COVID-19 will give a lead to so many unintended consequences. The government has not suggested any parallel approach of the resolution and there don’t seem to be any viable resolution plans for the creditors. There are so many questions that are left unanswered. It can also hamper the recovery of financial institutions post Covid-19 due to the cases of the existing defaults and also in all those cases where the businesses under MSMEs have already been declared NPAs.
The suspension of various provisions of IBC and the relaxation given to MSME will give relief and have the potential to boost the productivity of small businesses and commercial enterprises. They can now concentrate on improving their bottom lines, increasing their profit margins and it will also help them to improve their production cycle which was affected due to the fallen consumer demand.
Now MSMEs will not be required to spend their time and resources in making representations and defending themselves before the NCLT for saving their businesses and assets from bankruptcy. It will also help the judicial infrastructure as the number of cases to be filed will drastically reduce for the time being which is very important considering how the court hearing is affected due to the lockdown as the lawyers are still getting acquainted with the virtual court hearings.
Below is the link of another interesting post, you might be interested in- Future of the M& A deal-making post COVID-19