Insolvency and Bankruptcy Code: A post-COVID view

I. Introduction

The Insolvency and Bankruptcy Code, 2016 1 (hereinafter as “IBC”) has turned out to be a
albeit radical and transformative, but a much-needed overhaul of the nation’s insolvency
resolution and restructuring processes. It has been instrumental in streamlining the once
patchwork procedure, and creating a uniform skeletal framework to deal with sick
companies and insolvent debtors across India.

Beginning with the Provincial Insolvency Act 1920, and the Presidency Insolvency Act 1909,
there existed but a patchwork of statutes wherein the process of insolvency differed in
different States, Provinces and Presidencies. Gradually they were replaced by a triumvirate
of statutes in the Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter as
“SICA”), the Recovery of Debt Due to Banks and Financial Institutions Act, 1993, (hereinafter
as “RDDBFI”) and the Securitization and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002 (hereinafter as “SARFAESI”). Eventually it was further piled
upon by the Companies Act, 2013. The importance of the IBC lies in the consolidation and
streamlining of the process these very many statues sought to regulate.

At the outset, it is merely a skeletal framework meant to guide corporate restructuring in

India. It has been instrumental in efficient allocation and reallocation of resources 2 from a
company on the verge of bankruptcy, efficient use of time taken by such processes, 3 and
making the bankruptcy regime more debtor-friendly. 4 The aim therefore is no more to leech
off the sick company of the money owed to its creditors, but to come up with an
appropriate plan to get the company back on its feet, 5 making it once again a profitable
venture. IBC has so far been successfully in compartmentalizing the commercial and judicial
aspects of the processes. It has reinforced the legal mechanisms pertaining to revival,
liquidation, bankruptcy and debt recovery and consolidated them into an understandable
whole whereby commercially intelligent decision-making is greatly complimented. It
achieved this by moving from a “debtor in possession” approach to a “creditor in
possession” approach. As a result, it has starkly improved India’s ranking in the Ease of
Doing Business Index.6
1
Insolvency and Bankruptcy Code, 2016, available at https://indiacode.nic.in/handle/123456789/2154?
view_type=browse&sam_handle=123456789/1362.
2
Statement of objects and reasons, Insolvency and Bankruptcy Code, 2016.
3
Statement of objects and reasons, Insolvency and Bankruptcy Code, 2016.
4
Government of India, The Report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design ,
2015, available at http://ibbi.gov.in/BLRCReportVol1_04112015.pdf.
5
Government of India, The Report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design,
2015 available at http://ibbi.gov.in/BLRCReportVol1_04112015.pdf.
6
Garg, P., Jhunjhunwala, R. and Datta, S., 2018. Evolution of insolvency and bankruptcy code, 2016.
As such IBC is a law which is in constant and gradual development. The Insolvency and
Bankruptcy Board of India (hereinafter as “IBBI”) has been very prompt in pushing out
notifications, clarifications and amendments to the IBC from time to time. As a mere skeletal
framework, it becomes easier to fill gaping holes in the procedure whenever a problem
arises, either out of commercial practices, judicial interpretations, or economic changes.
Resultantly, how IBC deals with prompt and sudden changes in the economy is more outset
and visibly practical than other laws. The present article undertakes a non-doctoral analysis
of the potential state of IBC laws post a pandemic-like situation, such as the one we are
facing caused by the inundated spread of the Novel Coronavirus Disease 2019 (hereinafter
as “COVID-19”). 7

We briefly discuss the effects of COVID19 on the insolvency and bankruptcy infrastructures
in place, and how has it affected the companies. Thereafter, we undertake a discussion of
some developments the IBBI came up with amending and clarifying the applicability and
adaption of the IBC to the present scenario, along with some judicial developments. Lastly,
the paper puts into perspective what these developments may entail once the pandemic is
sufficiently dealt with by the nations of the world.

II. Effects of COVID-19

COVID-19 has adversely affected all the economies of the world. 8 No business undertaking
or commercial activity has been unaffected by this deathly contagion. With no sight of a
vaccine in near future,9 all the governments of the nations have resorted to mandatory
orders of social distancing to be undertaken by the citizens. Pursuant to that, India
announced a 21-day lockdown on 25 March 2020, which was eventually extended to 31
April 2020, and then to 17 May 2020 by the Central Government. In this period, there is a
nationwide lockdown essentially bringing the entire nation to a halt.

With the amount of uncertainties involved, it is impossible to accurately assess its impact on
Indian businesses, but it’s a unanimous opinion of all economic pundits that COVID-19 shall
change the world’s industries forever. For better or for worse, that depends on our ability to
deal with the pandemic in terms of our economic and social policies. The Reserve Bank of
India (hereinafter as “RBI”) announced a debt moratorium, and a number of relief packages
were announced by the Finance Ministry. On that account, even the courts of India are
social distancing and even National Company Law Tribunals (hereinafter as “NCLT”) and
National Company Law Appellate Tribunals (hereinafter as “NCLAT”) have closed down until

7
World Health Organization, 2020. Coronavirus disease 2019 (COVID-19): situation report, 72.
8
World Health Organization, 2020. Coronavirus disease 2019 (COVID-19): situation report, 72.
9
Le, T.T., Andreadakis, Z., Kumar, A., Roman, R.G., Tollefsen, S., Saville, M. and Mayhew, S., 2020. The COVID-
19 vaccine development landscape. Nat Rev Drug Discov.
31 March 2020 which was later extended. 10 As such, the pandemic is only expected to
increase the already overflowing courts of NCLT with cases of insolvency, bankruptcy and
liquidation.11 In this backdrop, the Finance Ministry announced certain relaxations in
regulation for cases dealing with corporate and tax-related compliances via a notification
(hereinafter as “the Notification”).12

III. IBBI’s safety nets against COVID-19

These measures included some amendments in the IBC too, giving the Indian businesses
some sort of safety to ease their functioning in these uncertain times, giving them adequate
chances to avoid unwanted bankruptcy and closure. The most important one was perhaps
the increase in the monetary threshold for the default before an application can be filed for
the initiation of the Corporate Insolvency Resolution Process (hereinafter as “CIRP”). It was
increased drastically from the initial INR 1.00,000 (one lakh) to a whopping INR 1,00,00,000
(one crore),13 with immediate effect. Hence, the thresholds under Sections 7 (initiation of
CIRP by financial creditor), 9 (initiation of CIRP by operational creditor), 10 (initiation of CIRP
by the corporate applicant) of IBC were all increased. While the retrospectivity of the
notification is still questionable and will have to be decided by a judicial proceeding or a
legislative clarification, the increase in threshold was a welcomed move.

Another declaration in the Notification was the announcement of the suspension period of 6
(six) months if the lockdown continues beyond 30 April 2020, 14 which it inadvertently did. In
the said period, Sections 7, 9 and 10 of the IBC would remain suspended.

In a case of judicial outreach, the Supreme Court took suo moto cognizance of the effects of
COVID-19 on the economy and ordered an extension of limitation period of filing petitions in
courts and tribunals across the country with effect from 15 March 2020 15. It has also bene
settled that National Company Law Tribunals (hereinafter as “NCLT”) and National Company

10
Press Trust of India, COVID-19: NCLT shuts down all benches across India till March 31, dated 23 March 2020,
available at https://www.business-standard.com/article/pti-stories/covid-19-nclt-shuts-down-all-benches-
across-india-till-march-31-120032300718_1.html.
11
Becker, B., Hege, U. and Mella-Barral, P., 2020. Corporate Debt Burdens Threaten Economic Recovery After
COVID-19: Planning for Debt Restructuring Should Start Now. VOX CEPR Policy Portal, 21.
12
Press Information Bureau, Finance Minister announces several relief measures relating to Statutory and
Regulatory compliance matters across Sectors in view of COVID-19 outbreak, dated 24 March 2020 available
at https://pib.gov.in/newsite/PrintRelease.aspx?relid=200639.
13
Press Information Bureau, Finance Minister announces several relief measures relating to Statutory and
Regulatory compliance matters across Sectors in view of COVID-19 outbreak, dated 24 March 2020 available
at https://pib.gov.in/newsite/PrintRelease.aspx?relid=200639.
14
Press Information Bureau, Finance Minister announces several relief measures relating to Statutory and
Regulatory compliance matters across Sectors in view of COVID-19 outbreak, dated 24 March 2020 available
at https://pib.gov.in/newsite/PrintRelease.aspx?relid=200639.
15
Supreme Court of India, In Re: Cognizance for extension of limitation, dated 23 March 2020 available at
https://images.assettype.com/barandbench/2020-03/edcda9a6-fc17-4036-823f-
ae591bc8536c/In_re_cognisance_of_extension_of_limitation_order.pdf.
Law Appellate Tribunals (hereinafter as “NCLAT”), can further relying on this decision of the
Apex Court, increase the 330-day time limit given to wrap up any CIRP, in the case of
Committee of Creditors of Essar Steel India Limited Vs. Satish Kumar Gupta & Ors. 16

IV. A post-COVID-19 IBC

It should be a no surprise that the upcoming year would be one of financial distress for
businesses all over the world, and a soon courts will be choked full of pending cases. IBC’s
track record in that regard has been exceptionally bad, with over 2,000 cases still not
concluded even after the extension of deadlines17. The stipulated time limit is taken as an
elastic cord by the Council of Creditors. In the wake of this pandemic, the process of
valuation of businesses, disinclination of investors to invest in the market, and slower
adjudication of arising everyday disputes is already an acceptable roadblock. In that regard,
it is important that a sense of entrepreneurial and managerial skills is imbibed in the
resolution professionals and other parties involved, to keep the day-to-day disputes at a
minimum. This would be one of the major and foremost challenges the IBC is likely to face in
a post-COVID-19 era. A possibility could be finding a way of attaching the fees of resolution
professional (hereinafter as “RP” or “IRP”) to the performance.18 Even an independent
checker can be mandated to be hired to assess the performance of the IRP in the attempt of
developing a system of checks and balances.19

Additionally, there needs to be a limit on how much work-load a person can pick up. Hence
an upper limit on how many such CIRPs one individual can be involved in, as an RP
simultaneously, needs to be fixed. This needs to be complimented by an increase in the
number of judges in various NCLTs and NCLATs 20 to account for the increased workload in
the post-COVID-19 era. This should be supplemented by developing a sophisticated
infrastructure for online filing of petitions in the court. This push of moving towards an
online environment and facilitation of adjudication of disputes 21 might be the biggest
change that this pandemic brings about in the IBC regulatory environment.

As far as the Notification is concerned, there seems to be no end date to the increase in the
threshold of minimum debt before an application for initiation of CIRP can be filed. Hence, it
is difficult to assess as of now whether the amendment shall continue, or when will it be

16
Committee of Creditors of Essar Steel India Limited Vs. Satish Kumar Gupta & Ors. 84 (IBC) 15/ 2019.
17
Dube, I., 2019. NATIONAL REPORT FOR INDIA. In EXECUTORY CONTRACTS IN INSOLVENCY LAW. Edward Elgar
Publishing.
18
Vig, S., 2019. Insolvency Reforms in India: Policy and Economic Implications. The Journal, 25(1), pp.14-29.
19
Vig, S., 2019. Insolvency Reforms in India: Policy and Economic Implications. The Journal, 25(1), pp.14-29.
20
Mahajan, K., 2019. Inherent Powers of NCLT/NCLAT vis-à-vis IBC. NCLAT vis-à-vis IBC (October 28, 2019).
21
Morrison, E.R. and Saavedra, A.C., 2020. Bankruptcy’s Role in the COVID-19 Crisis. Available at SSRN
3567127.
repealed. There have been previous recommendations for raising the threshold, 22 so it may
just be beneficial if the threshold is permanently raised from the original INR 1,00,000 for
filing of complaints, it would be beneficial in acting as a deterrent to frivolous complaints,
and regulating the number of complaints.

The Finance Ministry should also consider promoting out-of-court settlements between the
debtors and the creditors. While this may be difficult to achieve with companies with
complex management structures and debt recovery systems, it can be a consideration for
smaller companies and ventures which are at a higher risk of facing bankruptcy and
undergoing liquidation.

Another major change a post-COVID-19 IBC maybe looking at is the possibility of imposition
of a debt moratorium.23 According to the RBI, only such major steps would suffice in bringing
the economy up to the par once a state of normalization is reached in the volatile markets. 24

These steps, while seemingly drastic, may still not be enough to be enough to make up for
the economic and human capital loss inflicted upon the world. However, the flexibility that
the skeletal framework of IBC provides, if complimented by timely and effective
developments by the government, may help with minimizing losses, and optimized
rebuilding of the economy.

V. Conclusion

The all-encompassing nature of the COVID-19 spread has been nothing short of dramatic. It
has heavily affected not only the economic and financial standings of nations, but has
caused massive rifts in how politicians and governments view of social well-being and policy
making. It would not be surprising to assume that the worst is yet to come in terms of the
hit taken by the world. Cash flows, revenues and savings, all have been affected, not only of
businesses, but of individuals. Hence, while IBC reforms are recommended, they would only
be helpful if they are accompanied by appropriate social reforms as well. A company cannot
run without a skilled and educated human capital. The toll taken by COVID-19 on an average
employee25 needs to be taken into consideration by the government in coming up with
further reforms.
22
Press Trust of India, Government mulls raising Rs 1 lakh default threshold for invoking IBC: Srinivas, dated 14
October 2019 available at https://economictimes.indiatimes.com/news/economy/policy/government-mulls-
raising-rs-1-lakh-default-threshold-for-invoking-ibc-srinivas/articleshow/71583287.cms?from=mdr.
23
Press Trust of India, RBI may extend moratorium on loans by another 3 months, dated 05 May 2020,
available at https://economictimes.indiatimes.com/industry/banking/finance/banking/rbi-may-extend-
moratorium-on-loans-by-another-3-months/articleshow/75538216.cms?from=mdr.
24
Press Trust of India, RBI may extend moratorium on loans by another 3 months, dated 05 May 2020,
available at https://economictimes.indiatimes.com/industry/banking/finance/banking/rbi-may-extend-
moratorium-on-loans-by-another-3-months/articleshow/75538216.cms?from=mdr.
25
Shan, C. and Tang, D.Y., 2020. The Value of Employee Satisfaction in Disastrous Times: Evidence
from COVID-19. Available at SSRN 3560919.
A post-COVID-19 world would only be equipped to deal with the economic losses if a socio-
economic view of policy-making is undertaken.