Extension Of IBC Suspension A Good Idea To Ease NCLT Backlog, Experts Say
Photographer: Prashanth Vishwanathan/Bloomberg

Extension Of IBC Suspension A Good Idea To Ease NCLT Backlog, Experts Say

As of September 2019, there were 13,000 insolvency applications which had been submitted to various National Company Law Tribunals across the country. Of that, 10,800 applications are still pending admission, according to consulting firm Alvarez & Marsal.

In light of this, suspension of the Insolvency and Bankruptcy Code for six months was a good idea, Nikhil Shah, managing director of the restructuring consultant firm, said.

At the end of September, the Insolvency and Bankruptcy Code, 2016, will be staring at another six-month extension of the suspension. The Ordinance suspended initiation of fresh insolvency proceedings for defaults post March 25, and allowed the government to extend this relief for another six months—till March 2021.

Covid-19 isn’t a situation created by borrowers or promoters but it has obviously impacted their operations and finances, Shah pointed out. And so, for them to lose control and value of their companies isn’t fair, he added.

The suspension was a good idea for the first six months. Whether it should get extended or not, I think is again a function of new cases being admitted so that there can actually be a resolution. But that requires the courts to be working or working virtually and allow for the applications to be admitted. This has been a challenge for some time.
Nikhil Shah, Managing Director, Alvarez & Marsal

RK Bansal, managing director and chief executive officer of Edelweiss Asset Reconstruction Co. Ltd., agreed that the IBC suspension should continue. Even if defaults post March 25 were permitted to trigger insolvency resolution, they would not have got admitted because neither are the courts working nor do they have the infrastructure to admit these cases. The other challenge is finding willing buyers, he said.

IBC will go slow for some more time because of the infrastructure constraints. Also, because of Covid, you may not find buyers or you may not find strategic investors for some of these cases unless the valuation goes down substantially. The buyers have also gotten impacted. If one has to sell, let’s say a power plant or a steel plant, we have to look towards the power producers or the steel manufacturers. Many of them have been impacted too. So, it will take some more time before we can get a regular recovery through IBC.
RK Bansal, Managing Director and CEO, Edelweiss ARC

Given that the impact of the pandemic has extended beyond anyone’s expectations, most likely the suspension will be extended to one year, Bansal said. To resolve stress caused due to Covid-19, the new restructuring scheme announced by the Reserve Bank of India is the only option, he said.

If today a client defaults, in any case banks take time to refer the company to insolvency. It’s not like if today a company has defaulted, we will refer it to IBC within one month. RBI’s scheme has now given a two-year moratorium if all the conditions are met. And that’s anyway the amount of time that goes into taking a case under IBC.
RK Bansal, Managing Director and CEO, Edelweiss ARC

But both Shah and Bansal said that the government should lift the bar over voluntary insolvency filings i.e. section 10 filings that allow corporate debtors to themselves trigger insolvency proceedings versus creditors taking them to court.

“I think a company should have the right to choose if it wants to admit itself into an insolvency process. A company has the best view in terms of its cash flows and what its liabilities are and how it can service or not service them,” Shah said. “So, if a company chooses to take the drastic step of filing for insolvency, that the government should allow for that.”

Bansal said there might be concerns that companies may take the voluntary insolvency route to use the benefits of IBC—write-off statutory dues, tax liabilities, operational dues but such cases maybe very few.

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