The move to hold the Insolvency and Bankruptcy Code (IBC) in abeyance for one year on account of Covid-19 has an unintended consequence. The suspension is across-the-board and, therefore, disallows companies from filing for voluntary insolvency, apart from barring financial creditors and operational creditors from initiating insolvency resolution against a corporate debtor. There is no logic in preventing a company that cannot be run as a going concern from moving for voluntary bankruptcy. Timely resolution will ensure rapid deployment of resources that are trapped in the insolvent company. This is vital as companies with reserves are on the lookout for acquisitions and to restrain willing targets makes no sense. The government should restore the provision for voluntary insolvency instead suspending the IBC across the board.
Voluntary insolvency petitions accounted for about 10% of the total corporate insolvencies admitted by the courts. Section 10 of the IBC gives the defaulting company the right to file an insolvency petition with the National Company Law Tribunal. Of course, the onus lies on the corporate debtor to prove that her business is unviable, and has suffered losses in the previous financial years. There are many conditions to prevent misuse. Corporate debtors, who are financially stressed because of the Covid pandemic, must be legally allowed to use this route.
Rightly, the government has exempted all Covid-related debt from the definition of default under the IBC, and fortified small enterprises by raising the threshold for invoking insolvency from ?1 lakh to ?1 crore. The code has helped recoveries and brought in a behavioural change in debtors. The government must allow fresh insolvency resolution that will also help revive the economy.