The CIRP, which was suspended in light of the Covid-related stress, covers a one-year period ending March 24, 2021
Experts are of the opinion that there won’t be an immediate increase in the number of cases being filed at the National Company Law Tribunal
After suspension of the corporate insolvency resolution process (CIRP) is lifted after March 24, Insolvency and Bankruptcy Code (IBC)-related activity is likely to go up.
However, experts are of the opinion that there won’t be an immediate increase in the number of cases being filed at the National Company Law Tribunal (NCLT). This is because financial creditors are likely to weigh their options carefully before taking a company through the insolvency process. But a surge in filings for CIRP may be seen as NCLT benches move towards regular operations. Also, there may be more activity then as operational creditors struggle with debt default and look to settle it through the IBC.
The CIRP, which was suspended in light of the Covid-related stress, covers a one-year period ending March 24, 2021. For these defaults, no CIRP can be initiated, according to the amended law.
“The legal issue of interpretation is whether the accounts, which went into default during the suspension period and continue into default after the period of suspension, would be eligible to be taken into the IBC or not. Potentially, they can be, based on fresh default after lifting of suspension. But this is yet to be tested,” said Misha (who uses her first name), partner at Shardul Amarchand Mangaldas & Co.
Insolvency and Bankruptcy Board of India (IBBI) chairman, M S Sahoo, too, has said that while the number of applications for initiating insolvency is likely to increase, the rise is not likely to be significant. “It is because stakeholders are continuing to resolve stress through several options available, including the CIRP. The IBC is one of the many options available and should be the last resort,” Sahoo said. Industry experts say it is the operational creditors who may throng the IBC door in expectation that debtors would give in to the threat of losing their firms and pay up.
“There won’t be a flurry of cases right after suspension is lifted. Defaults for operational creditors are usually at a very small level. With the threshold of default now at Rs 1 crore, a lot of them cannot initiate CIRP. Also, others can use the IBC as a threat for promoters to pay their dues,” said Anshul Jain, partner, PwC India.
Resumption of IBC for corporate insolvency would also mean that creditors would have all options at their disposal to deal with default, stressed assets and to restructure debt. The IBC was itself not under suspension, nor were the filings. Only new filings pertaining to default during the one-year period of suspension of the IBC had been barred. However, the government needs to step up efforts to ramp up the NCLT capacity and infrastructure, said M M Kumar, former NCLT president.
Kumar added, “There have not been any appointments since January 2020, but many have retired in NCLT benches. The staff members are outsourced and infrastructure is poor.”
He said that during Covid, the government may not have wanted to ramp up capacity but added that it was time that these issues were addressed.
Industry is also awaiting the prepackaged scheme (prepack) to be introduced under the IBC framework. This can help in dealing with Covid-related stress. “Introduction of the prepack will certainly help resolve the cases consensually between corporate debtors and creditors and reduce some load on NCLTs,” said Rajiv Chandak, partner, Deloitte India.