What is IBC?
Insolvency and Bankruptcy code (IBC) was introduced in 2016. This was done to tackle the problem of massive Non Performing loans (Bad Loans) in the banking system. This made it easier for creditors to get their money from defaulting firms.
It was hailed as a major reform in India’s banking system.
Suspension of IBC provisions:
In an effort to provide relief to companies suffering the impact of Covid IBC has been amended wherein insolvency proceedings against a debtor for a default occurring on or after March 25, for a period of six months (can be extended upto one year) have been suspended.
The idea that Covid led lockdown has resulted in an abnormal situation and companies should be helped to ride out this phase. That there might be a lot of companies which otherwise were doing normal might be pushed to bankruptcy and the move is to help them.
The amendment suspends initiation of insolvency proceedings plea by a financial creditor (given financial loans) or operational creditor (supplier, employee or workman) and that a corporate debtor can’t file for bankruptcy himself.
That no insolvency proceeding will be filed for defaults arising on or after March 25 for a period of 6 months (can be further extended upto a year).
The government had already increased the threshold for initiating solvency proceedings to Rs. 1 Crore (from 1 Lakh).
Implications:
The concern is about permanent ban on insolvency proceedings against defaults during this period.There is a possibility that some companies could use this route and default on debt which they could have otherwise paid and escape insolvency proceedings. They might misuse the provision.
Wordings of the provision might send a wrong message that there is a lifetime holiday for defaulters during the exempted period.
Also, by suspending the option for companies to file for bankruptcy themselves, the provision takes away the exit option for the companies.
Way Forward:
Policymakers should try and balance the interest of creditors with efforts to help companies ride out the storm.
Restructuring of debt might be a better option than a blanket ban on IBC proceedings.
