Flattening the bankruptcy curve: Why IBC cases may surge post-lockdown

Two American professors, Kenneth Ayotte and David Skeel, recently expounded in an opinion piece in Wall Street Journal why there is a need to flatten the bankruptcy curve as businesses reel from the aftereffects of the pandemic. A surge in pandemic-triggered insolvency and bankruptcy cases are expected in India in the post-lockdown period. Experts, however, feel just suspending initiation of new cases for a certain period is not enough to safeguard the IBC framework from the onslaught of pandemic-related cases.

“Unless there is activity and effort to revive the corporate debtor, the problem will be aggravated by the end of the suspension period. It will cause greater financial loss to banks and financial institutions,” says Shardul Shroff, executive chairman, Shardul Amarchand Mangaldas & Co.

Shroff is in favour of introducing a new chapter to the Insolvency and Bankruptcy Code (IBC) with temporary provisions. There is a need to develop a long-term finance institution with the help of global forces to build a World Bank-type institution for distressed assets, he says.

“Currently, the World Bank, the Asian Development Bank,  and other global institutions have merely functioned to lend to commercial enterprises or countries for new or continuing investments. They have to now focus on global revival, and managerial expertise in times of crisis, rather than lending,” he adds.

Some experts feel the IBC proceedings could be the means to restructure or revive some fundamentally viable business whose operations and financial balance has been rendered fragile because of the pandemic.

L Viswanathan, partner, Cyril Amarchand Mangaldas, is in favour of deploying the debt restructuring framework under the RBI Stressed Assets Directions. “This framework can be strengthened further to provide for a framework as closely aligned to the IBC as possible,” he says.

Other regulators could recognise this framework and align their regulations with it, he adds. “Strengthening the RBI framework by introducing a pre-pack regime is the need of the hour,” says Viswanathan.

Suharsh Sinha, partner, AZB& Partners, agrees the IBC provides promoters with an effective tool for restructuring mounting debt. “As long as promoters are not 29A debarred and are open to competition from rival bidders, they can effectively use the IBC to reduce the debt burden by filing voluntarily,” he says. Besides, an IBC proceeding gives the company a moratorium on any debt enforcement and the provision of essential goods and services cannot be terminated.

Sinha is of the view the government consider amendments to the IBC to introduce the pre-pack mechanism to enable stakeholders to devise restructuring proposals, which only need formal court approval once the IBC suspension is revoked.

To flatten the bankruptcy curve, Vijay K Singh, senior partner, Singh & Associates, suggests emphasis should be on triggering insolvency proceedings only in those cases where resolution is practicable. “IBC proceedings should not substitute recovery proceedings,” he adds.

Experts, however, differ on the length of the post-lockdown suspension period. While most expect it to last for six months, Singh feels given the overall adverse effect on business, the suspension period must be until March 2021.

Nikhil Shah, managing director, Alvarez & Marsal India, too, feels that the impact of Covid-19 may last for a prolonged period — six months or longer. “Considering this, it would be prudent for businesses to recapitalise especially those that are highly levered,” he says.

Shreya Prakash, a Delhi-based lawyer, suggests the government should try to create a consent-based moratorium on debt enforcement scheme, as has been introduced in New Zealand. “Where a moratorium cannot be agreed upon the government should allow recourse to IBC proceedings,” she adds.