The government’s ordinance giving a perpetual holiday from the Insolvency and Bankruptcy Code (IBC) for defaults between March and September has left banks and investors in a lurch as it leaves them with only recovery options which have proven to be ineffective.
Lawyers say that a complete suspension of IBC cases for defaults occurring during the six month period is regressive and takes away the fear of default from promoters. Particularly hit will be investors in market instruments like bonds, external commercial borrowings (ECBs) and trade credits which have recourse only to the delay prone debt recovery tribunals (DRTs).
Moreover, the ill-conceived ordinance could put India back on eyes of international investors who bet on legal frameworks for recoveries and hit fundraising through bond sale.
“A perpetual suspension of a creditor’s right to file insolvency resolution applications for defaults occurring during the 6 month period starting March 25 is excessive. It means that for any default during this period the doors of the IBC are closed. Unsecured creditors anyway don’t have recourse to SARFAESI which leaves them with only civil courts like DRT where the process is painfully time consuming,” said Aashit Shah, partner, J Sagar Associates.
The ordinance passed by the government on Friday said that “no application shall ever be filed” for insolvency proceedings on default on or after March 25. It also has a provision to extend the ban on filing new cases up to one year.
“This move will strengthen the hands of unscrupulous borrowers who may misuse this provision and not payback. It will complicate recovery. Instead of a blanket ban the better thing would have been to let banks take the call after judging the borrower’s ability to pay,” said Rajesh Gupta, managing partner, SNG & Partners.
The impact will be more for operational creditors, foreign lenders and bond investors which depended on IBC for their recovery process. Banks and NBFCs which anyway have to give a six month moratorium to their borrowers until the end of August and another six months until next March to pay off their loans can still escape the clause by accounting for the default after this period.
Bankers say they are still assessing the impact post the moratorium period. “Our legal team is weighing the impact. Anyway because of the moratorium we cannot technically register a default in this period. But how it will impact after six months has to be assessed ” said a senior public sector bank executive.
Lawyers say rather than banning cases altogether they could have given some more time for debtors to pay back before initiating IBC proceedings.
“This will deny creditors, the right to initiate IBC proceedings even if subsequently the debtor is in a position to pay but chooses not to pay. It would have been better to give a grace period for correcting these defaults rather than precluding all proceedings ever based on these defaults,” said Pooja Mahajan, managing partner at Chandhiok & Mahajan.
The new ordinance will negate the fear of law that promoters had to deal with after the IBC was initiated and could stall settlement with banks and other creditors, lawyers said.
