In its approach to the IBC, the government was right | Analysis – analysis
An impending suspension of the Indian Bankruptcy and Insolvency Code (IBC) was widely reported until recently. For companies in default of the national blockade, such a suspension made perfect sense, but speculation about a general suspension of all IBC insolvency admissions fueled concern in global insolvency circles.
The announcements by Finance Minister Nirmala Sitharaman are relieved, although some ambiguity persists. His statements related to IBC focused on (i) the impact of the pandemic and the blockade on companies, and (ii) a review of the definition of “non-compliance” under the IBC to suspend the “new start” of Insolvency based on coronavirus disease (Covid-19) related default values. The government’s intention appears to be a limited suspension of “new” insolvency cases, which prohibits admission due to pandemic-related breaches. This will avoid potential difficulties of a general suspension and underscores India’s commitment to credit reforms.
In order not to derail the progress of the reforms, the criteria for the suspension of new admissions should not be open to interpretation or manipulation by the debtors. Given that an existing default is the central criterion for insolvency admissions under IBC, and given the impact of the blockade, the government may be contemplating the suspension of insolvency admissions based on noncompliance that occurs after the blocking. Such a clear and practicable delimitation would keep IBC admissions under control and yet allow admission based on pre-closure defaults.
The announcements also referred to suspension for up to one year. Such a fixed-term exemption is reassuring. It will allow borrowers affected by the pandemic the opportunity to recover or attempt to restructure beyond the inappropriate prescriptive limits of the current IBC process. It will also ease the burden of insolvency courts with limited capacity and provide an opportunity to refine the Code or regulations to better meet the changing needs of the day.
Meeting the aspirations of Indians (two thirds of them are under 35) requires sustained and high economic growth. This crucially depends on the consistently priced and consistent supply of credit. Since 2015, a series of inspired reform measures have transformed India’s reputation as a credit jurisdiction. Almost all the key actors in the effort (the government, the Bankruptcy Law Reform Committee, the Joint Parliamentary Committee for IBC, the Bankruptcy and Insolvency Board, the National Company Law Courts and, most notably, the Court Supreme) have managed to remarkably highlight India. Pariah credit scheme of the past. We now take for granted results that were unthinkable just three years ago, such as IBC transfers from giants like Bhushan Steel and Essar Steel.
Remarkably, however, the transformation of India’s credit regime remains a victory in the making. Much remains to be done to achieve better insolvency results, including broader participation and market-driven offers in the insolvency process. In this context, the nuanced approach the government appears to have chosen will reinforce India’s reputation as a jurisdiction that takes creditors and investors’ rights seriously. It will also reinforce the high ground that Prime Minister Narendra Modi’s government has gained through its resolute and smart reforms.
There are four reasons why the calibrated IBC suspension, rather than a general suspension, is positive.
First, a general suspension would have frustrated the battle for better insolvency results. With the new law and current courts, jurisprudence has been created for decades in the past three years. The system is only now evolving to restructure companies with the participation of new management teams, response experts and capital providers. Distressed investors are also trying to help modulate inflexible resolution practices and adapt to the idiosyncrasies of historical banking regulation. A general suspension would have dealt a blow to the new insolvency regime preparing for takeoff.
Second, maintaining a reasonable flow of new cases based on pre-Covid-19 defaults will avoid destabilizing a nascent insolvency ecosystem, which incorporates law, finance, and business. If IBC’s new activity stagnates, investors, lawyers, restructuring consultants, etc., who have chosen to specialize in insolvency, can redirect their efforts, leaving the system’s capacity dissipated.
Third, a general suspension would have revitalized errant borrowers. To equate those defaulters with borrowers who have so far been executed by the pandemic, is contrary to logic. Enabling insolvency transfers from such borrowers has been highly responsive and responsive, as evidenced by Section 29A offer eligibility restrictions that prioritize long-term benefits for the entire system and sacrifice greater immediate recoveries.
Finally, for investors, the limited suspension underscores the political will, vision, and determination that brought IBC to life, rather than invoking fears about the credit regime that the IBC enactment banished. A widespread suspension of such a historic law would have been a throwback to the fanciful theft that defined Indian credit for decades. Investors are paid to be concerned, and they would have found reasons to doubt India’s commitment to creditors’ rights, property rights and the rule of law just as they are encountering excess opportunities elsewhere. .
In this time of economic difficulties, the answer does not lie in leaving IBC aside, but in actively encouraging its application, development and evolution. Just as the world may be shifting towards government-led solutions in the post-Covid-19 era, it can help India find faith in market-led solutions to advance in other jurisdictions and create superior insolvency outcomes.
Ensuring a steady supply of credit at appropriate interest rates is a prerequisite for India’s continued economic growth and the prosperity of the next generation. By maintaining their faith in IBC with only a limited suspension, the Indian government appears to have chosen wisely by letting a winner run.
Anurag Das specializes in global insolvency, distressed debt and salvage capital investments, and is Managing Director and CEO / CIO of International Asset Reconstruction Company
The opinions expressed are personal.