With more than three lakh confirmed cases and 14 thousand deaths across 190 countries, the Coronavirus disease (COVID-19) pandemic has caused (and continues to cause) unprecedented disruptions in the global political, social and economic environment. India has not remained untouched from this. With almost 500 confirmed cases and the country in lock-down mode to prevent further outbreak, social and economic activities have come to a grinding halt.
The pandemic has forced governments across the world to impose restrictions on working and travel conditions as well as human movement. The severity of the situation requires quick and decisive action from the Government and all sections of the economy to prevent ‘deepening’ of the crisis.
The courts started with due notice of the need of “social distancing” and most courts including the National Company Law Tribunals (“NCLT”) and the National Company Law Appellate Tribunal (“NCLAT”) decided to adjourn all matters earlier this month except the very urgent ones. With lockdowns being imposed currently, NCLTs have since shut down till March 31, 2020 (expected to be extended further) and the NCLAT till further orders.
In another helpful move, the Supreme Court suo moto passed an order extending limitation period for all matters with effect from March 15, 2020 till further orders. This will bring much needed relief to a litigant for whom limitation period was to expire during this shut-down period.
The crisis caused by COVID-19 has given rise to much discussion on the insolvency law response to it. Think tanks and practitioners have considered changes that may be required to insolvency laws to deal with the challenges posed by the pandemic. Suspending the duty of the directors to file for insolvency, providing liquidity measures for distressed businesses, and temporary protection to businesses seem to be the need of the hour.
The Indian Government on Tuesday raised the threshold of default for filing of an insolvency petition under the Insolvency and Bankruptcy Code, 2016 (“IBC”) from Rs 1 Lakh to Rs 1 Crore. Section 4 of the IBC specifies Rs 1 Lakh as the minimum default amount basis which a petition under the IBC may be filed. This section also provides the Government of India the ability to increase this threshold amount to any higher amount up to Rs 1 crore. The Central Government has exercised this power vide its notification dated March 24, 2020 and therefore, petitions under the IBC cannot be filed in respect of payment defaults below Rs 1 crore. This is a welcome move and will help medium and small industries who have been hit the hardest by COVID-19. Having said this, the notification does not specify that the increased threshold is for defaults occurring during the ongoing lockdown period and therefore, from the date of notification, IBC proceedings cannot be initiated for cases where the default amount is less than Rs 1 crore irrespective of the date of default (the limitation period for IBC applications is three years from the date of default.
The Indian Government also indicated that if this grave situation continues beyond April 30, 2020, India will consider suspending Sections 7 (right of a financial creditor to file an application under IBC), 9 (right of an operational creditor to file an application under IBC) and 10 (right of the company to file an application under IBC) of the IBC for a period of 6 months.
Insolvency Law Response to COVID-19 Globally
Australia and a number of countries in Europe have also responded swiftly to the challenges posed by the COVID-19 pandemic to various participants under the applicable insolvency law regimes.
Switzerland, Spain and Australia have temporarily suspended insolvent trading norms i.e. the directors can continue the business of the company despite its cash flow / indebtedness situation on account of impact of COVID-19. Germany has proposed similar relaxations which are expected to be put in place shortly. However, it is likely that continuing the business and incurring further debt without a careful plan to revive the business once the restrictions cease will not protect the directors.
Spain has temporarily suspended creditor rights to file for insolvency. Australia has not entirely suspended the creditor rights but has increased the threshold for statutory demand from Australian dollars 2,000 to Australian dollars 20,000 and has increased the time to comply with such a statutory demand from 21 days to 6 months.
Conclusions and Way forward
While the changes introduced are much needed and welcome, few more aspects, as noted below, may need to be considered to deal with the crisis holistically:
- Priority Financing: Section 5(15) of the IBC was recently amended to provide the Government with the ability to identity certain debts of a company which may qualify as ‘super-priority’ loans in the insolvency of the company. The Government recently exercised such a right to identify debts raised from the Special Window for Affordable and Middle-Income Housing Investment Fund I to be a ‘super-priority’ loan. Some news reports suggest that few banks are offering COVID-19 affected borrowers an emergency line of credit to tide over the crisis. The Indian Government should consider whether super-priority status should be provided to such emergency lines of credit.
- Ongoing Restructurings: Many cases are being considered for restructuring under the guidelines of the Reserve Bank of India dated June 07, 2019 and creditors have signed inter-creditor agreements to agree on the restructuring terms. The guidelines contemplate implementation of the restructuring within 180 days. Therefore, the Indian government may need to consider whether extensions are needed for cases where a restructuring has been agreed upon and is pending implementation. The guidelines also require rating of the company’s debts before restructuring. The credit rating agencies will need to consider if any tweaks are required to the rating rationale in the background of the resilience of the business.
Overall, this is an unprecedented and tough period for businesses and the insolvency regime needs to show flexibility to take into account such factors.
 Order dated March 23, 2020 in Suo Moto Writ Petition (Civil) Nos. 3/2020.