Delaying the inevitable: On suspension of insolvency proceedings

Restructuring of bad loans will get tardier as the bankruptcy code is kept in abeyance

The government has kicked the can down the road by deciding to keep in abeyance critical provisions of the Insolvency and Bankruptcy Code (IBC) of 2016 till March 31, 2021. To recap, because of the large-scale economic hara-kiri triggered by the COVID-19 pandemic and lockdown, the government had raised the threshold of loan defaults that would spark off insolvency proceedings from ₹1 lakh to ₹1 crore on the day of the lockdown’s announcement — March 24.

It had indicated that if things did not improve by April-end, the suspensions of certain sections of the IBC for six months could be considered to prevent companies at large from being forced into the insolvency process for a ‘force majeure’ default. An ordinance, in June, indefinitely barred the initiation of insolvency proceedings both, voluntarily or by creditors, for defaults arising on or after March 25, 2020, for a period of six months that could be stretched to a year.

When the initial six months of forbearance under the IBC expired, it was extended till December 25. Union Finance Minister Nirmala Sitharaman’s pronouncement now, of a further suspension, would mean the one-year limit permitted by the law is fully used up. The government must make it clear that this is the last such window of respite, even as the necessity for a blanket suspension of IBC at this point in time is not as apparent as it was in the first or second quarter of 2020-21.

Stretching the IBC’s abeyance, for one, does not square up with the government’s proclamations of a firm, V-shaped economic recovery. Finance Ministry mandarins have repeatedly talked up growth prospects by flagging indicators returning to pre-COVID-19 levels, in several sectors. Surely, businesses in those sectors need no longer be sheltered from exits if they are not competitive.

The government, by now, should know which sectors continue to remain in trouble. And if it is concerned about small and medium businesses, it could tweak the default threshold limit a tad higher, while letting bankruptcy processes function again for larger loan accounts. But a catch-all suspension could burden banks further and does not appear to have enthused industry either.

One reason could be that the suspension also cuts off businesses’ ability to voluntarily enter insolvency — for many, post-COVID-19 operations may not seem viable. Denying them an exit route so as to cut their losses, while their assets shed value is a lose-lose proposition for both borrower and lender. A more nuanced approach would have been better for banks, businesses and the economy. Delaying the inevitable would mean greater financial stress ahead, as the restructuring and recovery of bad loans shall get tardier and future growth momentum would be punctured at the cost of understating present systemic stress.

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