Stitch in time: Lenders call for suspension of IBC for small firms

As 2nd wave hits mid-sized, small firms, lenders and industry seek a breather

Indian lenders will not rush to send companies to the National Company Law Tribunal (NCLT) for debt resolution under the Insolvency and Bankruptcy Code (IBC), 2016, taking into account the second wave of the pandemic.

Instead, taking suggestions from industry, lenders are planning to ask the government to suspend the IBC process yet again so as to give an opportunity to companies to restructure their finances, said lawyers.

Lawyers said due to restrictions imposed by state governments in some form or the other, the working of the NCLT, National Company Law Appellate Tribunal, various high courts, and the Supreme Court is limited only to urgent matters and that too via video conference.

Lawyers are unable to attend offices, tribunals, or courts. Likewise, litigants cannot go to office or access office records.

“It would be most practical if the IBC is suspended for three-six months initially from April 2021 onwards. The government can then take stock sometime in September-october this year to ascertain if India has recovered from the second wave and if it is possible for tribunals/courts to function. Only if the government feels it is practical to restart courts/tribunals normally can it consider lifting the suspension of the IBC,” said Nirav Shah, partner, DSK Legal.

Along with suspension of the IBC, the government should consider coming up with another round of Covid-19 regulations (similar to those introduced by the Reserve Bank of India last year).

“This will be a great step in ensuring that companies that deserve to be revived don’t go under the hammer of the IBC. Given the big picture of the catastrophe that we are facing, this seems to be most practical,” Shah said.

The second wave is expected to hit mid-sized and smaller companies worse.

“Lockdowns in key markets like Maharashtra and Karnataka will result in balance sheets of many companies getting pounded. Lenders are now postponing sending companies to the NCLT at least for the next two quarters,” said a lawyer who is advising a bank.

In March 2020, the government had suspended the IBC. It was reinstated in March this year but banks were not very keen to send companies to the NCLT. The data released by the Insolvency and Bankruptcy Board of India

Lawyers are unable to attend offices, tribunals, or courts. Likewise, litigants, too, cannot go to office or access office records

(IBBI) shows that as of December 2020, there were 1,717 bankruptcy cases, a drop of almost 12 per cent compared to September 2020.

It’s not just the banks. Industry lobby bodies are also asking the government to suspend the IBC. In April, Assocham asked the government to re-impose the moratorium on taking debtridden firms to the NCLT till December.