In its approach to the IBC, the government got it right

Instead of a blanket suspension, it went for a calibrated suspension. It will help India gain over other jurisdictions

An impending suspension of India’s Insolvency and Bankruptcy Code (IBC) was being widely reported till recently. For businesses pushed into default by the nationwide lockdown, such a suspension made ample sense, but speculation about a blanket suspension of all IBC insolvency admissions fuelled concern in global insolvency circles.

Finance minister Nirmala Sitharaman’s announcements are thus being met with relief, though some ambiguity remains. Her IBC-related statements centred on (i) the impact of the pandemic and lockdown on businesses, and (ii) a revision of the definition of “default” under IBC to suspend the “fresh initiation” of insolvency proceedings based on coronavirus disease (Covid-19)-related defaults. The government’s intent appears to be a limited suspension of “fresh” insolvency cases, disallowing admission based on defaults related to the pandemic. This will avoid potential pitfalls of a blanket suspension, and underscores India’s commitment to credit reforms.

So as not to derail the progress of the reforms, the criteria for suspension of new admissions should not be open to interpretation, or manipulation by debtors. Since an existing default is the central criterion for insolvency admissions under IBC, and given the lockdown’s impact, the government may be contemplating suspension of insolvency admissions based on defaults occurring after the lockdown had been put in place. Such a clear and practicable delineation would keep IBC admissions in check, and yet permit admission based on pre-lockdown defaults.

The announcements also referred to the suspension being for up to one year. Such a fixed-duration waiver is reassuring. It will allow borrowers hurt by the pandemic a chance to recover, or to attempt to restructure outside the unsuitably prescriptive confines of the present IBC process. It will also ease the burden on capacity-constrained insolvency tribunals, and provide an opportunity to refine the Code or regulations to best serve the changing needs of the day.

Meeting the aspirations of Indians — twothirds of them are below 35 years — requires sustained, and high, economic growth. This hinges crucially on the consistent, and appropriately priced, supply of credit. Since 2015, a series of inspired reform measures have transformed India’s reputation as a credit jurisdiction. Nearly every key player in the effort — the government, the Bankruptcy Law Reform Committee, the Joint Parliamentary Committee for IBC, the Insolvency & BankruptcyBoard,theNationalCompanyLawTribunals, and very notably the Supreme Court — has come through remarkably in remaking India’s pariah credit regime of the past. We now take for granted outcomes that were unthinkable a mere three years ago, such as the IBC transfers of goliaths like Bhushan Steel and Essar Steel.

Notably, though, India’s credit regime transformation is still a victory-in-the-making. Much remains to be done to achieve better insolvency outcomes, including wider participation, and market-driven bids in the insolvency process. In this context, the nuanced approach the government appears to have chosen will bolster India’s reputation as a jurisdiction that takes creditor and investor rights seriously. It will also reinforce the high ground Prime Minister Narendra Modi’s government has gained through its resolute and intelligent reforms.

There are four reasons why the calibrated suspension of IBC, rather than a blanket, across-the-board suspension, is positive.

First, a blanket suspension would have thwarted the battle for better insolvency outcomes. With the new law and courts in place, decades-worth of jurisprudence has been created over the past three years. The system is only now evolving to restructure companies with the participation of new management teams, turnaround experts and capital providers. Distressed investors’ are also trying to help modulate inflexible resolution practices, and adapting to idiosyncrasies of historical banking regulation. A blanket suspension would have dealt a blow to the new insolvency regime readying for take-off.

Second, maintaining a reasonable flow of new cases based on pre-Covid-19 defaults will avoid destabilising a nascent insolvency ecosystem, which incorporates law, finance and business . If new IBC activity were to stall, investors, lawyers, restructuring advisers, etc., who have chosen to specialise in insolvency may redirect their efforts, leaving system capacity dissipated.

Third, a blanket suspension would have re-energised errant borrowers. To equate such defaulters with hitherto performing borrowers pushed into default by the pandemic is inimical to logic. Enabling insolvency transfers from such borrowers has taken great resolve and responsiveness, as evidenced by Section 29A bid eligibility restrictions which prioritise system-wide, long-term benefits while sacrificing higher immediate recoveries.

Finally, for investors, the limited suspension underscores the political will, vision, and grit that brought IBC to life, rather than invoking fears of the credit regime that IBC’s enactment banished. A blanket suspension of such a landmark law would have been a hark back to the whimsy-cum-grand larceny that defined Indian credit for decades. Investors are paid to worry, and would have found therein reason to doubt India’s commitment to creditor rights, property rights and the rule of law just as they are finding a surfeit of distressed opportunities elsewhere.

In this time of economic distress, the answer lies not in brushing 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 may help India to find faith in market-led solutions to gain a march on other jurisdictions, and create superior insolvency outcomes.

Ensuring a steady supply of credit at appropriate interest rates is a pre-requisite for India’s continued economic growth and the prosperity of the next generation. In keeping its faith in IBC with only a limited suspension, the Indian government appears to have chosen wisely in letting a winner run.