No surge in bankruptcy filings post IBC ban lifting
NEW DELHI: Since the year-long Insolvency and Bankruptcy Code (IBC) suspension was lifted on March 25, India has not witnessed a surge in fresh bankruptcy filings, said experts.
This comes as a respite to policymakers battling the economic fallout of the pandemic.
The trend is also a breather for businesses grappling with the devastating second wave of Covid-19 infections, despite the uncertainties surrounding India’s economic recovery and the financial health of businesses, experts said.
The government’s move to increase the threshold on payment defaults from ₹1 lakh to ₹1 crore in March 2020 for initiating bankruptcy proceedings against companies, and the special resolution scheme for small businesses were key factors to curb the number of bankruptcy cases, they added.
The special scheme allows small businesses and creditors to informally put in place a corporate rescue plan before moving bankruptcy tribunals.
The sentiments surrounding distressed assets, too, discourages creditors from dragging debtors to tribunals. “The pace of filing cases under IBC is same as was earlier and we are not witnessing an increase per se. May be its too early to comment on it. The creditors are also cautious
that going through the IBC route may not give them much benefit than exploring other options,” said Daizy Chawla, senior partner, Singh & Associates, a law firm.
While investor sentiment remains muted, lenders, who are facing manpower challenges due to the pandemic, are also not in a hurry to initiate legal proceedings.
Karthik Natarajan, partner, Bhuta Shah & Co. LLP, a consultancy, said expectations of a surge in fresh bankruptcy filings once the IBC suspension was lifted were high. “But it appears no sharp increase in filings is taking place. One reason is that people prefer out of court settlement in such matters to avoid going through the rigors of insolvency proceedings.
Another reason could be the low turnout of personnel at banks and non-banking financial companies owing to the on-off nature of lockdowns. This may be delaying policy decisions,” he added.
Natarajan said there is an element of empathy as in debtorcreditor relations, as creditors understand the genuine hardships faced by businesses during a pandemic.
With local restrictions on mobility across states disrupting economic activities, and increasing the uncertainties for businesses, on May 5, the Reserve Bank of India (RBI) allowed lenders to offer a limited window to small borrowers for restructuring loans while classifying the same as ‘standard’.