Bankruptcy courts await a flood of default filings
Fresh filings are likely to resume after the current suspension expires on March 25
NEW DELHI: Bankruptcy courts and corporate turnaround professionals are set for hectic action with the one-year ban on creditor action against companies for payment defaults ending on Wednesday, setting the stage for testing investor interest for assets battered by the Covid-19 pandemic.
While payment defaults in the last one year will remain out of bankruptcy courts for ever, fresh defaults expose companies to action by creditors. With restoration of functioning of the bankruptcy ecosystem in full swing after remaining frozen since March 25 last year, the market for stressed assets and potential deal making under the oversight of bankruptcy tribunals is expected to come back to life.
What will be of key interest to industry players and policy makers would be whether there would be a surge in bankruptcy filings and whether there are enough takers for assets ending up in bankruptcy tribunals. One sobering fact is that as of September last year, of all the 4,008 bankruptcy cases admitted in tribunals, only about 7% could be successfully rescued while over 25% have been ordered to be liquidated although all the efforts under the IBC is to salvage companies in distress wherever possible.
A government official explained to Mint that the government already raised the threshold of payment defaults that triggers bankruptcy action to ₹1 crore from ₹1 lakh last March, which will offer protection to many micro, small and medium enterprises from the threat of bankruptcy action from creditors. The official also said that the maximum suspension of the IBC for defaults during the pandemic under existing law was one year and if any need for further tweaking the law was felt in the coming days, there is always the possibility of making that through an Ordinance. The current thinking, however, is not to extend the IBC suspension further. Giving protection to micro, small and medium enterprises (MSMEs) from slipping into bankruptcy proceedings is a key concern for policy makers as this segment attracts less investor interest than large companies with physical assets.
According to Rajiv Chandak, partner at Deloitte India, one may see a flood of applications to National Company Law Tribunal (NCLT) as the moratorium on referring a case under IBC is lifted. “The government needs to enhance the entire NCLT infrastructure and simplify admission procedures so that stressed companies referred to NCLT can be resolved faster,” said Chandak. As per official data, 63% of the more than 21,000 cases pending with the NCLT benches as on end of January are IBC cases.
The lifting of IBC suspension and Tuesday’s Supreme Court decision not to further extend the loan repayment moratorium beyond end of last August offer banks the much needed clarity in classifying bad loans and in taking bankruptcy action where needed. Indian economy is currently recovering from a massive contraction in the first two quarters of the current fiscal. (ends)