Govt has decided to increase the threshold for applications under the IBC to ₹1 crore from ₹1 lakh
It plans to bring a special insolvency resolution framework for small businesses
The government’s move to increase the threshold of filing insolvency applications and a special resolution framework for small businesses will give some breathing room to the micro, small and medium enterprise (MSME) sector even as resolution of stressed assets takes a beating.
Finance minister Nirmala Sitharaman announced on Sunday that the government has decided to increase the minimum threshold for applications under the Insolvency and Bankruptcy Code (IBC) to ₹1 crore, from ₹1 lakh earlier. This, lawyers said, would aid small businesses under pressure because of the covid-19 lockdown and even before. The government also plans to bring in a special resolution framework for small businesses, who so far were largely on the same footing as their larger counterparts.
In her fifth and final tranche of announcements on Sunday, the finance minister also said that debts related to covid-19 will be excluded from default under the Insolvency and Bankruptcy Code (IBC), up to one year.
“At the moment MCA (ministry of corporate affairs) has extended this by six months and we intend to extend this by another six months. For MSMEs, a special insolvency framework will be notified under section 240-A of IBC," she said.
Aashit Shah, partner at J Sagar Associates said that the proposed amendments to the IBC will provide respite to the MSME sector that has been the most affected by the pandemic. Shah added that hopefully, the amendments will not impact applications that were filed prior to the lockdown and are still pending admission.
“Although the picture will be clearer after the provisions are notified, I feel the special framework will be more lenient towards MSMEs and perhaps give time for their bankruptcy cases. So far, these companies only had the benefit of exemption under Section 29A that barred defaulting promoters from bidding," said a lawyer who did not wish to be named, adding that the suspension of fresh cases under IBC for one year will also relieve MSMEs of stress arising out of creditor defaults in this period.
The MSME sector, which employs millions of people, is one of the casualties of the ongoing countrywide lockdown that has led to the closure of factories and businesses as the government intensifies steps to contain the covid-19 pandemic. The share of the MSME sector in India’s gross domestic product was 30.3% in FY19, up from 29.7% in FY18, according to data submitted to Parliament on 12 March.
According to Veena Sivaramakrishnan, partner, Shardul Amarchand Mangaldas & Co, as the outcome of covid-19 remains in a state of flux, the government seems to be taking steps continuously to come up with what they feel would be measures to curtail its impact. However, she cautioned that the
suspension of the proceedings for a year will lead to delay in resolutions.
“The insolvency amendments are also on these lines. While the MSME amendments have given some breathing space to the sector, the blanket-suspension of defaults on account of covid-19 could lead to unintended consequences," said Sivaramakrishnan.
She added that questions like why should an entity not refer itself to insolvency, what is the parallel regime of resolution, what is the framework for creditors to come up with a viable resolution plan outside of IBC, continue to remain unanswered. Under IBC, while a creditor can refer a company to the bankruptcy tribunal, a company can refer itself too, seeking resolution of its stress.
Till December 2019, the bankruptcy tribunal has admitted 3,254 companies for resolution under IBC. Of this, resolution plans have been approved for 190 cases, 246 cases have been closed on appeal or review and liquidation proceedings have begun in 780 cases.
Karan Mitroo, partner at law firm Luthra & Luthra said that 0ne would need to see the details and the language of the amendment but the proposed suspension of fresh proceedings under IBC had been a step been keenly followed by corporate India and would provide relief to the corporates who were facing stress due to covid-19. The same is in line with measures taken by several other countries as well, he said.
“Having said that, pro-active measures need to be taken simultaneously to protect the interest of the banks and financial institutions and to provide flexibility to them and the corporates to restructure the debt which has been impacted by covid-19, without negative consequences on the lenders, to ensure that the debt remains sustainable and does not turn into a bad debt," said Mitroo.
Last week, Sitharaman had rolled out the government’s covid-19 economic relief package for the MSME sector and non-bank financiers. Small businesses and non-banking financial companies (NBFCs) are critical to the economy and measures announced to help them with liquidity is expected to provide a fillip to the struggling sector. “Hopefully, the liquidity measures will also ensure their solvency, which is critical for job retention and creation at a time like this," said Sanjay Kirloskar, President, AIMA on the stimulus announcements.(Jayshree P Upadhyay and Tanya Thomas in Mumbai contributed to this story.)