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Finance Minister announces suspension of insolvency proceedings

18 May 2020

As a part of several economic stimulus measures announced by the Finance Minister (FM) to support the economy impacted by COVID-19 pandemic, the FM made the announcement to suspend fresh initiation of insolvency proceedings up to one year, depending on the pandemic situation. The discussions around suspension of admission under Insolvency and Bankruptcy Code (IBC) had been circulating for the past few weeks. The exact wordings and language of the ordinance will have to be studied as and when it is released so as to understand the full impact of this announcement, specifically with regards to cases which have been pending for admission. The broad consensus is that defaults resultant due to COVID-19 are to be exempted from admission to the IBC. It will also have to be seen if Section 10 of IBC is being suspended, which enables a Corporate who has committed a default to self-initiate and file an application for admission under IBC. Even with new admissions under IBC being suspended, there are several other options and mechanisms under which a corporate debt resolution can be achieved.

Financial stress resolution options available with lenders and sponsors

IBC is one of the mechanisms available within the lenders and sponsor community to resolve a financial default situation or financial stress in a Corporate. There are several other mechanisms as mentioned below which continue to be available to both lenders as well as Corporates:

  • Restructuring of debt under RBI guidelines: Corporates under default as well as lenders can restructure debt under the aegis of 07 June 2019 RBI circular for Resolution of Stressed Assets
  • Change of Ownership: RBI permits lenders to implement a change of ownership in financially stressed companies so as to enable capital infusion in the beleaguered entity as well as shift the credit risk to a better rated and well-capitalised corporate. This mechanism can also be utilised by sponsors wherein they can identify strategic and financially strong partners who can take majority stake and management control and help revive business
  • One-time Settlement (OTS): Lenders have board approved Settlement Policies. Sponsors, either through their own sources or with tie-ups with special situation funds, private equity players, etc., can approach lenders to settle the debt
  • Scheme of Arrangement or Compromise under Section 230 of Companies Act, 2013: Corporates continue to have the option of capital realignment and debt restructuring with their creditors vide Scheme of Arrangement or Compromise under Section 230 of Companies Act, 2013

BDO Comments

The suspension of admission under IBC for a period of one year gives an opportunity to sponsors of stressed companies to request for other methods of debt resolution. Since the introduction of the IBC, it had become the chosen method of resolution by lenders on account of it being a court approved process. However, lengthy and complex processes, high costs, litigations and sub-optimal realisation has been resulting in fatigue for all stakeholders including lenders and investors. This could be a good time where financially stressed corporates having viable business models may request lenders for permissible and realistic debt recast. The sponsors should be willing to infuse capital as a part of their contribution and/or give additional collateral comfort to enable the lenders to take prudent decisions. They should also be willing to bring in strong strategic partners and dilute their stake at realistic and acceptable market valuations. These steps will enable Lenders to support corporates with good reputation and track record and help protect interest of all stakeholders.