The Covid-19 Mahabharata: Impact on Insolvency Professionals in India

[By Animesh Khandelwal and Surbhi Kapur]

Both the authors are lawyers based in New Delhi.

Introduction 

Pandemics have a potential to be very disruptive, entail a catastrophic effect with a staggering cost on one and all. With Covid-19 being declared as a pandemic, the global community is left helplessly supine with irreparable loss to the lives of the people. All the sectors of the Indian economy have suffered the downturn triggered by this virulent outbreak.

The relationship between the deterioration of human health capital and its effect on economic growth and development is shaping both the regulatory design, response, and implementation thereof. Understanding the severity of this relationship, the Government of India in coordination with the state governments has notified several mitigation policies and emergency declarations. Starting with the enforcement of a nationwide lockdown, making social distancing a norm, several key regulatory reforms have been instituted to alleviate the catastrophic effect of the turmoil caused by this virulent pandemic.

With companies across the world and in India working from home through online resources, manufacturing has been hampered and economies have been hit badly with early signs of a slowdown and possible recession. This may lead to a high rate of default on loans by corporates pushing them closer to a higher possibility of initiation of insolvency proceedings against them. Both the firms as well as the individuals have been reviewing the contractual clauses for performance of their obligations. The importance of force majeure as a legal doctrine to cover the present outbreak of Covid-19 has become contentious.

In this vein, the role as well as responsibilities of an Insolvency Professional (“IP”) in India assumes prominence. In light of the current extraordinary economic situation, it is difficult for the IPs to conduct the corporate insolvency resolution process (“CIRP”) and manage the stressed corporate debtors(defaulting companies) as going concerns. It would be onerous for an IP to ensure the attendance of the members in the meetings of the committee of creditors (“CoC”). The preparation and submission of the resolution plans by the prospective resolution applicants (“PRA”) also seems unviable. The interested resolution applicants may want to pull back or defer their decision on submission of a viable resolution plan. Therefore, the timely completion of various tasks during a CIRP within the timelines specified under the Code seems impractical. Being a creation of the Insolvency and Bankruptcy Code, 2016 (“the Code”) and a manager of the financial distress as such, and currently attributable to the pandemic, an IP is expected to offer workable solutions to steer the corporate debtor (“CD”) through the legal uncertainties into resolution.

Measures initiated by the Government

The government recently announced two important facilitative steps to be undertaken regarding the insolvency landscape in India.

At first the Ministry of Corporate Affairs (“MCA”) increased the threshold for the determination of the default in insolvency matters from one lakh rupees to one crore rupees as the minimum amount of default under Section 4 of the Code. This step was taken to, inter alia, assist and aid the functioning of micro, small and medium enterprises (“MSMEs”), who may be operational creditors, which might face defaults owing to the economic slowdown and unprecedented lockdown. Next in line, the suspension of Sections 7, 9 and 10 (provisions for initiating CIRP) of the Code for a period of six months was announced. Regarding the suspension of initiation of CIRP, the MCA has prepared a proposal for the consideration of the Union Cabinet. Along with this, the Reserve Bank of India (RBI) has also provided for a debt moratorium.[i]

Tribulations being faced by IPs in India

Some of the issues faced by the IPs are outlined as follows:

  1. Human Resource: While most of the employees of the IPs have travelled to their respective homes in adherence to the lockdown, some IPs are finding it difficult to provide a steady income to their team and thus, losing precious team members. This has led the IPs themselves toiling and burning the midnight oil and multi-tasking, thereby increasing their workload and productivity.
  2. Commercial Decisions: The prime tasks of an IP is to run the stressed CD as a going concern and also to ensure that viable resolution plans are presented to the CoC. The IPs are finding it difficult to perform both these tasks due to the state of the economy during the ongoing pandemic. The availability of interim finance too seems a distant remedial measure. On the one hand, the already stressed companies are facing further difficulties in day to day operations, on the other, the PRAs are either not coming forward or withdrawing from the already submitted resolution plans.
  3. Communication and IT: Since members of the CoC are themselves ‘working from home’, the IPs are constrained to organise the CoC meetings via video conferencing. This is raising not just bandwidth issues but also concerns with respect to cyber intrusion, privacy and data breach, espionage and pilferage.[ii] Indian Computer Emergency Response Team (“CERT-In”) has cautioned of the perils of unguarded use of digital platforms, given its vulnerability to phishing and cyberattacks.
  4. Work Allocation: After completion of the pending work in CIRPs, the IPs are not finding much more to be done since new assignments cannot be undertaken.
  5. Timelines under the Code: Regulation 40A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 provides a model timeline for the conduct of CIRP as per the provisions of the Code. One of the biggest issues faced by the IPs could be with respect to adherence to the timelines specified under the Code. Since time and speed are of essence under the Code, disciplinary action may be initiated against the IPs for not following those timelines.

Efforts by the Insolvency and Bankruptcy Board of India (IBBI)

IBBI has been pro-active and taken due consideration of the concerns of the IPs and other stakeholders. It has suspended the enrollment for the limited insolvency examinations till 3rd May, 2020 and has also allowed the Insolvency Professional Agencies (“IPAs”) to conduct the pre-registration courses for the prospective IPs via online mode. IBBI has also resolved the issue with respect to timelines under the Code by notification of amendments in the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

Judicial Rendition

With the Government unequivocally endorsing social distancing measures, to avert any impediments to the continuity of judicial proceedings and hardships to the litigants, the Hon’ble Supreme Court of India in Re: Cognizance for Extension of Limitation[iii], extended the period of limitation for all matters with effect from March 15, 2020 till further orders. Both NCLT and NCLAT have suspended their hearings and decided to exclude the lockdown period from the official duration of the time-bound insolvency process, thereby providing a big relief to the IPs.

Conclusion 

It is foreseeable that the socio- economic impact of COVID-19 on India will be unprecedented. This is evident in the disruption caused to the supply chains, business operations, and manufacturing for most of the sectors. In the face of this crisis, the Government has taken courageous steps in addressing the economic fallout and secure the continuity of business operations. In line with the preventative mandate of the Government and a responsive regulator, an IP is duty bound to manage the CD as a going concern whilst ensuring employment, securing liquidity and cashflow and preserving and maximising its value. Akin to the great war envisaged in the ancient Indian epic, Mahabharata, the task is truly daunting for the IP during this ongoing pandemic.

End Notes

[i] Debt Moratorium provided in RBI’s Statement on Development and Regulatory Policies dated 27th March 2020.

[ii] The Zoom App is a classic example of issues of data breach created through a video conferencing app which was widely used by thousands of people and governments.

[iii] Suo Motu Writ Petition (Civil) No. 03/ 2020- order dated 23rd March, 2020.

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