How countries are shielding businesses from insolvency in times of Covid-19

Even as India’s central bank – Reserve Bank of India (RBI) – on today announced a slew of measures to offer help to corporate and retail borrowers facing financial stress due to Covid-19 pandemic, it became one of the many countries in the world to take such steps.

The RBI among others announced sanctioning of additional credit facilities, extension of the residual tenure of the loan, conversion of a part of the debt into equity (for corporate borrowers), and allowing banks to restructure loans of small businesses without the risk of asset downgrade.

Earlier, the government of India has suspended for one year insolvency proceedings against debtors who defaulted on repayment due to Covid-19 related stress.

Globally many countries have taken such steps. A report prepared jointly by INSOL International, a world-wide federation of national associations of accountants and lawyers who specialise in turnaround and insolvency, and World Bank Group Global Guide enlists those steps.

InsolvencyTracker.in digs into the report to give a brief account of how countries across the world have responded to insolvency or financial stress faced by companies and people due to Covid-19 pandemic.

Suspension or restriction of creditors’ rights to initiate insolvency proceedings: According to the report (Corporate Insolvency: Responses in Times of Covid-19), several countries, including Italy, Spain, Switzerland, and Turkey, have suspended creditors’ rights to initiate insolvency proceedings.

Some other countries have imposed restrictions on creditors’ rights to initiate insolvency proceedings by by increasing the quantitative threshold required for creditors to initiate insolvency proceedings or  by extending the statutory period to respond to written demands, or both (like in Australia and Singapore).

In certain countries like in Singapore, debtors affected by Covid-19 can apply for a moratorium that will protect them from a variety of legal actions, including the commencement of insolvency proceedings.

Relaxed rules for smaller companies: Like in India, the government has relaxed the norms for insolvency for MSMEs, other countries also have taken similar steps. For example, Brazil has proposed implementation of simplified insolvency rules for small companies. In the United States, the legislature has increased the threshold required for access to the simplified insolvency rules recently adopted through the Small Business Reorganization Act of 2019. Therefore, more companies will have access to these simplified proceedings in times of Covid-19

Suspension of directors’ duty to initiate insolvency proceedings: Several countries, especially in Europe, require corporate directors to initiate insolvency proceedings once a company becomes insolvent.  As a response to the Covid-19 crisis, many countries, including Bulgaria, France, Germany, Luxembourg, Portugal, Poland and Spain have suspended this duty to initiate insolvency proceedings.

Implementation of rescue financing provisions: In times of Covid-19, some countries like Colombia) have decided to implement a regime of rescue financing similar to those existing in the United States and Singapore, where lenders providing new financing to debtors subject to insolvency proceedings receive a priority in the form of an administrative expense. Countries such as the United States and Singapore allow lenders to obtain a ‘super priority’, provided that various requirements are met and the new financing is authorised by the court. In certain circumstances, this super priority can consist of allowing the new lender to ‘prime’ an existing lien or get paid ahead of pre-existing administrative expense claimants.

Suspension of ‘recapitalise or liquidate’ rule:  Several jurisdictions, particularly in Europe and Latin America, require corporate directors to promote the recapitalisation or liquidation of the company once the company’s net assets fall below a certain proportion of its legal capital. This ‘recapitalise or liquidate’ rule has been temporarily suspended in various countries, including Colombia, Italy, and Spain.