No complete ban on IBC, says IBBI chairman MS Sahoo
The govt has partially banned IBC to give respite to businesses facing stress due to Covid
The Insolvency Bankruptcy Board of India (IBBI) has done a very microscopic keyhole surgery under the Insolvency and Bankruptcy Code (IBC) in light of the Covid-19 crisis and there is no suspension, complete ban or prohibition, its chairperson Dr MS Sahoo said in an ASSOCHAM e-summit on IBC today.
“What was required was to have a well-calibrated middle path and suspend some of the elements,” he said.
Noting that the traditional model does not work at this point of time when every firm, industry, economy and the entire world is under stress, he said: “This called for experimentation that when these twin complementary remedies translated to two competing options — either suspend the operations of the code or let it continue to operate.”
“If you suspend the operations of the code, you will fail to liquidate an unviable firm, this mistake can be rectified in the following quarter or year. But if you operate the IBC in its normal form, this mistake can never be rectified. So rescuing a viable firm is far more important than failing to liquidate an unviable firm during the current times. Both the options have intended and unintended consequences.”
Dr Sahoo said that only those companies will be prevented from being forced into insolvency proceedings which are experiencing stress for the first time only because of Covid and did not have the stress earlier. The stress, he said, could be because of the unprecedented situation, force majeure, etc.
“There is a possibility that a company which never defaulted earlier defaults during Covid on account of some fundamental reason and not because of the pandemic, there could be such a rare case but if we get into such things as to which one defaulted on account of Covid and which one for some other reason then we will simply lose years fighting legal battles, so let such rare case have the benefit but avoid disputes and move on,” said the IBBI chief.
He further said that the ordinance brought in Section 10A that prohibited filing of applications only for the purpose of CIRP, Dr Sahoo said that it did not change the definition of default, it did not dissolve the obligations of the debtors, no other law was touched and even under IBC also every aspect relating to default remains untouched except that one cannot initiate CIRP for a default arising on or after 25 March for a period of six months or such further period not exceeding one year from such date.
Noting that insolvency is essentially an outcome of market forces, he said that insolvency law expects that market should find its own solution. “Of course they need to be facilitated by the law, ecosystem, NCLT, IBBI and others, but essentially we believe that it is an economic problem and it has to be sorted by market participants. The law has to remain firmly grounded to the realities of the market and rescue the firms.”
He also informed that substantial work was going on for having a framework for MSMEs (micro, small and medium enterprises) with some special dispensations, some relaxations without disturbing the basic structure of the Code.
On the committee set up by the government to give a pre-pack framework, he said, “We expect the report of the committee to come by the end of this month. But if this has to be drawn on law and not as per market practice, it will require an amendment in law.”
He also said that work is ongoing on many fronts be it group, cross-border, individual insolvencies and others. “But I think the insolvency law has to remain focussed on basic code, its focus should remain to rescue the company and must continue to serve the economy.”
