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Stop Fresh Filing In NCLT – Is This The Solution ?

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[This guest post dated 12 May, 2020 is authored by Rohit M Gupta, Advocate, Mumbai. Any query regarding this article can be addressed to him at rohitmgupta@live.in]

During this current unprecedented situation of the Novel Corona Virus Pandemic (“COVID-19”), the Government of India is taking all possible efforts to safeguard the interests of the public at large. The Union Cabinet has recently cleared a proposal from the Ministry of Corporate Affairs to suspend Bankruptcy proceedings against all the Companies by amending the Insolvency and Bankruptcy Code and inserting Section 10A, which will suspend Sections 7, 9 and 10 for six months or until further orders. The said amendment is awaiting Presidential approval.

While the idea seems to be to grant an opportunity to the Companies who have defaulted due to this crisis and not bring them under purview of the Bankruptcy proceedings, the real issue is, whether this suspension really is the appropriate solution?

On the face of it, there is a higher possibility of this amendment being misused by various defaulters for their vested interests. How does one distinguish between someone who has committed default much prior to the onset of the Pandemic in India vis a vis someone who has committed default after the cut-off date.  Under the present circumstances even a Company who has committed defaulted say 12 months prior to the Pandemic, but against whom the creditors have not moved, may be due to negotiations, will also get the benefit of not being proceeded against presently. There has to be a clear mechanism to determine whether a company has actually suffered due to the global pandemic or that it was already in default prior to the onset of the pandemic. In this respect the guidelines issued by the Reserve Bank of India which confirm that protection from declaration of a NPA will be given only if the account was standard as on 1st March 2020 is a better reference point. Thus, a Company who was already classified as a NPA on or before 29th February 2020 will not get any protection. This ensures that only borrowers who are genuinely affected by the Pandemic get the protection. Giving an omnibus protection for six months may not really be the solution. It’s impossible to filter cases and adjudicate whether the cause of default is COVID-19 or not.

As far as the Amendment seeking to suspend Section 10 is concerned, it would be really absurd to do so. An Application is filed under Section 10 when the company itself wants to approach the National Company Law Tribunal (“NCLT”) to seek the restructuring of its debt for its own revival. This is not like an Application filed under Sections 7 or 9 which are filed by third parties against the Company. If the intention is to protect the Corporate Debtor from third party litigation the same can be better achieved by allowing the filing so that the Corporate Debtor is entitled to the moratorium against any action, than by suspending the filing itself. If the company itself is of the view that there is a requirement for judicial intervention so that it can be protected during its revival and restructuring then the amendment seeking the suspension of Section 10 for six months or more at this stage may actually be counter-productive. Section 10 is thus, required to be kept completely out from the amendment.

As far as Applications filed under Section 7 are concerned these Applications are filed by Financial Creditors which generally are Banks and financial Institutions or Asset Reconstruction Companies. Before suspending the rights of the banks to file such Applications, the Government needs to consider that once any company commits default in repayment of its liabilities it will face serious difficulty in raising fresh funding from the Banks. Even if the Banks are restrained from filing fresh proceedings, the same will not have any bearing on the decision of the Banks not to sanction fresh loan or restructure existing loans of a defaulting company. There will not be any fresh funding until and unless some revival or restructuring package is sanctioned by the very same Banks under the aegis of the NCLT. Thus, it is immaterial whether the Banks file proceedings or not, because in the absence of funds from Banks the Company will anyway go bankrupt and close within a period of 6 months to a  1 year. This will be a Bankruptcy without a Court order. Therefore, it is futile to restrain filing fresh applications by the Banks under Section 7 of the IBC. Any such restriction will be of no use and will only delay and prolong the revival or restructuring process of these companies by further six months to one year or in some case may also sound their death knell.

The Government has to take a pragmatic view on this issue. Banks should be allowed to decide whether they desire to approach NCLT for resolution of the case or withhold the same presently. If the Banks in their wisdom decide to file such proceedings they cannot be restrained from doing so. However, the decision should not be left to “one bank” in case where multiple Banks have advanced loans to the entity. It should be based on a majority decision. There is an identical mechanism under the provisions of SARFAESI Act, 2002, wherein if Banks and Financial Institution wish to take any action under the provisions of SARFAESI Act, 2002 they are required to have consent of 60% lenders. Similar, provisions can be incorporated under IBC for the time being. This temporary suspension of Section 7 and filing of the proceedings will only prolong and delay the problem and may be more harmful than helpful.

As far as Applications filed under Section 9 are concerned these are Applications filed by Operational Creditors such as suppliers of material or service. Such Applications can be filed only when there is no pre-existing dispute. It has generally been observed that Applications filed under Section 10 are generally only filed as pressure tactics and several are even dismissed due to the disputes. The payment of materials and services are generally of short term duration and any delay or default in the same can be construed to be as a result of the temporary lockdown or temporary financial crisis that may occur due to the pandemic. Thus proceedings under Section 9, can be suspended or be restricted in a manner similar to the real-estate companies.

This entire process of restraining the Banks and Financial Institutions from taking appropriate steps, which may be called as coercive steps, at this juncture is going to severely impact the Banks and the recovery mechanism as a whole. This will prolong the process of revival of the economy as a whole. As it is the economy is reeling under the huge pile up of NPA’s. The banks are suffering due to the non-functioning of the Debts Recovery Tribunals which are plagued by the lack of infrastructure and huge vacancies and this suspension will add further misery to  the banks who are already suffering on that account. In this scenario, the Government is required to take a balanced and judicious approach whereby not only the defaulter companies need to be protected but at the same time there has to be some protection to the Banks in case they desire to take any such steps.

Disclaimer: 

The opinions expressed by the Author and those providing comments are theirs alone, and do not necessarily reflect the opinions of Daily Law Times Private Limited (DLTPL) or any employee thereof. DLTPL is not responsible for the accuracy of any of the information supplied by the Guest Author. This work is the opinion of the Author. It is not the intention of DLTPL to “malign any organization, company, or individual and not be considered as Legal Opinion.