Implementation of insolvency resolution plan amid COVID-19: A potential to unnecessary litigation

In the wake of unprecedented nationwide lockdown, having the potential to aggravate the financial stress in the country, two prompt and desired steps have been taken by the government and the regulatory authority to address the anticipated implications in the implementation of the insolvency framework.

Firstly, the Central government exercising its power under the Insolvency and Bankruptcy Code, 2016 (IBC) increased the threshold of default amount, to require a company to undergo resolution under IBC, from Rupees One Lakh to Rupees One Crore [1].

Secondly, the regulatory body amended the relevant regulations to exclude the period of lockdown while calculating the period within which a company is required to be resolved under IBC [2]. While the former takes care of any fresh action against a company which might not be able to clear its dues during this unfavourable period, the latter takes care of the company which is already undergoing resolution process and seeking bidders.

However, the implementation of resolution plan which is the desired culmination of every positive step taken under the existing legal framework has been neglected and not addressed at all leading to two problematic aspects, amongst others; firstly, a question on the commercial viability of the resolution plan which was approved without taking into consideration the lockdown and secondly, exposure to criminal actions for not adhering to timelines provided in the said plan [3]. Also, it may lead to corporate death forcing the company into liquidation and jeopardizing the interest of all stakeholders [4].

The business viability of a resolution plan is necessarily premised upon the valuation of the assets of the company under resolution. It would not be wrong to say that the potential financial stress, foreseen by experts across the spectrum, would affect the variables of valuation to its detriment. Needless to say, labour intensive sectors like real estate and power which were already facing slump would be amongst the most affected.

For instance, the resolution plan of a real estate entity involves completion of apartments within a time frame. The mammoth task involving labourers and clearances from various regulatory authorities is definitely on stand-still amid the present lockdown. However, the adverse impact of lockdown would not necessarily be temporally restricted to its duration. Rather, it would, in all probability, lead to contraction of inventory as well as manpower due to friction in production and demand of raw material, and dispersion of labourers.

Further, given the struggling equity market, the lockdown would not only affect the already approved resolution plan but also the plans that are already on table for resolution, for instance, the resolution plan of Reliance Communication Limited, wherein the bidders would probably want to re-negotiate or retract the bid to the detriment of the creditors.

The IBC provides for not only corporate death of the company but also criminal action against the bidder who would be unable to implement the resolution plan. This would affect not only the stakeholders of the debtor under resolution but also the bidder which defaulted only because of the dreaded virus and the lockdown which was a much needed step to contain the spread of the novel corona virus.

In this backdrop, the real issue which warrants the attention of the legislature is the impact of resultant non-implementation of the resolution plan. While the recent amendment in the relevant regulation takes care of the time period till the approval of the resolution plan, no such moratorium or concession has been provided for the implementation of the approved resolution plan.

Of course, the equity being in favour of the bidders, they would, arguably, be able to make a case before judicial authorities. However, if the legislature does not come up with some interim exclusion of the time for the bidders, there would be a floodgate of cases seeking such exclusion of the period arguing the impossibility of implementation of the plan, due to the current lockdown and its effect on the equity market among other sectors of the spectrum. Sadly, such relief would be sought in each individual case, to the detriment of the timelines provided in the existing legal framework. It is not difficult to imagine the bidders pitching for effective implementation of plan at one end, and the errant erstwhile promoters of the debtor company resisting it at other.

Fortunately, this inherent but problematic scenario of litigation on case to case basis can be avoided by providing a moratorium period of a reasonable time span subject to extension, as a policy measure to ease the possible burden on the already overburdened adjudicating authorities. It wouldn’t be unfair to say that a supportive and robust adjustment in law is required to protect the interest of all stakeholders in these testing times of COVID-19.

The author is Anuj Tiwari, an advocate based out of New Delhi who specializes in corporate and insolvency laws. He can be reached at an.anuj@gmail.com.

[1] See S.O. 1205(E) dated 24.03.2020; See proviso to Section 4 for enabling provision.

[2] See Regulation 40C IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

[3] See Section 74 of Insolvency and Bankruptcy Code, 2016.

[4] See Section 33(3) of Insolvency and Bankruptcy Code, 2016.