The Indian government has recently decided to temporarily suspend filing of fresh insolvency proceedings under the Insolvency and Bankruptcy Code. This policy change comes at a time when the IMF has warned that Covid-19 epidemic would push emerging markets like India into challenging external funding conditions, rising rollover risks, and increased debt restructuring.

Debt restructuring would be particularly necessary in the aftermath of Covid-19 crisis. During the pandemic, going concern sales may not be possible or desirable. Buyers may not be available in the market. Or, there could be an oversupply of similar assets in the market due to industry-wide factors, pushing down the price for such assets. Therefore, instead of a going concern sale to a new buyer, claimants of an insolvent business may be better off “selling” the business to some or all of the existing claimants themselves. Such a “hypothetical sale” is commonly referred to as debt restructuring.

Indian law presently provides three routes to debt restructuring. First, the RBI’s June 7 Circular, which provides an out-of-court restructuring option. Second, the IBC, that could be used for restructuring under the aegis of the National Company Law Tribunal. Third, a scheme of arrangement under the Companies Act, 2013, could also be used for debt restructuring through the NCLT. The third route is sparingly used in practice. And now with the IBC due to be suspended, the only option practically left is the RBI Circular.

Restructuring isn’t particularly easy under this option. The Circular applies only to RBI-regulated lenders and requires them to enter into an inter-creditor agreement (ICA). Non-RBI regulated entities (such as mutual funds) are not bound to sign the ICA and may not co-operate. Such lenders may therefore hold up the entire restructuring process.

The IBC does not suffer from any such limitations. It applies to all claimants of the corporate debtor, including lenders, whether regulated by the RBI or not. This provides a much more holistic restructuring framework compared to the Circular. Moreover, financial creditors with 66 per cent voting share on the Committee of Creditors (‘CoC’) can cram down the dissenting financial creditors. Therefore, a resolution plan cannot be held up by a minority group of creditors under the IBC. Lastly, the IBC provides a statutory moratorium on recovery actions by all claimants. This assures every creditor that no other creditor can engage in an asset grab race during the restructuring.

In spite of these major advantages, the IBC currently is unlikely to facilitate debt restructuring. This is because it is designed to facilitate going concern sales, not debt restructuring. As discussed above, restructuring is a “hypothetical sale” and need not require submission of resolution plans from third party buyers. Plans by third parties are necessary only for going concern sales. However, the IBC provides the same process for both going concern sales as well as debt restructuring.

Overall, the IBC is meant to facilitate going concern sales, not debt restructuring. In contrast, the Covid-19 crisis calls for debt restructuring, and not going concern sales. This dilemma would not be resolved by suspending the IBC. Instead, deeper reforms to the IBC are necessary to facilitate debt restructuring.

A new chapter could be inserted into the IBC with the following five features:

Allow filing of a restructuring application under the IBC by a corporate debtor which is experiencing financial distress.

Impose temporary moratorium on any suit or legal proceedings against such corporate debtor from the time of filing under the IBC.

Allow a debtor-in-possession regime so that on admission into the restructuring process, the promoter could continue running the business as a going concern, while debt restructuring negotiations take place under the moratorium.

Relax the application of Section 29A to cases under this chapter.

Clearly apply the Absolute Priority Rule to all such restructuring transactions.

Overall, this new chapter in the IBC could help facilitate effective debt restructuring in India in the wake of the Covid-19 crisis.

Datta is a Senior Research Fellow and Marwah is a Research Fellow, Shardul Amarchand Mangaldas & Co. With inputs from Prashant Saran, Sudarshan Sen, and Misha. Views are personal

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