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Economic package: No fresh bankruptcy filings for a year, some provisions of Companies Act decriminalised

A majority of the announcements made today are repeats of earlier proposals or a repackaging of old schemes and announcements.

Written by Karunjit Singh , Aashish Aryan | New Delhi | Updated: May 18, 2020 2:20:02 am
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In the last tranche of the COVID relief package announced by Finance Minister Nirmala Sitharaman Sunday, changes to the Insolvency and Bankruptcy Code (IBC) as well as the Companies Act were proposed to help small and medium businesses. As part of this, she said debt defaults “related to the virus” will be excluded default and there would be no initiation of fresh insolvency cases for up to one year, “depending upon the pandemic situation”. Apart from changing the norms for triggering of insolvency, the minimum default threshold to initiate proceedings under the Insolvency and Bankruptcy Code (IBC) has been raised from Rs 1 lakh to Rs 1 crore, an attempt aimed at giving relief to MSMEs. The norms for which defaults will be excluded or from when the one year will be counted have, however, not been announced.

Though the norms are likely to benefit companies which want to pull themselves out of the economic slump due to the ongoing lockdown, it is likely to hamper the recovery proceedings of financial institutions and lead to an increase in the non-performing asset book of the lenders, experts said. A majority of the announcements made today are repeats of earlier proposals or a repackaging of old schemes and announcements.

These include a bevy of measures under the Companies Act, such as the decriminalisation of some compoundable offences under the Companies Act as well as a shifting adjudication of a number of compoundable offences from the National Company Law Tribunal to internal adjudication mechanisms under the Corporate Affairs Ministry. The decriminalised offences include shortcomings in CSR reporting, inadequacies in board reports as well as filing defaults. The FM also noted that seven compoundable offences were being removed from the Companies Act and another five offences would be dealt under alternative frameworks.

Explained

Creditors still have other means of seeking recoveries

The government announcement of suspension of insolvency initiation for up to a year may protect promoters from losing control of their companies but will not prevent creditors from seeking recoveries through other means. Decriminalisation of provisions in Companies Act are unrelated to Covid and had been announced before the lockdown as part of previously planned reforms. Companies still need further relaxations on ordinary compliances that they are unable to meet due to the lockdown.

These changes as well as changes in allowing direct listing of Indian public companies on foreign stock exchanges and lower penalties for one person companies, small companies, producer companies and startups are already part of the Companies Act amendment bill before the Lok Sabha. The Union Cabinet had approved these changes on March 4.

Experts say companies still need a number of relaxations under the Companies Act because of the disruptions due to the Covid-19 pandemic. Ankit Singhi, partner at law firm Corporate Professionals, said there were many compliances which companies needed relaxations on including on the timelines of transferring unclaimed dividends to the Investor Education and Protection Fund as the registrar and transfer agents who are needed to record the transfer of shares were not fully operational.

Most of the changes announced under IBC have been either already announced or have been in the works for some time now. For instance, the minimum threshold for initiating proceedings against a company under IBC has been raised from Rs 1 lakh to Rs 1 crore, Sitharaman said.

The government had announced the same measure nearly two months ago on March 24, when it had raised the minimum financial limit for triggering insolvency by the same quantum. The finance minister had also announced at the time that the government would consider suspension of initiation of insolvency for a period of six months at the time.

“At the moment, I think the MCA has extended it to six months. We intend extending it by even another six months because even after the lockdown gets lifted immediately you are not sure how much of business will be restored,” said Sitharaman. Similarly, under IBC, the central government has been now empowered to “to exclude COVID-19 related debt from the definition of default”. The norms for the same, however, have not been announced yet.

A new insolvency resolution framework for Micro, Small and Medium Enterprises (MSMEs) will also be announced soon, Sitharaman said. A senior government official said the alternative framework for insolvency resolution in the case of MSMEs may include the introduction of pre-packs in which creditors can come to an agreement with a potential bidder when initiating insolvency proceedings, thus expediting the resolution process.

The official also said that the framework may even include provisions for funding by banks to maintain the going concern status of MSMEs.

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