The recent example of Videocon, one of India’s biggest electronic makers, which is forced to stare at the path of liquidation as COVID-19 indicates a severe diversion from resolution of companies to their ruination. The Government of India, in order to to cushion the economic shock which would have been caused to the business corporations reeling under an impending fear of falling into bankruptcy, suspended the initiation of fresh insolvency proceedings under the Insolvency & Bankruptcy Code, 2016 by inserting Section 10A into it, and raised the threshold for creditors for issuing statutory demand for debts arising before the imposition of lockdown, that is 25th March 2020, to a hundred-fold from Rupees One Lakh to Rupees One Crore. Further, it inserted Section 66(3) into the I & B Code which respites the directors of the companies from the stringent provisions of due diligence, which otherwise would have made them personally liable for wrongful trading to provide them with extra time and space to weather the current economic crisis. These amendments come in the backdrop of massive economic jolt caused as a result of the COVID-19 pandemic which has plummeted the global economy, the intensity of which is reflected by the fact that it is contemplated to be the deepest recession since the Second World War, as opined by the World Bank in its June 2020 Global Economic Prospects.
Suspension of Fresh Insolvency Proceedings: ‘Debtor-driven’ Amendments?
The primary reason behind suspension of fresh insolvency proceedings under the I & B Code is absence of ‘white knights’ in the market to rescue the companies staggering under heavy debts, and it seems more prudent to save the viable companies rather than liquidating the unviable ones. As a corollary to the suspension, there is an imminent danger of disturbance in the capital flow in the economy as the suspension of fresh insolvencies as the ‘debtor-driven’ amendment has tied the hands of the creditors from receiving any money from the corporates.
Moreover, due to lack of assurance as to timely supplies, the debtors are finding hard to breathe and survive with such financial distress wherein the entire chain of operations is disrupted. The suppliers are terminating their existing contracts in the wake of delayed payments schedule and the blanket suspension of insolvency proceedings for defaults pertaining to COVID-19, which is contributing to develop a sense of insecurity in their minds.
The Rise of ‘Living-Dead’ Companies and the Way Forward
On the other hand, the suspension has left the companies willing to resolve their debts themselves through insolvency proceedings high and dry. This may result in ‘zombification’ of companies. Despite of stringent actions taken in their insolvency regimes, many countries like Italy did not find it very judicious to suspend voluntary filing for insolvency. However, the Government of India may have found it appropriate for two apparent reasons. Firstly, if the company goes into insolvency, COVID-19 has deterred buyers from making investments to resolve a company, as we have witnessed in the case of Videocon. Resultantly, the COVID-19 induced economic crisis would force the corporate debtor to go into liquidation. Secondly, to stimulate certain out of court restructuring mechanisms, such as active negotiation between the creditors and debtor by means of instalment payments, extensions of performance period for liabilities and changes in contract price, which may prove to be substantial for a country like India. The already clothed NCLT’s are certainly relaxed of some burden and if the alternative mechanisms absorb well in the Indian Insolvency system, then even the much anticipated issue of haystack of new cases post-suspension would be resolved.
Exclusion of Lockdown Period from Insolvency Resolution Process
In order to take care of the procedural delays where insolvency resolution process is under process, the period of lockdown imposed by the Central Government in the wake of Covid-19 outbreak is mandated to be excluded for the purposes of the time-line for any activity that could not be completed due to such lockdown. The periods of lockdown by way of amendments or precedents are excluded and the same are also effectively used by the ‘Prospective Resolution Applicants’ for making effective due diligence, better negotiations, adjusting payment schedules, modifying contractual obligations and conducting transactional audits in an efficient manner. Moreover, it prevents a forced push into liquidation as the exclusion provides time and space for resolution of companies.
Insertion of S.66(3): Gaping at New Opportunities
Albert Einstein once remarked - ‘in the middle of difficulty lies opportunity’, and the same perhaps holds true for the sectors such as travel, hospitality, banking, aviation which have been hit hardest by CoViD-19. Since Section 66(3) has been inserted in the I & B Code to insulate directors from certain accountabilities and wrongful trading, the new investments by the directors in these tough times may be strategically made in their entrepreneurial risk-taking capacities. For instance, the strategic decisions of Lemon Tree Hotels Ltd. which announced the opening up of its new premier property Gujarat, in line with its expansion plans of 2019. Also, the Indian Hotels Co. Ltd (IHCL), promoters of the Taj group of hotels, said its expansion plans remain intact despite the CoViD-19 pandemic. These announcements are made amidst the hospitality sector staring at a revenue loss of ₹90,000 crore in 2020. The growth opportunities are definitely anticipated and that why the investment decisions by the hoteliers are taken. The coffee chain of Tata STARBUCKS is planning out to enter into partnerships with Cafe Coffee Day stores which have faced gross losses due to pandemic. An alliance of hospitality groups created a worker pool to share with a supermarket chain to support the sudden spike in their delivery business, offsetting a decline in lodging.
To conclude, despite the pandemic woes, the directors are now taking all the bigger risks for expansions and mergers and the accountability for the same is relaxed by the novel insolvency norms. Also it is an accepted historical fact that the as M & A during downturn or crisis would always be an important mechanism for corporate and economic recovery and growth as has been seen during the burst of the dot-com bubble in 2000-2002 and the Great Recession of 2007-2009.Certain industries that have been disproportionately affected by the pandemic, such as travel and leisure, transportation, and oil and gas, will thereby now see upticks in M&A activity in 2020 as buyers see opportunities for bargains in these sectors. In this ‘new normal’, deal making in distressed assets is a beacon of hope for the sluggish economy to create synergies and economies of scale.