The IBC’s provisions have been extensively used by various creditors whose dues were not paid.
What was the threshold limit? Initially, the threshold limit was just Rs 1 lakh and the IBC became an effective recovery mechanism for all operational creditors.
What is the limit now? Just before the lockdown, the finance minister raised the threshold for invoking the insolvency provisions to Rs 1 crore.
This limit was raised to prevent proceedings being initiated against small and medium enterprises.
Possibility of the domino effect after the lockdown is over
After the lockdown, several enterprises, large, medium and small, might not be able to pay their dues, at least in the short-term.
The easiest way for a creditor to recover money is to initiate insolvency proceedings against the debtor company and threaten it with liquidation.
The shutdown of business after the lockdown could have a domino effect.
How would the domino effect come into play? If an auto-manufacturer has shut down its operations, the ancillary units will not get their dues.
This would then lead to non-payment to downstream vendors and service providers as well.
It might take at least three to four months for the situation to stabilise.
Steps that should be taken to avoid the domino effect
Moratorium on the IBC: The most important, and immediate, step that needs to be taken is to have a six-month moratorium on the IBC.
It may be necessary to promulgate an ordinance suspending the prospective operation of Sections 7 and 9 of the IBC so that no fresh petition is filed against a company.
Impact on creditors: While this could hurt some of the creditors, the damage that could be done to the corporate sector by invoking the IBC is likely to be far greater.
A distressed creditor is not without a remedy as he can always approach the civil courts for relief, which will not be so severe on a defaulting company.
If an insolvency petition is filed and the RP appointed, it is difficult to stop the insolvency process.
The IBC requires a financially-stressed company to be taken over by a financially-sound
For example, Essar Steel was taken over by ArcelorMittal and Bhushan Steel was taken over by Tata Steel.
In the current scenario, it will be difficult, if not impossible, for an RP to find a suitable buyer and the only option would be to liquidate the company.
Using the insolvency process to recover dues is contrary to the IBC’s objectives.
The objective of the IBC is not just insolvency but the reorganisation of companies, maximisation of value of assets and the need to balance the interests of all stakeholders. Pay attention to this point.