Businesses cheered moratorium on bankruptcy proceedings – but it may actually hurt them
As a part of its response to the economic turmoil caused by the Covid-19 pandemic, the government of India on June 5 promulgated an ordinance suspending the operative provisions of the Insolvency and Bankruptcy Code for a period of at least six months, from March 25. This move received widespread praise from businesses, which were already reeling under considerable economic stress.
While the Insolvency and Bankruptcy Code was envisioned as a mechanism to help restructure struggling businesses, in practice, it has proven to be a popular and powerful tool not just for restructuring, but also for recovering debt. With civil suits taking anywhere upto 10 years to conclude, suppliers and contractors have managed to use the threat of insolvency proceedings to recover their dues.
Reports suggest that nearly Rs 70,000 crore worth of debt was recovered in 2018-’19, up from about Rs 5,000 crore in 2017-’18. This number was expected to be around Rs 100,000 crore in 2019-’20.
If the Insolvency and Bankruptcy Code was allowed to continue even after the pandemic, banks and suppliers would have rushed to the National Company Law Tribunals seeking to recover their dues. This would only have worsened the financial pressure on businesses.
Overbroad amendment
However, the ordinance suspending the bankruptcy code may not be the panacea Indian business...
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