Aggrieved with the present pandemic crisis, the Finance Ministry, as a part of the Prime Minister’s Atmanirbhar Bharat Abhiyaan (Self-Sufficient India Mission), announced several measures to assist the ease of doing business through increasing the minimum threshold for the initiation of insolvency proceedings from Rs 1 Lakh to a whopping Rs 1 Crore. Further, Sections 7, 9, and 10 of the Insolvency and Bankruptcy Code of India, which talk about the initiation and application of insolvency proceedings, have also been suspended for six months, along with an absolute halt on the commencement of any new insolvency proceedings for the coming year. The government claims that such measures shall help provide support to small businesses to run efficiently, without the fear of going bankrupt due to a lack of business because of the ongoing crisis. However, this step’s credibility is questionable, owing to the variety of responses it is likely to get.

As expected, the Micro, Small and Medium Entrerprises (MSME) sector, which was expected to benefit most by this step, does not support the changes.  Due to their inability to continue with their operations, the small and micro enterprises are the worst impacted, but the scheme provides absolutely no assistance to them. Since a majority of the MSME group is yet in the emerging or growth stage – the stages where the risk of running into insolvency is insignificant – they remain unaffected by this immunity against insolvency since such companies often carry minimal debts. Thus, they have a very low risk of running into bankruptcy.

The ministry’s proposal seems to be flawed, since no business plans for bankruptcy before it has matured. So, protecting such businesses from insolvency proceedings is futile. Further, this move only emphasizes business continuity, but does nothing to help the sector remain afloat. Instead of providing immunity against bankruptcy proceedings, had the government proposed tax benefits, refunds, and online declarations, the small enterprise sector would have welcomed the move with open arms. Though their operations have halted due to the lockdown, companies still need to pay fixed costs in the form of salaries, rent, and electricity to continue running.

For now, the move only seems to benefit large enterprises, who often carry humongous debts on their shoulders. Organizations belonging to this segment have already matured, and are therefore obligated to pay back their investors. This immunity against insolvency acts as a safety net for such companies since they have more time to return their borrowings and can focus on remaining at par with their competitors.

Though this insusceptibility to insolvency proceedings was intended to help companies suffering from losses due to the lockdown, it must be noted that just like these companies, creditors are suffering also from the pandemic. Since the market has come to a close, financial institutions had no major source of income, but to recover from their debtors. But now that the ordinance has come into action, such organizations are likely to suffer. This unfitting step will cause an unjust burden on lenders since they are no longer able to recover the wealth which they had advanced to businesses. Their recovery proceedings shall be severely hampered, and their portfolio too shall suffer, due to the enormous non-performing side in their asset books, all for no fault of their own. Since companies have no threat of running into insolvency in the coming year, it is unlikely that paying back their debits would be a matter of priority for them. It is agreed that the entire market is suffering due to COVID-19, but barring organizations from recovering their capital seems to be no solution. The government seems to have erred here, as it has ignored the simple principles of equity, by prioritizing the welfare of profit-making businesses, but has ignored the interests of lending companies.

Additionally, the fact that the government has disguised its implicit backing to large conglomerates under the garb of providing ease of business to MSMEs has two connotations – either the government utterly miscalculated the outcomes of its proposal, or that this is an opportunity provided to some “well-wishing” conglomerates to extinguish their chances of running into insolvency. But the idea that remains constant is that these reforms shall only be of great help to the privileged.

While the proposed step is yet to become an ordinance, it is likely that it shall soon get Presidential approval and come into action, but its efficacy is yet to be tested by the market.

For more on COVID-19, see our special coverage.

Prateek Singh and Ritik Kanoujia are first-year students of National Law University, Jodhpur. 

Suggested citation: Prateek Singh and Ritik Kanoujia, Indian Bankruptcy Reforms Under COVID-19: A Reform for the Privileged?, JURIST – Student Commentary, May 27, 2020, https://www.jurist.org/commentary/2020/05/singh-kanoujia-reform-privileged  

This article was prepared for publication by Brianna Bell, a JURIST Staff Editor. Please direct any questions or comments to her at commentary@jurist.org