The government has done micro, small and medium enterprises (MSMEs) a good turn by upping the threshold limit for initiating insolvency proceedings 100 times to ₹1 crore, say experts. Further, Finance Minister Nirmala Sitharaman’s observation that in case the Covid-19 situation persists beyond April 30, section 7, section 9 and section 10 of the Insolvency and Bankruptcy Code (IBC) could be suspended for six months, will assure companies that they will be given time to recover from COVID-related impact.

Section 7 of IBC deals with initiation of corporate insolvency resolution process (CIRP) by financial creditor; section 9 and section 10 deal with the initiation of CIRP by operational creditors and corporate applicants, respectively.

According to Krishnan Sitaraman, Senior Director, CRISIL Ratings, increasing the threshold limit to ₹1 crore will provide respite to micro and small enterprises thatare struggling to come to terms with the Covid-19 lockdown and may default on their payment obligations due to circumstantial exigencies.

“Suspension of section 7, 9 and 10 of the IBC in case of prolonged challenges from the Covid-19 lockdown will do away with initiation of insolvency resolution proceedings against defaulting corporates.

“This will provide a breather for entities who may have defaulted due to the Covid-19 challenges and give them a recovery opportunity once the situation normalises,” he said.

Suman Chowdhury, President – Ratings, Acuité Ratings & Research, observed that the increase in default threshold for IBC applicability from ₹1 lakh to ₹1 crore will act as a protection for MSMEs in the current crisis period.

Referring to the intent to suspend creditor rights on corporate insolvency for a temporary six-month period, Chowdhury said this will arrest any possible move by lenders to proceed under the IBC in a scenario where corporate asset quality has already seen stress due to the continuing economic slowdown, and is being further aggravated by the Covid-led lockdown.

Manish Aggarwal, Partner and Head - Infrastructure M&A, and Special Situations Group, KPMG in India, said: “The need to revisit key operative sections of the IBC at an appropriate time to avoid large-scale insolvencies is appreciated. However, there is an urgent need to address the entire restructuring and resolution framework that exists at present to facilitate large-scale restructurings and to avoid insolvencies.”

Aggarwal felt that sector-specific measures, cash flow, and liquidity enhancement measures are first needed to ensure that businesses can withstand this tough period. This, in the real sense, will avoid insolvency situations.

Stoppage of process towards insolvency is necessary, but not a sufficient condition to address fundamental issues facing the business environment, he added.

Related Topics
comment COMMENT NOW