No one expected this surprise at the end of the bankruptcy moratorium
The number of court-admitted corporate insolvency cases remained low at 164 in the three months ended June 30 despite the government’s decision to lift the one-year moratorium on creditors’ actions against defaulters by March.
This should provide relief to the government, which decided to lift the suspension on March 25 amid concerns over widespread financial tensions. The Ministry of Corporate Affairs estimated that an increase in the default threshold of ₹1 lakh to ₹1 crore and a new alternative resolution system for small businesses called the prepackaging system would prevent any sudden increase in insolvency cases.
At the end of June, 4,540 bankruptcy cases had been admitted to court, against 4,376 at the end of March, according to data from the ministry and the Insolvency and Bankruptcy Board of India (IBBI).
New deposits to 164 when the bankruptcy code is fully functional are not much more than the average quarterly deposits in FY21 when bankruptcy filings were only allowed for defaults before the pandemic. Before the covid-19 pandemic, the quarterly average was 495 in the year ending March 2020. Up to 1,978 cases were admitted by bankruptcy courts that year.
The decrease in bankruptcy cases during the June quarter could likely be attributed to efforts to resolve some of the accounts under the Reserve Bank of India’s June 7 circular, said Anoop Rawat, partner, insolvency and bankruptcy at the Bank of India. Shardul Amarchand Mangaldas & Co. RBI law firm provided a distressed asset resolution framework on June 7, 2019.
Experts also said that even while the Insolvency and Bankruptcy Code (IBC) was suspended for default in the one-year period ended March 24, creditors had other options such as enforcement of security, civil action and prosecution against personal guarantors.
“Some creditors would have considered these alternatives. In addition, the possibility of better fund recovery only exists during a stable economic period, ”said Divakar Vijayasarathy, Founder and Managing Partner of DVS Advisors Llp, a consultant.
“In a pandemic situation like this, where the economy is going through a period of stress, the size of the haircut would be greater, and creditors would therefore prefer to wait for the right time,” he said.
The number of applications from July is one to watch, and the real impact would be visible in the second half of the year unless the government suspends the IBC again, he said.
Admittedly, the number of cases admitted to the courts may not fully reflect the full extent of stress among businesses.
“Admission of cases reflects the number of cases admitted by the National Company Law Tribunal and may not reflect the exact number of cases filed. There are a lot of cases that are waiting for admission for several reasons, ”said Rawat.
The government’s first economic package for this fiscal year, announced in June after the Union budget in February, has largely focused on making credit available to businesses struggling to stay afloat.
The ₹The $ 6.28 trillion package was aimed at increasing liquidity and providing risk hedging for exports of goods and projects. The Union budget has focused on capital spending in order to create more opportunities for businesses.
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