Insolvency & Bankruptcy in India during Covid-19

Neha Mehta analyses what the Indian government is doing to mitigate the impact of Covid-19 on bankruptcy and insolvency.

COVID-19 & INITIAL MEASURES

Covid-19 has altered the fabric of the global economy. Worldwide lockdowns, travel restrictions, restraint on international trade and other stringent measures to curb the pandemic, has led to uncertainty around the future of many businesses.
With the objective of lending support to struggling businesses, most nations, including India, have introduced fiscal, monetary and protective measures to prevent multiple bankruptcies.
In its first measure to protect small and medium enterprises, already under severe financial stress, the Government of India, in March 2020, raised the threshold of the default amount for invoking the Insolvency and Bankruptcy Code, 2016 (IBC) to Rupees One Crore (earlier Rupees One Lakh).
The Government, to support and provide relief to businesses across all sectors subsequently indicated that it may suspend, for an initial period of six months, the (key) sections 8, 9 and 10 of IBC which trigger the insolvency process, and perhaps further extend such shield to a year, if the pandemic continues.


THE UNCERTAINTY
The effective date of such amendments would be the date of promulgation of an ordinance. However, as one was not issued, till now, speculation was rife over what the Government will do, especially with respect to the cut-off date to invoke insolvency under sections 8, 9 or 10.
In the midst of this, there has been an overwhelming section of the public that has been disenchanted over the attempt to shield defaulters and provide them benefits that they may not deserve. There has also been concern over whether the protections would extend to prior defaults, existing pre Covid-19. This includes borrowers, banks, financial institutions, legal professionals and parties affected by breached contracts.

Ultimately, on 17th May 2020 the Union Finance Minister, in line with earlier announcements, announced that the Government will promulgate an ordinance suspending initiation of fresh insolvency cases for a year, and that the amended definition of ‘default’ under the IBC would exclude Covid-19 related debt.
Despite the announcement, it was unclear whether fresh insolvency filings would include a debt or default occuring prior to the onset of Covid-19.

CLARITY
The air was cleared with the promulgation of an Ordinance on 5th June 2020 (Ordinance), suspending the Corporate Insolvency Resolution Process (CIRP) for all defaults arising on or after 25th March 2020 for a period of six months, with a possible extension upto one year that may be notified subsequently (Suspension Period)
In essence, by virtue of the Ordinance no CIRP proceedings, may be invoked at any time in future, for defaults that have arisen during the Suspension Period. However, defaults occurring before or after the Suspension Period are not protected.
In addition, the Suspension Period is excluded from the six-month default period for declaration of a debt as a non-performing asset (NPA).


LENDERS – A HAPLESS BUNCH?
To say that these are challenging times for lenders would be an understatement. The IBC has not only provided efficacious and speedy remedy for recovery, it has also proved a strong deterrent against borrowers defaulting.

In the absence of this formidable weapon and shield, lenders may turn to The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI) for enforcement of security interests, including enforcing mortgages of real property, and assuming management and control of a debtor.

While the Government has not suspended SARFAESI (at least not as yet), the deferment of NPA classification for the six-month Suspension Period may render SARFAESI a toothless tiger. This may leave lenders with the sole option of invoking dispute resolution provisions, as a method of recovery, in respect of a default. 

As far as affected parties to a contract, as IBC is off the table for the time being, their only option would be to resort to dispute resolution, which, of course, is neither as economical or as speedy as the CIRP process. 

CONCLUSION 

With a flood of defaults looming, questions will arise over whether these protective measures shield those who don’t really deserve protection, with a view to save the few who are genuine and well-intentioned. The argument in favour will, of course, be that the Government, by taking the broader long-term view, and allowing distressed businesses to heal and recover, will help the economy recover and, in the long run, even recoveries. Certainly, that would be the ideal outcome, but until we see that happen, lenders and parties to contracts that are owned monies will have to hold their breath and hope for the best. 

Disclaimer: This article is provided for informational purposes only and is not legal advice. For more advice on the topic, please contact the author. 


Options for US Business in the Current Economic Downturn

Cost of EB 5 Visa

Duncan Hill is marketing director at Davies & Associates LLC. Duncan is not a lawyer and nothing in this blog constitutes legal advice.

 

Businesses across the United States are reeling from the economic impact of the Covid-19 Coronavirus outbreak. Furloughed employees, disrupted supply chain, cancelled purchase orders, nosediving share prices and shuttered premises are all compounding to create an unprecedented challenge.

Over the past decade, Davies & Associates has brought hundreds of businesses and entrepreneurs to the United States. Our L-1 clients have expanded their existing business to America, our E-2 Clients have set up new business or purchased franchises, and our EB-5 Immigrant Investor clients have been granted the freedom to pursue their own business objectives.

 

Cashflow is Key

These clients come from all over the world, and what they are finding is that America is one of the best places to own a business in a global economic downturn. The country’s resilience, stemming from its diverse economy and historic commitment to business, means there are a range of options available to help businesses weather this storm.

Cashflow is always key to a business, but never more so than over the next few months. Different businesses inevitably have different amounts of cash buffers available. While some may be able to withstand a few months of this crisis, others cannot survive more than a few weeks. Since no one knows for certain how long the current shutdown will last, many businesses are going to need help. The United States now has an unprecedented array of federal and state programs in place to assist through this crisis.

 

Payment Protection Program

The latest and most high-profile support measure to become available is the Payment Protection Program (PPP). This is part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act signed by the president last week. The PPP is a loan scheme designed to prevent massive layoffs caused by disrupted trade and commerce.

The loans can be claimed for operating expenditures like salaries, health and retirement benefits, rent and mortgage payments, and utilities. Since funding is limited, loans to cover salaries are likely to be given preference.

Businesses claiming the loans are able to claim 100% forgiveness if they maintain headcount or rehire recently laid-off workers. You must also ensure not to reduce salaries by more than 25% for employees earning less than $100,000 a year. Those that do not comply will have to pay back some of the loan, deferred for 6-12 months, at an interest rate of 0.5%.

Businesses with 500 or fewer employees are eligible for this scheme, and this includes self-employed contractors. The CARES Act authorized $350 billion for the program. Because of its popularity it is advisable to apply early before funding runs out. Applications through approved lenders can be submitted from Friday 3rd April.

 

Economic Injury Disaster Loan

The Coronavirus pandemic has also been declared a disaster under the Small Business Administration Act, which means small businesses can also apply for an Economic Injury Disaster Loan (EIDL). Although businesses can apply for both EIDL and the PPP, there can be no double dipping with the PPP, so the loans must be used to cover different expenses.

Unlike the PPP, Economic Injury Disaster Loans are not new and have not been specifically introduced as a response to the Coronavirus pandemic. EIDLs include what is essentially a cash grant to businesses of $10,000. Any additional loan – up to the limit of $2 million- is subjected to repayment over three decades at low rates of interest.

 

State and Local Programs

Different states and municipalities are offering loans and grants of their own. For example, New York is offering grants to cover 40% of payroll and interest-free loans of up to $75,000 to businesses that can prove they have incurred losses of more than 25% because of Coronavirus.

Chicago is providing low interest loans to businesses with fewer than 50 employees and San Francisco is offering cash grants of up to $10,000 for companies with between 1 and 5 employees provided annual gross revenue is less than $2.5 million.

 

Tax incentives

Most people are aware that many taxpayers are in line for a $1,200 one-time rebate and that the deadline for filing federal taxes has been pushed from April to July. Other changes include the removal of a 10% penalty on people seeking to access retirement funds early, deferral of payroll taxes, and alterations to the tax on charitable contributions. Davies & Associates has a tax team able to assist clients with understanding their options.

 

International Debt Collection

Looking beyond the short-term assistance programs, the global economy is likely to be in disarray when it gets going again. One feature may be that people have difficulty paying their bills. D&A’s creditors’ advisory business can help chase payment of debts. Given the internationalization of modern supply chains, many debts will cut across national borders. D&A’s international reach, with offices and partnerships around the globe, means we can pursue debts for clients both in their home country and overseas. Debt collection in the United States is governed on a state by state basis

 

Bankruptcy

For firms struggling to pay their bills, one possible option is the bankruptcy system. While the term bankruptcy often implies something terminal, in the United States it is possible for firms to file for bankruptcy and continue operating. Under Chapter 11 of the bankruptcy code it is possible to reorganize your business and renegotiate your debts. Chapter 13 offers something similar for individuals on fixed incomes. The most common form of bankruptcy in the United States is Chapter 7 where assets are liquidated to pay off debts. It is important to engage an attorney to understand which assets could be legally protected from the liquidation process.

 

D&A Corporate Team

As you can see, there are lots of different measures in place to help individuals and businesses amid this unprecedented global crisis. And we are here to help. While D&A is most known for bringing people to the United States, we are often less well known for our corporate work once they get there.

Yet for certain visa categories, corporate work is essential. Immigration law and corporate law are natural bedfellows. For example, all new E-2 Visa applications and any “new office” L-1 Visas require a US entity to be established as part of the visa process.

Once these clients have moved to the United States, we stick by their side. Offering ongoing corporate services and tax advice in good times as well as tougher times.

 

These are some tough times and we are here to help.