Settlements and Resolutions Under the Insolvency and Bankruptcy Code: Assessing the Impact of Covid-19

Ram Singh,Hiteshkumar Thakkar

doi:10.1177/00194662211013218

Ram Singh, Hiteshkumar Thakkar

Open Access

https://doi.org/10.1177/00194662211013218

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Abstract

In this study, we develop a model to examine the dynamics of the insolvency and bankruptcy code (IBC) processes in the aftermath of Covid-19. We use the model to study the impact of the pandemic on the following aspects of the financial disputes and their implications: number of disputes between debtors and their creditors in the aftermath of Covid-19; frequency of these disputes coming to the National Company Law Tribunal (NCLT); impact of the pandemic on the frequency of ‘out of court’ settlements; the nature of disputes settled amicably and those adjudicated under the corporate insolvency resolution process of the NCLT; and the recovery rates in the settled versus litigated disputes. We show that while the number of disputes will go up, the frequency of settlements will come down in the post-Covid world. Moreover, the post-pandemic legal changes made to the IBC are detrimental to the interest of the micro, small and medium enterprises and also for the formal and informal sector employees. We offer suggestions for promoting out-of-court settlements to save time and costs of the parties involved. Our suggestions related to public policy can help mitigate the macroeconomic costs of the pandemic. JEL Classification Codes: K00, K22, K41, G21

Highlights

The Covid-19 pandemic has unleashed a spate of commercial disputes
We examine the effect of Covid on the following aspects of disputes between corporate debtors and their creditors: frequency of disputes in the aftermath of Covid-19; frequency of the disputes coming to National Company Law Tribunal (NCLT) before and after the pandemic; and effect of the pandemic on the number of ‘out-ofcourt’ settlements (OCSs) of these disputes
We develop a model that captures the essential aspects of functioning of the insolvency and bankruptcy code (IBC) process

Summary

Introduction

The Covid-19 pandemic has unleashed a spate of commercial disputes. The pandemic and the lockdowns have inflicted heavy losses on sales and incomes of many businesses—big or small, formal or informal. In an effort to ameliorate the liquidity crisis faced by the debtors, the Government of India has suspended initiation of insolvency and bankruptcy proceedings under the insolvency and bankruptcy code (IBC) These moratoria have helped the companies and other debtors defer servicing of their debt obligations. The recovery rate is higher under OCS compared to litigation These predictions are tested using the empirical evidence available on the issues mentioned above. A larger proportion of post-Covid disputes will remain unsettled for a longer duration On one hand, this will increase frequency of socially wasteful litigation and on the other hand, resolution of distressed assets will be prolonged. The model is used to make predictions about the likelihood of OCSs and litigation for different types of creditors and their recovery rates. We offer suggestions for reducing litigation and mitigating the adverse effects of the pandemic

Settlement and Resolution Processes under IBC

Empirical Findings

Conclusions and Policy Recommendations