Corporate Restructuring During COVID-19 Pandemic

The COVID-19 pandemic has disrupted the global economy, forcing businesses to reevaluate their operations, strategies, and structures. Corporate restructuring became a crucial tool for organizations to adapt to the unprecedented challenges posed by the pandemic.

Introduction

As the word implies, corporate restructuring refers to the reorganisation or rearrangement of the management, operations, finances, etc. of the company, to enhance the effectiveness and efficiency of the company. This rearrangement is mostly and generally done when a corporate entity faces significant issues and financial stress. Making changes in the company’s operations, structure, etc. helps it to increase productivity and understand what aspects of the company need to be closed and what needs to be worked upon. It depends on the company’s condition and the severity of issues to decide what approach and changes will be applied.

The complete lockdown of the economic system affected companies severely during the COVID-19 pandemic times. It affected corporate entities, banks, factories, industries, etc. In this regard, the World Bank even issued an order for companies to file for insolvency and also opened the door to recover debts from creditors. The pandemic impacted corporate entities’ manufacturing processes, movement from one place to another, the working of labourers, etc. The borrowers were not able to advance finances to banking entities. The Government of India also intervened to resolve this issue and RBI issued a moratorium resolution for six months.

In this article, the author discusses how corporate entities faced issues and challenges in filing such insolvency petitions during the COVID-19 pandemic.

Background

Corporate Debt Restructuring, as first introduced by the Reserve Bank of India in 2001, applies to all financial and corporate entities. As stated above, it deals with financial difficulties that a corporate entity faces, so that the balance of profit and loss is maintained and the assets of the company remain protected. Be it any company, profit and loss are both the part of game but in certain situations, the company comes to such a point where it’s not able to further carry out its operations unless it makes changes in its structure. Corporate Restructuring helps the entity to reduce risks, losses, etc. and gain new investments, financial growth, etc.

However, the COVID-19 pandemic affected the finances of corporate entities to such an extent that they were not able to settle on good terms with borrowers and negotiate for financial gain. The COVID-19 pandemic significantly impacted banks, borrowers, lenders, and corporate entities. Recognizing this, the judiciary adapted by offering virtual hearings to facilitate debt recovery and insolvency resolutions.

However, the responsibility for implementing policies related to corporate restructuring primarily rested with regulatory bodies like the Reserve Bank of India (RBI). The RBI issued guidelines on moratoriums and restructuring schemes to mitigate financial stress, while creditors and lenders often determined restructuring plans within the framework of the Insolvency and Bankruptcy Code.

World Bank’s Perspective on Corporate Restructuring

The pandemic had stopped the whole business process, be it labour working, manufacturing to customer supply chain or anything else in this regard. The World Bank showed its concern over corporate debt during the COVID pandemic and allowed for petitions of insolvency so that companies could recover debts from creditors. For the same, physical courts were not running that smoothly, rather virtual courts were authorised to accept petitions of insolvency during the pandemic, so that corporate entities wouldn’t be delayed with recovery. The World Bank rejected the process of approval of reorganisation of companies for the time being and also came up with a limitation period to file the petition. The focus was on four main areas:

• Saving lives threatened by the pandemic,
• Protecting the poor and vulnerable,
• Helping save jobs and businesses,
• Working to build a more resilient recovery.

Indian Scenario

The Indian government has taken several initiatives to mitigate the impact of COVID-19. Only measures related to insolvency are included in this article.

This unexpected circumstance necessitated yet another experiment that required a decision between two conflicting policy options: suspending the Code's activities or carrying on with business as normal.

An unprofitable firm would not be liquidated by the market if the first option were to be exercised. Although this could have a negative impact on the economy, it could be fixed in the upcoming quarter or year. The market would irrevocably liquidate a successful company if the second option were to be exercised. Therefore, saving an operating company is far more crucial than failing to liquidate an unprofitable one.

At the very least, they would adjust their 'all-new normal' to their operations and enterprises. Therefore, the first option—which gives businesses breathing room and advances the Code's goals—was chosen.

Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020

Counter to the prevailing belief, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 is a keyhole technique that suspends a very small part of the Code, not a year-long suspension.

When a default occurred during the COVID-19 period, which was six months starting on March 25, 2020, but could be extended up to a year, if necessary, it prevented applications for the initiation of an insolvency proceeding against a company from being filed. It shielded corporations that had no defaults as of March 25, 2020, but defaulted during the COVID-19 period, from being subjected to insolvency proceedings.

Such a default was not even excluded from the Code's definition of default. Except for starting an insolvency process against the business, such a default was still a default for all purposes under the Code. The Ordinance made it clear that a company's defaults before March 25, 2020, may be the basis for an application to begin an insolvency procedure against it. Applications for the start of an insolvency proceeding that had already been submitted to the Adjudicating Authority (AA) and were awaiting admission, as well as existing corporate insolvency proceedings, including resolution and liquidation, including voluntary liquidation, were not suspended. Provisions on current bankruptcy actions against financial service providers and personal guarantors were not suspended.

Given that the goal was to protect businesses affected by the epidemic, why should a business that failed during the COVID-19 timeframe but not because of COVID-19 be protected? Hardly a single business was unaffected by COVID-19. A small number of corporations may have defaulted during the COVID-19 period for reasons other than COVID-19, even though they had not previously defaulted. Determination in each case would be necessary to identify such a small number of companies. It makes more sense to grant protection to such rare instances than to be right in theory and waste years in court battles.

Fresh Start Scheme

To assist businesses and limited liability partnerships during the COVID-19 pandemic, the Ministry of Corporate Affairs has released a notification. The government has updated the LLP resolution scheme 2020 and released a new policy for the companies' fresh start scheme 2020, which permits filing a fresh start for any filing default, limitation of default, and right to fully register a complaint. This scheme has reduced the difficulty of compliance and altered the LLP scheme for submitting compliance.

It also entails the weight of financial requirements on long-standing defaults, as well as other filing responsibilities under the Companies Act 2013 and the LLP Act 2008. Certain immunity from criminal prosecution, late submissions, and appeals before regional directors has been granted by the system. MCA 21 was added to the program to address late application and appeal filings. The program lasted from April 1 to September 30, 2020, and when it did, ROC took the appropriate measures against enterprises that didn't comply.

Moratorium Policy on Financial Emergency

A moratorium period signifies a temporary suspension of repayments, not necessarily related to the duration of the debt. On the other hand, a force majeure event prevents the borrowers from making loan payments. The Reserve Bank of India imposed a loan moratorium to limit loan repayment during the COVID-19 pandemic. For three months, it applied to all commercial banks, including small finance banks, cooperative banks, regional rural banks, and financial institutions.

The Reserve Bank of India (RBI), in a press conference on May 22, 2020, announced an extension of the moratorium on term loan EMIs for an additional three months, up to August 31, 2020.

Listed Companies

The Securities and Exchange Board of India (Listing obligations and disclosure requirements) Regulations of 2015, which were modified on January 10, 2020, were published in the Indian government's gazette. The government imposed severe guidelines on listed firms to comply with the COVID-19 Pandemic, which has affected industry and company operations. Listed entities have been given dispensation by SEBI to adhere to the LODR regulations:

According to Regulation 30(3) Disclosure of Events or Information, any listed company is required to report events listed in Paragraph B of Part A of Schedule III, following the application requirements outlined in Sub-regulation (4). This includes any event that signifies a disruption of events, such as strikes or lockdowns, which may be brought on by omissions, natural disasters, etc.

According to Regulation 33(3) financial results, the listed firm must provide the stock exchange with quarterly and year-to-date financial results by the end of the quarter year, within 45 days.

The listed organisations are required to submit the annual report under Regulation 34, which was extended during the shutdown.

Conclusion

Resolving the issue was complicated and challenging due to the effects of corporate debt recovery. Insolvency petitions involving business debt became more common, and loan arrangements were being waived. The RBI adopted the moratorium policy that the World Bank had put in place. Nonetheless, the Reserve Bank of India had put policies into place that had a beneficial effect.

To promote market participation and offer some relief to borrowers, the RBI implemented precautionary measures. Corporate debt restructuring has presented the corporations with the most difficulties. Through the insolvency process, some of the businesses were able to recoup their debt.

References

[1] Corporate restructuring strategies in post-pandemic recovery, Available Here

[2] Dr M.S. Sahoo, Insolvency Laws in Times of COVID-19, Available Here

[3] India: Corporate Restructuring in Unprecedented Era – An Inevitable Proposition, Available Here

[4] World Bank Group COVID-19 Crisis Response, Available Here

[5] Yamuka K., Importance of Corporate Restructuring in Times of an Emergency, Available Here

[6] Companies Act, 2013

[7] The Insolvency and Bankruptcy Code (IBC), 2016

[8] The Limited Liability Partnership Act, 2008

[9] Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020

[10] The Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations of 2015