By – Rhea Sinkar ~ DES Law College, Pune
In the wake of the pandemic, several companies are on the verge of a breakdown and their disruption has largely affected the economy. The recent amendments to the Insolvency and Bankruptcy Code have been set off due to the economic distress caused during the lockdown due to COVID 19. The Insolvency and Bankruptcy Code (Ordinance) came into force on June 5 2020.
It has introduced Section 10 A which has deferred the applicability of Section 7, Section 9, and Section 10 of the Insolvency and Bankruptcy Code, 2016. It prohibits the initiation of insolvency proceedings for defaults arising during six months from March 25, 2020 (extendable to a year).[i] The Ordinance takes away the rights of creditors under Section 7,9 and 10 given to them by the IBC, 2016 during the exemption period. Section 10 A further clarifies that the amendment shall not have any application on defaults arising before March 25, 2020. Therefore, creditors/corporate applicants are entitled to initiate proceedings for any defaults arising before March 25 2020. The second part of the Ordinance suspends filing applications under Section 66(2) during the same exemption period. The Government has come up with these amendments to cope with the detriments of the pandemic to protect those who are adversely affected.
|SR NO||DATE||CHRONOLOGY OF AMENDMENTS|
|1.||March 24 2020||The limit for filing an Insolvency petition increased from 1 lakh to 1 crore.|
|2.||March 29 2020||Introduction of Regulation 40 C which provided an exemption of lockdown period during COVID 19 in respect of timelines prescribed under the Resolution Process of the Insolvency and Bankruptcy Code.|
|3.||April 17 2020||Introduction of Regulation 47A which provided for exemption of lockdown period during COVID 19 in respect of timelines prescribed under the Liquidation process of the Insolvency and Bankruptcy Code.|
|4.||May 17 2020||The Finance Ministry announced an official interdict on initiating fresh proceedings for the next 1 year.|
|5.||June 5 2020||The Insolvency and Bankruptcy Code(Ordinance), 2020 came into being.|
The Ordinance has banned Insolvency proceedings altogether which has given a leeway and relaxed lenders however the language of the Ordinance has raised some concerns with regards to its interpretation.
- Section 10 A’s Proviso goes as follows: “Provided that no application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the said default during the said period.” [ii]While the Section intends to provide an exemption for a period of 6 months extending to a year, the proviso can be interpreted otherwise due to its language that gives a relatively broad scope for interpretation which can easily be misused by defaulters to seek protection. Because of its ambiguous language, defaulters can claim immunity under the provision even after the suspension period, which can be a significant concern for lenders. The main objective of the IBC is to secure the interests of the creditors and if it were to be construed in the widest sense parties would resort to other mechanisms to secure their claims which would then go against the entire purpose of the Ordinance.
- The Ordinance bans the filing of applications after March 25, 2020 on accord of the pandemic. However, there are no parameters mentioned in the Ordinance to adjudge which defaults are a result of the pandemic and which are not. This again leaves a broad scope for interpretation and covers all claims whether affected by the pandemic or not. Section 10 A has no clear reference to the pandemic and hence what it could mean is that defaulters would not have to prove any linkage to COVID 19 before the adjudicating authority.
- A new clause (3) has been inserted to Section 66 which says: “ Notwithstanding anything contained in this section, no application shall be filed by a resolution professional under subsection (2) in respect of such default against which initiation of the corporate insolvency resolution process is suspended as per Section 10” [iii]Considering that Section 66 deals with fraudulent trade, the insertion of clause 3 seems unnecessary and questionable. Section 66 stops a corporate debtor from defrauding a creditor by empowering the resolution professional to initiate an application before the relevant authority to make the assets of the debtor contribute towards the debt. With the insertion of Clause (3), the Section creates a pathway and encourages debtors to engage in fraudulent practices and not be held liable for the same. This again is a contentious amendment.
- Section 240A of the Insolvency and Bankruptcy Code talks about the applicability of the Code to Micro Small Medium Enterprises.[iv] Since the minimum threshold for application under IBC has been increased to 1 crore, the Ordinance fails to specify whether this will apply prospectively or retrospectively. The 2020 Ordinance remains silent about the status of MSMEs during the pandemic or any other relaxations in this regard considering that they have been largely hit by the pandemic. MSMEs would rather resort to an alternative mechanism under the MSMED Act and refer to the SAMADHAAN portal for recoveries which also provides for Arbitration.[v]
- S 10A goes as follows: “Notwithstanding anything contained in Section 7,9 &10, no application for initiation of corporate insolvency resolution process of a Corporate debtor shall be filed.” [vi] IBC provides for initiating the insolvency process of the corporate debtor as well as a personal guarantor. The act remains silent as to the initiation of the insolvency process of a personal guarantor which means that it is open to a personal guarantor to initiate proceedings. However, the question remains that when the debtor’s liability is relaxed in the first place how can a personal guarantor be held liable for the same. There needs to be a clarification with regards to this ambiguity.
- The Reserve Bank of India has allowed banks to offer a 3-month moratorium on principal and interest payments beginning March 1 2020 to provide relief to borrowers affected by the pandemic.[vii] This again was extended for another 3 months up to August 31 2020. This Ordinance would therefore be unjust towards creditors who already have to abide by the RBI moratorium.
The most important objective of the Insolvency and Bankruptcy Code,2016 is to provide for a quick resolution process and maximization of assets, securing the interests of debtors as well as creditors. Since being enacted, IBC has relied mainly upon & has successfully resolved many cases. The 2020 Ordinance was enacted to provide security to borrowers, stakeholders & lenders altogether whilst provide reliefs to debtors hit by the pandemic. However, there need to be certain clarifications to avoid misuse and abuse of the same. Any proceeding filed between March 25 and June 5 will by reference to the Ordinance stand dismissed. The increased threshold seems to reduce the number of cases filed under the CRIP of IBC and to reduce pressure on the NCLT. The legislature needs to provide clarifications with regards to the probable misuse of the Ordinance because of its possible broad interpretation which can be used by defaulters to seek unfair protection. Meanwhile, Creditors may choose to opt for alternative mechanisms for recovery.
- [i] PRS India/Insolvency &Bankruptcy Code (Amendment) Ordinance,2020, https://www.prsindia.org/billtrack/insolvency-and-bankruptcy-code-amendment-ordinance-2020.
- [ii] The Insolvency &Bankruptcy Code (Amendment) Ordinance, 2020, No 9, Acts of Parliament 2020 (India)
- [iii] Ibid
- [iv] The Insolvency &Bankruptcy Code, 2016, No 31, Acts of Parliament 2016 (India)
- [v] The Micro, Small &Medium Enterprises Development Act,2006,No 27,Acts of Parliament (India)
- [vi] Supra note ii
- [vii] Repayment Plan/Eu Bureau, Economic Times, Sep 11,2020.