Do Covid-19 Related Debts Form a Part of Default under IBC?

This article discusses in detail the Changes Made in Insolvency and Bankruptcy Code, 2016 to ease the liabilities of debtors during the pandemics. This article also discusses the Insolvency and Bankruptcy Amendment Act 2020.
Estimated Reading Time: 9 minutes

Introduction

The whole world came to halt since the intervention of COVID-19. Lockdown has been imposed in various parts of the world so as to reduce the damage caused by such virus. The Government of India imposed the lockdown from 25th March 2020 so as to reduce the risk that can be caused by such deadly virus. To ensure the business activities whether small business or medium business or large business will not get affected the Finance Minister of India Smt. Nirmala Sitharaman introduced some relaxations under statutory and corporate laws so as to lower down the burden of loss incurred by the businessman during the lockdown period.

Various changes in functioning of the Insolvency and Bankruptcy Code of India were also made in order to secure the interest of those corporate entity which are affected due to this pandemic and are unable to repay back the amount owed to them against various creditors. 

Impact of lockdown in economy

The lockdown imposed due to COVID-19 has impacted the economy of India in a very bad manner. The businessman and companies along with almost all offices will remain shut and are allowed to discharge their functions from their respective home. The movement of people were restricted only the essential works were allowed during the lockdown period. This further affected the corporate classes who have taken various loans and the same were due during this period. As per the laws of Insolvency and Bankruptcy Code, the creditors of such person to whom they have given credit and the same corporate / person is unable to pay back the amount owed to him then, the creditors have the right to file an application for initiation of insolvency proceedings against such corporate person.

Keeping in view the challenges faced by each and every person due to the imposition of lockdown, the government has made different changes in the Code in order to curb the same.

Changes Made in Insolvency and Bankruptcy Code, 2016

  1. Threshold limit under section 4 of IBC 2016

On 24th March 2020, when the finance minister addressed the nation, the threshold limit under the code was increased. Earlier to initiate the insolvency proceeding under the provision of Code, the threshold limit was one lakh rupees, i.e., when the default of minimum of one lakh rupees occurred on the part of the corporate debtor, then the creditors of those corporate debtor can initiate the insolvency proceeding against such corporate debtor. In view of the imposition of the lockdown and saving of the interest of various corporate debtors the threshold limit increased from one lakh to on crore. Now, the initiation of insolvency proceeding will take place only when the default of minimum one crore rupees occurred on part of the corporate debtor.

Hence, the financial creditor can initiate the proceeding under section 7 of the Act only when the default of minimum one crore rupees take place on the part of corporate debtor.

This amendment is made in order to secure the interest of MSMEs. The central government also planned to decriminalize most of the provisions of Insolvency and Bankruptcy Code, 2016 where the violators in the case are technical or procedural by nature. The ordinance was passed in order to make such changes effective as early as possible and the loss caused to various industries can be prevented.

  • Restriction on Section 10

The restrictions were imposed under section 10 of the code. Section 10 of the code empowers the corporate debtor to initiate the insolvency proceedings against himself if he is of the opinion that he is unable to pay the required amount of debt owed by him and has reached to the minimum amount of default as mentioned under section 4 of the Code. This is also known as self-initiation of corporate insolvency resolution process by the corporate debtor.

It has been a typical situation under the indebtedness system where organizations settle on their rebuilding through area 10 of IBC emerging out of the intolerable budgetary crunch. This refusal refuting the opportunity of exit in the midst of COVID-19 is actually what is not required to be done, in absolute negation to the key soul of IBC. This restriction is imposed on the cases arising after 25th March 2020.

Further, a proviso has been inserted in section 10A to specify that no application shall ever be filed for initiation of CIRP of a corporate debtor for the said default occurring during the Specified Period i.e., CIRP can never be initiated on the basis of a default during the Specified Period, even if the default is continuing after having occurred during the Specified Period.[1]

It was further clarified that non obstacle clause has been inserted in section 66 of the code, which states that fraudulent trading or wrongful trading, to give protection to the directors of the corporate debtor. Hence, as per the provision inserted, the resolution professional is debarred to file an application under section 66(2) where such default has been occurred under the provision of Section 10 of the Code. As the section will remain suspended, no proceedings with respect to it will take place by the resolution professional.

  • Restriction under Section 14 of the Code

The restrictions will be imposed so as to halt the proceedings initiated under section 14 of the code. Section 14 states as following:

(1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely: —

(a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree, or order in any court of law, tribunal, arbitration panel or other authority;

 (b) transferring, encumbering, alienating, or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;

(c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; (d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.

(2) The supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period.

(3) The provisions of sub-section (1) shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator. (4) The order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process:

Provided that where at any time during the corporate insolvency resolution process period, if the Adjudicating Authority approves the resolution plan under sub-section (1) of section 31 or passes an order for liquidation of corporate debtor under section 33, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be.

Section 14 of the IBC, which prior used to profit the account holder by giving the bar against the market-selling of its benefits and commencement of lawful procedures would make a deluge of recuperation procedures against the borrowers once the suspension of the IBC gets over and, in any event, during the suspension, in specific cases.

  • Suspension of Section 7, 9 and 10 of the Code

The advertisers of the Companies will be focused during the suspension of segments 7, 9, and 10 of the Code. It has been found in a catena of events where the chiefs and advertisers of the Companies stretch out their own assurances to its moneylenders and in these cases, they can be arraigned under Part III of the IBC.

Section 7 of the Code deals with the case related to initiation of insolvency proceedings against the corporate debtor by the financial creditor. The financial creditor of such debtor will be allowed to make the committee of creditors and take decision with respect to the resolution plan that is made so as to figure out how the amount can be recovered. Section 8 further deals with the provisions related to the operational creditors of the corporate debtor. The application for the initiation of insolvency proceedings against the corporate debtor is filed as per the provisions laid down under section 9 of the Code.

All the three sections of the code were suspended by the central government after passing of the ordinance. These suspensions will be in force for the time period of one year. This suspension will save the interest of the promoters of the company of the corporate debtor.

Measure for businesses by the Central Government

As a measure for businesses, the Central Government also intends to exclude COVID-19 related debt from the definition of “default” under the IBC, to prevent triggering insolvency proceedings. This measure, too, only benefits the defaulting corporation, with no redressal for the entity suffering the default. Moreover, this proposal does not preclude companies from initiating insolvency proceedings to create pressure and make the purported defaulting company bleed money on defending the IBC process.[2]
Furthermore, for calculation of as far as possible for exercises identified with CIRP and liquidation, the time of lockdown has been barred by embeddings Regulation 40C to CIRP Regulations, 2016, and Regulation 47A to the Liquidation Regulations, 2016.

The NCLT and NCLAT have acquainted procedural changes with moderate the effect of the lockdown. They hear dire issues in any event, during the lockdown with earlier email notices. They have expanded the break orders till the following date of hearing in NCLT will take place.

Insolvency and Bankruptcy Amendment Act 2020

The administration has thought of IBC 2020 to smooth out the CIRP, secure last-mile subsidizing, and help interest in monetarily bothered divisions.

The progressions put a limit condition for starting CIRP by the money related lenders, who are allottees under a land venture. The revisions have additionally acquainted a necessity with guarantee the upkeep of a gracefully of basic merchandise and enterprises and assurance from the suspension or end of basic permits to operate, enlistments, and government licenses during the ban. It likewise imports shields for fruitful bidders, the corporate account holders, and its benefits from the offenses of the previous advertisers or the executives. Presently, the focal government may advise any obligation to remember it for the meaning of between time funds.

Despite the fact that these alterations under IBC 2020 have been in power since December 28, 2019, and the sacred test to its arrangements is as yet pending. Just when the courts revive that this change will be tried by and by.

The mandates of the Central Government to hold over these difficult occasions are commendable. Be that as it may, huge numbers of these progressions are near sighted and will make issues for its partners over the long haul.

In these conditions, the Adjudicating Authorities—who are not just settling questions emerging out of the IBC yet in addition under the organization law and the opposition law debates—must standardize innovation. This one change can uniquely disburden the courts, improve assets, diminish delays, and lessen operational expenses. India took a long time to actualize such a successful bankruptcy system and improve its worldwide positioning of working together. This pandemic must not rewind the clock and start from the very beginning once more.

Conclusion

Passing by the worries referenced over, a total suspension of IBC does not appear to be a genuine thought within the sight of a previously given expanded limit by the administration which is going to turn out against the interests of the banks, operational loan bosses in explicit. There are different wards that have acquired changes their indebtedness laws, nonetheless, India stays to be the main nation to suspend the IBC, completely. The monetary and lawful effect of COVID-19 and the measures taken to forestall its spread could see numerous in any case gainful and suitable organizations experiencing money related pain.

As of now, organizations over all businesses are announcing money deficiencies, starting trepidation of disappointment among the organizations and its workers. While organizations of all sizes are probably going to endure, MSMEs may have an increasingly troublesome time enduring. The measures reported by the Government have been intended to give certainty and affirmation to the business to proceed with their exchange without the weight that they may enter their undertakings into indebtedness.

Nonetheless, starting at now, the full effect of COVID-19 and lockdown measures is not known. Other than financial alleviation bundles, huge scope liquidation changes may should be attempted, to help both of all shapes and sizes organizations that may get troubled sooner rather than later. All the while, stimulus and changes are required in the money related segment to forestall any insolvencies in the area as well as help them in offering alleviation to the organizations. Other than this, the indebted individuals and lenders would need to cooperate to discover arrangements that permit troubled organizations to climate the emergency.


[1] www.corporate.cyrilamarchandblogs.com

[2] www.economictimes.indiatimes.com

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