Insolvency and Bankruptcy (Amendment) Ordinance 2020

This article studies the scope and applicability of the Insolvency and Bankruptcy (Amendment) Ordinance 2020. This article also discusses the objectives and limitations of the newly inserted provisions.
Estimated Reading Time: 9 minutes

Introduction

Novel Corona Virus Disease 2019, or COVID-19, has created havoc across the globe. Till date, the pandemic has infected lakhs of people across the world and the said number has been increasing rapidly each day. Due to outbreak of COVID-19, various countries including India, have imposed lockdowns to combat the spread of the disease. This unprecedented situation has impacted the economy, financial markets and business operations severely, and also led to the non-performance or delay and defaults in payments to the creditors/banks/financial institutions. The Government of India, in order to safeguard the interest of corporate persons, had framed various schemes and granted several reliefs to the entities in India. In this regard, to rescue those corporate persons who may commit defaults towards their debt obligations, the Central Government brought forth a slew of amendments for the Insolvency and Bankruptcy Code, 2016 (“Code”), including the raising of threshold for initiating the Corporate Insolvency Resolution Process (“CIRP”) under Section 4 of the Code, from one lakh rupees to one crore rupees, vide a notification issued by the Ministry of Corporate Affairs (MCA) dated 24 March 2020. The article will discuss the Insolvency and Bankruptcy (Ordinance) Bill 2020.

Insertion of section 10A

In pursuance of aforesaid announcement, on 5th June 2020, an Ordinance titled Insolvency and Bankruptcy Code (Amendment) Ordinance 2020 came to be promulgated by insertion of section 10A which has practically suspended the applicability of section 7, 9 and 10 of the Insolvency & Bankruptcy, 2016 (“the Code”) for initiation of fresh bankruptcy proceedings against persons impacted because of COVID-19, for at least six months, up to a maximum of one year. Section 10A has been introduced with a view to provide protection to the corporate persons experiencing distress on account of unprecedented situation, from being exposed to insolvency proceedings under the Code for up to a period of 1 year and has also sought to restrain the RP from filing applications under section 66(2) of the Code.

The provisions of the sections of the Ordinance dated 5th June

Insertion of a new Section 10A

10A: Notwithstanding anything contained in sections 7,9 and 10, no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25th March 2020 for a period of six months or such further period, not exceeding one year from such date, as may be notified in this behalf:

Provided that no application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the said default occurring during the said period.

Explanation – For the removal of doubts, it is hereby clarified that the provisions of this section shall not apply to any default committed under the said sections before 25th March 2020.\”

The aforesaid new section covers the default of a corporate debtor which arises after the 25th March 2020 emerging due to the impact of COVID 19 and shall remain suspended for six months or up to a period of one year. Nevertheless, there seems to be no escape for the defaults which are prior to this date and are effectively enforceable under the IBC as more specifically provided in the Explanation of the section. The section lacks clarity as to what “date” will be considered for the purpose of calculating the period of six months or one year after 25th March 2020. Presumably, the Adjudicating Authority will have to decide upon the date of default on a case-to-case basis. In any event the introduction of this new clause has come as a breather to the business community who feared getting entrapped into the insolvency maze.

The proviso to section 10A of the Ordinance, specifies that no Application shall “ever” be filed for initiation of CIRP against a corporate debtor for the said default occurring during the said period (6 months or extendable up to 1 year). However, what would be the situation if even after the expiry of the said period – the default remains to be continued. Whether a creditor will be precluded from filing an application seeking initiation of CIRP regardless of the Corporate Debtor having recovered financially, for the reason that the default occurred after 25th March 2020, and whether such Corporate Debtor should continue to enjoy the Ordinance’s protection.

Limitations

On the other hand, RBI’s has vide its Notifications dated April 17th 2020 and 23rd May 2020, granted relief of 180 days to the borrowers facing stress on account of the economic fallout of the pandemic, from their accounts being declared NPA. Would it mean that after the completion of 180 days such defaulting accounts can still be taken to the bankruptcy court where reasons of default are not related to COVID-19, therefore ordinance will have no escape to such defaulters?

Objective

The premise of the amendment is to provide relief from the stress arising because of the pandemic, but the suspension of right to initiate CIRP under 7, 9 and 10 of the IBC does not take away the legal right of recovery which is provided under alternate laws of recovery of debts. Financial Creditors can turn to recovery process through section 19 of Recovery of Debts Due to Bank and Financial Institution Act or under section 13 and 14 of the SARFEASI Act. Similarly, Operational Creditors can look upon remedies under the Commercial Courts Act for recovery. SMEs can fall back to the recoveries under Samadhan Scheme.

It is worth noting that Section 10A further provides that “no application shall ever be filed for initiation of corporate insolvency process of a corporate debtor for the said default occurring during the said period”. Which means that defaults that have occurred between March 25, 2020 over the next six months to one year, Financial or Operational Creditor can never initiate insolvency proceedings. Thus for e.g., a Corporate who fails to perform its financial contractual obligations or corporate guarantees due to the COVID 19 force majeure, shall be protected under section 10A and be exempted from IBC perpetually.

Insertion of Sub-section (3) of Section 66

The Ordinance also inserts sub-section (3) to Section 66 of the principal Act thereby prohibiting the Resolution Professional from filing an application under sub-section (2) of Section 66 of the Code. The provision of sub-section (3) under Section 66 reads as under: –

“(3) Notwithstanding anything contained in this section, no application shall be filed by a resolution professional under sub-section (2), in respect of such default against which initiation of corporate insolvency resolution process is suspended as per section 10A.”

This would imply that the Directors/Partners of a Corporate Debtor can engage in a fraudulent transaction during the period of application of Section 10A causing defaults and yet enjoy the protection afforded to the Corporate Debtor under Section 10A; with the statutory protection extending even at a later stage, even if such Corporate Debtor enters CIRP. The insertion of sub section (3) to Section 66 appears to downgrade the powers of a Resolution Professional from a custodian of the process to a silent participant witnessing potential frauds.

Challenges under the Ordinance

While the present Ordinance can be observed as an immediate wave of relief for corporate persons facing challenges in their businesses during the pandemic, the Ordinance boasts of a few ambiguities that could prove detrimental in the long run.

Perpetual Applicability of Section 10A

As per Section 10A, the suspension is in place from 25 March 2020 till 24 September 2020, (“Exempted Period”) unless extended for another six months, which means the maximum suspension can last is till 24 March 2021. However, the proviso to Section 10A states that “no application shall ever be filed for initiation of CIRP for default occurring during Exempted Period’ and therefore the proviso substantially enlarges the scope that is sought to be achieved by the main Section. The language of proviso seems to put a blanket, forever exemption for defaults committed during the Exempted Period. It is a well settled rule of interpretation that a proviso cannot substantially enlarge the main provision.

Further, the expression “no application shall ever be filed’ as used in the Proviso to Section 10A creates distress in terms of whether this means a complete abatement/ suspension of the trigger sections, available even after the Exempted Period ends, with respect to the amounts defaulted during the said Exempted Period. If that be the case, a forever protection granted for the defaults committed by corporate persons during the Exempted Period which would actually result in a permanent ban on CIRPs.

If it is to be interpreted in the above manner, the other alternatives available to creditors, in that event, would be filing of civil cases or proceedings under the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act)/ Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI Act).

No talk about personal guarantors

The provisions of the Code relating to personal guarantors to corporate debtors came into effect on 1 December 2019. However, it has not been experimented with widely by the creditors. The Ordinance does not bar initiation of insolvency proceedings against personal guarantors to corporate debtors. As to how far the initiation of insolvency proceedings against personal guarantors, while the corporate debtors are exempted from the same, is legally tenable, may lead to interpretational issues.

Suspending even voluntary insolvency

In times of unprecedented situations like this, the exit/closure of corporates should have been made easier. Instead, the Ordinance prevents filling and admission of voluntary insolvency applications, and this is self-defeating to corporate debtors. The only other options now available for the aggrieved debtors are winding up under Chapter XX of Companies Act, 2013 (this is not available to creditors), which has been rarely used after enactment of the Code, or voluntary liquidation under the under Part II of Chapter V of the Code (this is not available to corporates who have committed any defaults).

Thresholds for CIRP

As per the Ordinance, any default occurred on or after 25 March 2020 for a period of six months, is protected from the applicability of section 7, 9 or 10 of the Code. Vide the notification dated 24 March 2020, the threshold for ‘default’ has been revised to Rupees 1 Crore. Different NCLT Benches through their various recent orders passed in Foseco India Limited v. Om Boseco Rail Products Limited[3], and Arrowline Organic Products (P) Ltd. v. Rockwell Industries Limited[4], had held that the notification of 24 March, 2020 increasing the threshold for default is prospective.

Therefore, for all defaults occurred prior to 24 March 2020, the default threshold is Rupees 1 Lakh, whereas the default occurred on 24 March 2020 alone, for which applications can still be preferred under Section 7, 9 or 10 of the Code, is Rupees 1 Crore. The newly introduced Proviso to Section 10A, defeats the purpose of introduction of the increased thresholds till such time Exempted Period continues.

Conclusion

The protection under the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020, with a permanent immunity to the defaulters from the default arising during the COVID 19 pandemic may be a welcome step but it will have its own consequences with more questions than answers over the period of time. The corporate lenders and debtors may require looking for options and possibilities of restructuring of those debts for which no insolvency proceedings could ever be filed.

The Ordinance, also, does not shine upon any special insolvency resolution framework for MSMEs under Section 240A of the Code, which was also in the pipeline, as per the Atma Nirbhar Bharat Abhiyan reforms. Though the notification dated 24 March 2020 was intended to benefit the MSMEs, the notification is not line with such intention. Further, it is not actually greatly beneficial to MSMEs, since MSMEs will not be entitled to practically initiate any action until the threshold (now increased to Rs. 1 crore) which is very unlikely to cross. Conclusively, it appears that the main purpose of the Ordinance, read with notification dated 24 March 2020 which increased the threshold limit, has been to merely ease the infrastructural and capacity constraints noose around the NCLTs and to discourage large volumes of applications filed for initiation of CIRP.

The question will still remain to be considered that even after restructuring those debts whether they will continue to be treated as protected within the proviso to section 10A or beyond its purview.

Hey there!

come here often?

Login To Come In