Relaxations Provided Under IBC Due to Covid-19

This article highlights the changes that were made in the Insolvency and Bankruptcy Code and Code (Regulations) for keeping pace with an ongoing situation of Covid-19. This article also discusses the relevant case law to analyse the actual situation.
Estimated Reading Time: 9 minutes

Introduction

The impact of Covid-19 pandemic has created the unavoidable consequences which creates a halt in the process of court proceedings. Every business, profession has been effected through its consequences in an unavoidable way for which Ministry of corporate affairs has announced relaxations under notifications on 24th March 2020 for Insolvency and Bankruptcy Code (IBC) proceedings to provide an ease for proceedings to be solved in this time of uncertainty. Also, the changes were made under the Code and in the regulations framed under the Code (Regulations) for keeping pace with an ongoing situation of Covid-19. The article will focus upon relaxations under IBC.

Key Relaxations given under the IBC

Minimum default threshold has been increased for excluding filling application

On 28th March 2020 by notification Ministry of corporate affairs and On 17th May 2020 finance minister Nirmala Sitharam on part-5 of announcement of Atam Nirbhar Bharat has announced that the minimum monetary threshold of default for filing an application for the initiation of corporate insolvency resolution process under the Insolvency and bankruptcy code shall be increased to INR 1,00,00,000 (Indian Rupees One Crore) from the current threshold of INR 1,00,000 (Indian Rupees One Lakh),  this will help curb the initiation of insolvency proceedings against the companies specially it will curb the triggering of defaults against MSMEs. In simple language it means that MSMEs will be most benefitted from it as the proceedings against them for initiation of insolvency resolutions plans will be less as the minimum debt money which is needed to initiate such proceedings has been increased to 1 crore rupees.

The change comes to an immediate effect after the notification has been issued by Ministry of corporate affairs. At the time of covid-19 business has faced a recession, due to unavoidable consequences of covid-19 over business there is need to curb the legal proceedings. Therefore, under Section 4 of IBC such change has been made to attract a smaller number of financial creditors.

No corresponding change in case of personal Guarantors to corporate debtors, as it stays as low as Rs. 1000/-

Illustration:

  1. If there is a MBN Company who owes debt to Y (financial creditor) of Rs. 1.5 crore then Y can initiate insolvency resolution plans under IBC as it fulfils all the three requirements for initiating the proceedings which are there is a company who is a debtor, there is a financial creditor, and the minimum threshold is above 1 crore.
  2. If there is a MBN Company who owes debt to Y of Rupees 75 lakhs and to X of Rupees 55 lakhs, under sec 7 of IBC individually they will not be able to initiate insolvency resolution plans but together they can because as it will complete the requirement of minimum threshold of Rs. 1 crore.
  3. If there is a MBN Company who owes Y of Rupees 1.5 crore and to X of Rs. 45 lakhs, then according to Section 7 of IBC Y can individually initiate the insolvency proceedings and X can initiate individual proceedings for insolvency resolution plan on behalf of Y if Y is not initiating such proceedings or X can initiate such proceedings with combining with Y.
  4. If there is an MBN Company who owes Y the operational creditor Rs. 85 lakhs and there is another operational creditor to whom MBN Company owes Rs. 1 crore. Then, X can only initiate the insolvency resolution plan individually there is no provision under Section 7 that operational creditors can jointly file an application for the initiation of insolvency resolution plan.
  5. If there is a MBN Company who owes Y the operational creditor a sum of Rs. 2 crore and to X who is another operational creditor with a sum of Rs. 25 lakhs. Then there is no provision under Section 7 of the act that X can initiate proceedings on behalf of Y if Y is not initiating any such proceedings.
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Debt will not be taken as “default”

On 17th May 2020 Finance Minister Nirmala Sitharam addresses press conference in subsequent to the Prime minister address to the nation for the topic of laying foundation on Atam Nirbhar Bharat she stated one of the reforms that if any debt incurred to the companies due to the cause of covid-19 then it will not be included in the category of “default”.  Under Section 3(12) “default” means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be.[1]

Section 6 of IBC: Where any corporate debtor commits a default, a financial creditor, an operational creditor, or the corporate debtor itself may initiate corporate insolvency resolution process in respect of such corporate debtor in the manner as provided under this Chapter.[2]

Here in the current situation minimum default against a company must be of Rupees 1 crore for initiation of insolvency resolution plan and if the cause of debt is corona virus then it will not be taken as default, so the major shield or relaxation has been given to the companies in the times of pandemic.

Suspension of fresh initiation of insolvency proceedings up to one year 

Another relaxation was given under IBC for which the announcement has been made by Finance Minister Nirmala Sitharam on 17th May 2020 that no fresh insolvency procedure or proceedings will be initiated up to one year. At the moment MCA has extended it to six months but the Government of India intend to extend it to another six months with a motive to provide relaxation under IBC as after the lockdown has been lifted, we are not sure that the business will get restored.

Suspensionof fresh initiation of insolvency proceeding up to one year depending upon the pandemic situation.

Relaxations provided under the timeline for calculating the fees to be paid

The relaxation is provided under the IBBI (Insolvency professionals) Regulations, 2016 that the time period of lockdown will be excluded for calculating the timeline under CIRP Regulations. Reg. 40C provide relaxation in timelines for excluding lockdown period.

However, there is no similar relaxations provided for calculating the timeline under the liquidation process under IBBI Regulations, 2016.   

Notification dated 29.03.2020 CIRP Regulations amended to insert regulation 40C-

To exclude the period of lockdown for the purpose of calculating timelines under the CIRP Regulation. However, IBBI press release held on 29 March 2020 state that relaxation will be the subject to the overall time limit given under the code.

Hence the relaxations are given by the virtue of lockdown period in the states

The question raises for the existing cases which have already in the process of insolvency proceeding

  • Under the case where the application has been admitted will remain unaffected.
  • Under the case where applications have been filed but the admission is pending there a rectification window may be given to the applicant to meet the revised threshold.
  • Under the case where demand notice is served in case of operational creditors, but the application is not filed, and the minimum threshold is less than 1 crore rupees then the creditor cannot take the advantage of having served the demand notice to file the application under previous threshold limit.

There is no formal clarity given with respect of the above matter. It has been inferred as similar case as where the revision given under the threshold under IBC (Amendment) Bill 2020 for the application by Real-Estate creditors.

Because of the absence of any clear indication given under the notification, a question arises if the increase of amount in filing threshold relates to substantive right of the applicant or is it only procedural right. Then, it can be argued with by the applicant that the retrospective effect has affected the given substantive right of the applicants who all have filed petitions under IBC as per the previous minimum threshold of default

Suo Moto Action taken by NCLAT

The Supreme Court has taken a suo moto cognizance on 23 March 2020 which means that Supreme Court has taken a step in its authority without any prior motion by any party. This is done because of the current situation faced by whole country due to pandemic. The period of limitation has given a flexibility in all cases i.e., also in the cases of IBC. The limitation period in all proceedings irrespective of the general law or special law it shall be extended with 15 March 2020 to further notice. It is done to make sure that the lawyer/litigants and clients does not necessarily need to be physically present for any type of court practice. The motive is that the litigants/lawyers need not be present for any miscellaneous work or to file any application.

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In case Quinn Logistics India Pvt. Ltd. v Mack Soft Tech Pvt. Ltd. NCLAT also act upon their power and took suo moto cognizance for the problems which were faced by stakeholders. The rule was given under Rule 11 of the National Company Law Appellate Tribunal Rules, 2016. The order which was issued was as under:

There was relief given under those cases in which CIRP has been initiated and those matters are pending before any NCLT (fresh matter or appeal) and if the registered office of corporate debtor is situated in such are where lockdown has been extended then it will be excluded for the limitation of 330 days.

In case of interim order passed by any NCLT it will continue or extended until the next date of the court hearing. The reliefs which are provided for extension will remain same under those areas where lockdown has been extended irrespective of the fact that it has been eased out in other regions or states.

Working of NCLT

The NCLT has also issued many notices relating to the matters of Covid-19 which directs the functioning of NCLT. NCLT has direct bearing on the ongoing cases listed with them as they do not need to provide concessions.

The NCLT in its first notice which is given on 15 March 2020 issued a notice to take only those matters which are urgent which is intimidated and requested by the parties till 27 March 2020.  Any other issue which is not urgent or does not need urgent hearing have to be adjourned on that basis only.

Another notice was given by NCLT in which they also take matters which are not urgent with some conditions that it will be taken upon only on Wednesday’s and Friday’s, the application must be given by the parties through electronic mode i.e., email to the registry . Also, NCLT by giving notification on the same date which is 22 March 2020 till 14 April 2020 close all the benches for judicial work. Under the same notice approval of resolution plan and liquidation matter are not covered under urgent matters.  

As the lockdown had extended so does the applicability of previous notices given by NCLT has been extended of the dates of 22 March 2020 to 3 May 2020.

Another notice was given on 17 April 2020 provided with the information that all NCLTs will take urgent matters through video conferencing. Given as the Amendment to the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2020 (IP Regulations)

As per Regulation 7(2)(ca) of IP Regulations who has received registration certificate have to pay the fee or professional fee. The fee is to be paid before 30 June 2020.  

Conclusion

It is evident that various relaxations have been given under the IBC with a sole purpose of providing shield to the business sector which has been effected and damage has been caused. There have been relaxations given under the code but there are matters which still need a formal notification such as the effects of these relaxations on the existing matters. Otherwise, the reliefs have been granted to ensure the rights of stakeholders. This will definitely aid business sector for the continuation of their existence. 


[1] The Insolvency and bankruptcy code, 2016

[2] The Insolvency and Bankruptcy code, 2016

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