The COVID-19 pandemic has had a widespread impact on all aspects of lifestyle. Its drastic effect can also be observed in various aspects of the Economy. The Indian Government, in order to cope up with the detrimental impact of COVID-19 on the nation’s economy, has taken certain measures to protect those who are worst affected by the pandemic. The various initiatives have been taken under the “Atmanirbhar Bharat Yojana”.
The announcement made by the Finance Ministry, on 17th May 2020 as a part of the 5th tranche of the aforementioned scheme, regarding major policy reforms in the Insolvency and Bankruptcy Code 2016 (hereinafter referred as ‘IBC’), had left the stakeholders baffled owing to a number of ambiguities that had arisen after the announcement. The various stakeholders have been eagerly awaiting further clarification by the Ministry in this regard. The Government of India has finally promulgated an ordinance [IBC (Amendment) Ordinance 2020], on 5th June 2020, and has cleared out the air for stakeholders. The new rules have been made immediately put into effect.
The ordinance has majorly dealt with the aspects pertaining to provisions concerning ‘default’ and ‘wrongful trading’. Thankfully, the confusion regarding the filing of fresh IBC Proceedings for “PRE-COVID” defaults has been clarified and the earlier proposed suspension has also engulfed Sec. 10 of IBC. Whether the ordinance has clarified everything regarding the policy or is still open to various interpretations and skepticism is something that needs to be seen by critically analyzing the changes.
Changes made through the Ordinance
The Central Government owing to the widespread impact of COVID-19 on financial markets and economy promulgated the Ordinance dated 5th June 2020 applicable with immediate effect. The highlights of the issued ordinance are as follows:
- The Ordinance has inserted Section 10A to the principal act. The section further suspends the initiation of the Corporate Insolvency Resolution Process (hereinafter referred to as CIRP) for any default arising after 25th March 2020. Currently, the suspension is for a period of 6 months, however, the ordinance reserves the extension of the said period to 1 year.
- The Proviso to Section 10A further stipulates that no application for CIRP “shall ever be filed” for the defaults which shall occur in this time period.
- The Ordinance further inserts sub-section (3) to Section 66 of the Insolvency and Bankruptcy Code, 2016. It stipulates that a Resolution Professional is no longer entitled to file an application under Sec 66 (2) to initiate CIRP for any default occurring in the prescribed time period.
After the announcement made on 17th May 2020, one major uncertainty was whether the suspension will apply to proceedings u/s 7, and 9 of IBC only, which talk about the initiation of the corporate insolvency resolution process (hereinafter referred as ‘CIRP’) by financial creditors and operational creditors respectively, or u/s 10 as well, which is the voluntary initiation of CIRP by the corporate applicant. This position has been clarified through the insertion of Sec. 10A which has suspended all these three sections for a ‘default’ arising on or after 25th March 2020. The idea behind this is to prevent the corporate persons who are facing distress due to an ‘unprecedented situation’ as mentioned in the ordinance. Taking these stressed units to bankruptcy proceedings and dragging them into tribunals in this time of crisis is not virtuous, and suspending sections 7 and 9 is justified for that matter. But the suspension of Sec. 10 is problematic and might defeat the objectives and purpose of IBC, hence it falls short of that justification.
One of the basic objectives behind IBC is to safeguard the firms even after defaulting, financially or operationally, and save them by providing them a second chance or a new life. Sec. 10 gives locus standi to the corporate debtor to voluntarily move an impugned petition against itself to initiate CIRP. The main motive of CIRP is to benefit both, the creditor as well as the debtor while focusing on maximization of assets as the purpose of IBC is to look out for all stakeholders. In this crisis, when it might be a possibility that the situation will continue for a time unknown, not allowing the stressed firms who are not able to survive, this chance under Sec. 10 is not justified because these units will not practically be able to function in an indebted condition and the ‘debt will eventually oust itself’. Furthermore, an explanation to Sec. 10A has clarified that Sec. 10A will not be applicable to any default that occurred before 25th March 2020, and the fact that there is no ‘blanket ban’ is a relief. In toto, the ‘disruption period’ can be taken as 25th March 2020 to 24th March 2021 (6th months initially and extension reservation up to 1 year).
In light of the credit crunch created due to the crisis, IBC suspension alone will not be sufficient unless an alternative framework is proposed to cater to credit availability. As mentioned by the Finance Minister earlier in her press conference about MSMEs, the ordinance has failed to specifically consider MSMEs. No corresponding change has been made in the definition of ‘default’ u/s 3(12) of IBC. Ascertaining that the default occurred due to the COVID-19 pandemic will be a grey area.
The drafting language in the ordinance has created yet another confusion which is very problematic. The expression “no application shall ever be filed” as used in the first proviso to Sec. 10A gives rise to a serious question that whether the creditor will be inhibited to initiate CIRP even after the ‘disruption period’ concludes. If this is true, then the creditor will not be able to recover the dues even after the debtor has recovered from the crisis and is no longer facing an ‘unprecedented situation’, hence providing the debtors a chance to unjustly enjoy the protection of this ordinance. Practically, if such interpretation is provided, the provision will become counter-intuitive. The debtors being able to permanently avail this ‘escape to pay’ will encourage them to default as much as possible during the disruption period. This should not be and cannot be the intent of the law as it will totally defeat IBC’s purpose.
Sec. 66 of the IBC deals with the instances of fraudulent trade. If during the CIRP it is found that the Corporate Debtor intended to defraud its creditors, the resolution professional is entitled to file an application before the adjudicatory authority to make the assets of the corporate debtor contribute to the debt. The sub-section (3) added by the ordinance, prohibits applications by resolution professionals for defaults occurring in the time period suspended by the Ordinance. This act of the Central Government is contrary to the principles of justice and Sec 66 itself as it tends to empower corporate debtors to carry out fraudulent practices during the said period and not be held accountable for the same owing to the protection provided to them by Sec 10A. This purpose behind the insertion of this sub-section requires further much-awaited clarifications.
Moreover, the ordinance should be looked at along with RBI’s Notification [RBI/2019-20/244 DOR. No. BP.BC.71/21.04.048/2019-20] dated 23rd May 2020, which has extended EMI moratorium for another 3 months on term loans. In that case, for this period, this ordinance will not be of much use in cases u/s 7 as the borrowers already have the benefit of extended moratorium through the aforementioned RBI Notification, making it a total of 6 months. Hence, this ordinance mostly disservices the operational creditors as financial creditors already have the RBI moratorium.
Another point that needs to be considered is whether the updated minimum threshold of INR 1 crore will be applied to cases before 25th March 2020 as well. The MCA Notification No. S.O.1205(E), dated 24 March 2020, had increased the minimum threshold for initiation of CIRP was increased from Rupees one lakh to one crore. The increased threshold was enacted to benefit the small companies and MSMEs which were the worst hit due to the lockdown imposed to curb the further spread of COVID-19. The Government notification, however, failed to clarify the applicability of the increase. The notification issued does not mention if the increased threshold will be applied prospectively or retrospectively. As per the precedent of the Supreme Court of India laid down in the case of S.L. Srinivasa Jute Twine Mills v. Union of India [(2006) 2 SCC 740, para 18), a statute is deemed to be applied prospectively unless explicitly mentioned otherwise. However, the prospective applicability of the increased threshold is still open to contrary interpretations due to the judicial interference and the notification being only a subordinate delegated legislation and not an amendment itself
Apart from this, IBC provides for the initiation of IRP against the personal guarantor in the event of his default to pay off the debt on the invocation of the personal guarantee. The Current ordinance has clearly ousted the CIRP under Sec 8, 9, and 10. However, the ordinance has not dealt with the insolvency resolution process against the Personal Guarantors whose liability for the debt is co-extensive with that of the corporate debtor. Thus, the IRP can still be initiated against personal guarantors, which shall further cause an impediment in achieving the objective behind the promulgation of the ordinance dated 5 June 2020 and create further ambiguities.
The IBC (Amendment) ordinance 2020 has created complexities and has raised certain questions that further need to be answered. Although some things have been clarified for the stakeholders through this, however, more than that the drafting has invited different interpretations which certainly question the intent behind it.
Law student, Year III, B.A LL.B. (Hons.), Symbiosis Law School, Pune; Founder and Managing Editor at Law et Justicia Law Review.
Law student, Year III, B.A LL.B. (Hons.), Symbiosis Law School
The Opinions expressed in this article are that of the author(s).The facts and opinions expressed here do not reflect the views of http://www.ibclaw.in.
The opinions expressed herein are those of the contributors (which shall, for these purposes, include guests) in their personal capacity and do not, in any way or manner, reflect the views of the organizations that the contributors are presently associated with, or that have previously employed or retained the contributors. Postings on this blog are for informational purposes only. Nothing herein shall be deemed or construed to constitute legal or investment advice. Discussions on, or arising out of this, blog between contributors and other persons shall not create any attorney-client relationship.