Analysis of Suspension of Section 10 of Insolvency and Bankruptcy Code, 2016
[Written by Saksham Solanki & Suchika Nagpal, 10th Semester Law Student at Amity Law School, Delhi (GGSIPU)]
The global outbreak of Corona virus has challenged the countries healthcare infrastructure and eventually the economic backbone. India being a major developing economy has to deal with the COVID-19 pandemic in a way to protect the economy form falling and in this regard the Hon’ble Finance Minister in her address to the Nation dated 17th May, 2020 announced a Fifth policy reforms in The Insolvency and Bankruptcy Code, 2016 (hereinafter referred as ‘the Code’) for suspension of the initiation of insolvency proceedings against the corporate debtor under Section 7, 9 and 10 of the Code.
The President by virtue of power vested under Article 123 of the Constitution, through IBC (Amendment) Ordinance 2020, dated 05.06.2020[1] added Section 10A under the code. The effect of Section 10A was to put a blanket ban on the insolvency proceedings against the corporate debtor for the default committed on or after 25th March, 2020 till initial period of six months which can be further extended to one year from this date. Thus, the object of the amendment was to protect the Corporate Debtor against the insolvency proceedings for default committed during the defined period. Though, the suspension of the filing of an application under Section 7 & 9 of the Code is justified however, barring the Corporate Debtor under Section 10 of the code puts the ordinance under the grey area.
Section 10 of the code reads as “Initiation of corporate insolvency resolution process by corporate applicant”: wherein the Corporate debtor has the right to initiate voluntary Corporate Insolvency Resolution Process (hereinafter referred as ‘CIRP’) in case of a default. This provision is an exit route available to the Corporate debtor wherein the prospective resolution applicant can take over the business of the corporate debtor with a proposed resolution plan when the corporate debtor finds himself under the obligation of debts and the business in not incurring profits. The concept of ‘voluntary insolvency’ is not an alien concept and prior to the Code, 2016, a relative concept existed under The Sick Industrial Companies Act, 1985 (‘hereinafter referred to as ‘SICA’). The companies seeking rehabilitation would seek remedy under SICA, however, the same was repealed and the jurisdiction to such rehabilitative measures was afforded to the National Company Law Tribunals (NCLTs) across the country pursuant to introduction of the Code, 2016.
Challenges in striking down Section 10 of The Code
In the landmark judgement of Binani Industries Limited v. Bank of Baroda and Anr., the Adjudicating Authority defined the objective of the Code as, “reorganisation and insolvency resolution of corporate persons in a time bound manner for maximisation of value of assets of such persons to promote entrepreneurship, availability of credit and balancing the interest of all stakeholders”[2]. It is contended that the ordinance dated 05.06.2020 that suspends the filing of an application under section 10 defeats this purpose of the Code as the idea under the Code is to revive and not to liquidate and thus, depriving corporate debtor from filing voluntary insolvency proceedings forces him to continue with the business even on occasion of losses and defaults which will eventually put him under a slow death and leaving no scope for its revival. This will neither help the corporate debtor nor the stakeholders as with the passing of the time, the depreciation and liability will increase, thus generating low realisation value and no prospective resolution applicant will be willing to propose a resolution plan. The code will divert from the objective of maximising the value of asset as by taking away the right will give it a slow death with nil returns to stake holders. Therefore, the objects of the Code to provide for time bound process of resolution is defeated with the addition of Section 10A to the Code.
The Constitution of India guarantees Fundamental rights under Part III which cannot ordinarily be taken away by the State. Article 19(1)(g) of the Indian Constitution guarantees every citizen the right to practise any profession, or to carry on any occupation, trade or business. It is submitted that the right to carry on a business has three facets:[3]
- the right to start a business,
- the right to continue a business and
- the right to close a business.
The Hon’ble Supreme Court of India in the landmark case of Excel Wear v. Union of India[4] held that: the right to close down a business was an integral part of the fundamental right to carry on any business guaranteed under Article19(1)(g). The Apex court has specifically stated in its judgement that right to carry on any business also provides the inherent right to close the business as no person can be compelled to carry on the business in case of loses or other circumstances. The Act of the government to close the exit route for the corporate debtor by striking off Section 10 of the Code is infringing the fundamental right provided to the corporate debtor under Article 19(1)(g) of the Constitution of India. Moreover, this would only result in keeping the industry alive forcibly to suffer the pain until it collapses.
The right to close down a business available to the corporate debtor is not absolute but is subject to the reasonable restrictions under Article 19(6) of the Constitution. The Hon’ble Supreme Court in Narendra Kumar v. Union of India[5] held that “In applying the test of reasonableness, the Court has to consider the question in the background of the facts and circumstances under which the order was made, taking into account the nature of the evil that was sought to be remedied by such law, the ratio of the harm caused to individual citizens by the proposed remedy, to the beneficial effect reasonably expected to result to the general public. It will also be necessary to consider in that connection whether the restraint caused by the law is none than was necessary in the interests of the general public”. Therefore, in light of the abovesaid judgement, it can clearly be interpreted that the ordinance is in violation of the fundamental rights of the corporate debtors as the purpose of ‘trade and business’ is ‘subsistence’ or ‘profit’ as observed by the Apex Court in Sodan Singh vs. N.D.M.C,[6] and taking away the same by way of the Ordinance thereby deny corporate debtor the right to initiate voluntary insolvency proceedings under section 10 of the Code without keeping it under the ambit of reasonable restriction under Article 19(6) of the Constitution.
Covid-19 pandemic has shaken the very existence of a healthy economy that has forced various businesses to close down due to heavy losses incurred by them. These unavoidable circumstance are beyond the control of the employers wherein it may not be possible for them to carry on their business and thus by suspension of Section 10 of Insolvency and Bankruptcy Code, 2016 the right of the employer to close down its business is infringed which is essentially an interference with his fundamental right to carry on the business.
Alternative remedies available with the creditor/debtor
With the suspension of the right to restructure its business under the Insolvency and Bankruptcy Code, 2016, the creditors and the corporate debtors are left with the following options to settle their claims in case of a default:
a. Section 230 and 231 of The Companies Act, 2013 – Compromise/Arrangement between the company and its creditors
Section 230 of The Companies Act allows the company or the member of the company or the creditor or the liquidator in case of a wind up to file an application before the Tribunal i.e. NCLT to seek a sanction for a compromise or arrangement between the company and the creditor or the company and its members as the case may be that shall be binding on the company if sanctioned by the Tribunal. Section 231 provides the power to the Tribunal to enforce this compromise or arrangement by supervising it and giving directions as may be necessary for its implementation. Such a compromise will ensure that the company continues its function and at the same time claims of the creditors are honoured. Though, this alternative is seen as the best recourse after the suspension of Section 7, 9 and 10 of IBC, however, the NCLAT in S.C. Sekaran vs. Amit Gupta and Ors.[7] highlighted its importance much earlier by directing the liquidator “to take steps in terms of Section 230” for the revival of the corporate debtor.
b. RBI’s Prudential Framework for Stressed Assets (June 7 circular) – Bank negotiated restructuring
This option is available to the RBI regulated creditors who can attempt a resolution at the bank level to provide a fresh start to the corporate debtor. By way of this circular, RBI authorises lenders to formulate resolution plan if case of a default and thereafter, monitor the performance of the debtor to capture any default on the ground level to secure themselves from larger amount of default. However, the circular failed to analyse that the creditors may not always be banks and NBFCs and thus neglected to include other classes of creditors like foreign lenders, bondholders or mutual funds. It is pertinent to know that this circular also didn’t apply to the revival and rehabilitation of micro, small and medium enterprises (MSMEs).
c. RBI’s Micro, Small and Medium Enterprises (MSME) sector: Restructuring of Advances Circular dated February 11, 2020 – One-time restructuring for MSMEs
This RBI circular, similar to its previous 2019 circular, has extended the time period for a one-time restructuring of the existing loans of the MSMEs classified as ‘standard asset’ till December 31, 2020. However, this recourse is only available to the MSMEs who do not have an aggregate exposure of banks and NBFCs exceeding Rs. 25 crores on January 1, 2020. This could prove to be a speedy resolution for stressed enterprises rather than a long process offered by the insolvency tribunals.
d. Remedy under different legislations
These options have always been available to the creditors in case of a default by the corporate debtor. Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act, 1993 can be put into operation wherein the creditor is a financial institution or banks. Additionally, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFEISI) Act, 2002 is also available to banks to recover the debt when a security is involved. Likewise, a money recovery suit under Order 37 of CPC, 1908 can be filed by an individual to recover a debt.
Does the availability of an alternative remedy save the fundamental right from infringement?
A citizen has a right to approach the Supreme Court or the High Court under article 32 or 226 respectively against the infringement of the fundamental right to carry on a business which includes right to close a business u/a 19(1)(g). The power under these articles are discretionary in nature and may not be exercised only when an ‘efficacious alternative remedy’ is available.[8]
It is contended that the availability of the abovementioned alternatives is not as efficacious as the remedy for restructuring available to the corporate debtor under Section 10 of IBC, 2016 due to the following reasons:
- The Corporate Debtor is still liable to pay through the restructuring of debt even though it is still in the dubious position.
- These alternatives fail to offer benefits that were available under the Code like Moratorium on legal proceedings.
- Restructuring outside the Code does not have the same binding effect as the resolution plans under the Code.
- Other than Section 230 and 231 of the Companies Act, 2013, all the alternatives are available to the creditors rather than corporate debtor to initiate voluntary restructuring.
Conclusion
Since the impact of Covid-19 pandemic has affected global economy, various countries like Australia, UK have also suspended their insolvency laws. While suspending any action by creditors against the companies in case of default, certain countries have managed to provide voluntary insolvencies in order to safeguard the interest of the company and its stakeholders. For Instance, Australia allowing voluntary insolvencies/administration under its insolvency law[9] witnessed its second largest airline, Air Mauritius file for bankruptcy.[10] Similarly, France also allowed companies to initiate voluntary restructuring or liquidation proceedings if a company’s distress worsens during the state of health emergency or if the financial operations of the business require it.[11] Likewise, Spain also allowed filing of voluntary bankruptcy applications but such applications would not be processed during the state of alert.[12]
It is believed that though the ordinance to suspend Section 7 and 9 of the IBC, 2016 is a welcome move in this situation, however, the suspension of Section 10 seems to have no rationale as it would only force the corporate debtor to continue when the company believes that the best solution for it would be resolution under the insolvency law. Moreover, the continuance would further deteriorate assets that may prove to be implausible for companies that could have restructured but will now be pushed into liquidation.
Reference
[1] https://www.ibbi.gov.in/uploads/legalframwork/741059f0d8777f311ec76332ced1e9cf.pdf.
[2] Binani Industries Limited v. Bank of Baroda & Anr, Company Appeal (at) (Insolvency) No. 82 of 2018.
[3] Barsi Light Railway Company Ltd. and Ors. v. Joglekar (K.N.) and Ors., (1957) 1 LLJ 243 SC.
[4] Excel Wear v. Union of India, AIR 1979 SC 25.
[5] Narendra Kumar v. Union of India, AIR 1960 SC 430 (437).
[6] Sodan Singh vs. N.D.M.C, (1992) 5 SCC 52).
[7] S.C. Sekaran vs. Amit Gupta and Ors., (2019) 152 SCL 536.
[8] Sanjana M. Wig v. Hindustan Petroleum Corpn. Ltd., (2005) 8 SCC 242.
[9] https://www.law.ox.ac.uk/business-law-blog/blog/2020/04/managing-insolvency-curve-australia
[10] Business Today, April 23, 2020, available at https://www.businesstoday.in/sectors/aviation/coronavirus-clips-air-mauritius-wings-airline-placed-under-administrators/story/401755.html.
[11] https://www.restructuring-globalview.com/wp-content/uploads/sites/21/2020/04/COVID-19-Impact-of-Global-Insolvency-Laws-29.04.20.pdf
[12] Ibid.
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