IBC (Amendment) Ordinance,2020: Straddling Between Manoeuvre and Ambivalence
Chronology of Amendments
- On 24th March 2020, the threshold limit for filing of an insolvency petition under the Insolvency and Bankruptcy Code, 2016 (“Code”) was increased from Rs 1 Lakh to Rs 1 Crore.
- On 29th March 2020, Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2020 introduced Regulation 40C (Special Provision Relating to Time-Line) providing for exemption of lockdown period in the wake of COVID-19 in relation to the timelines prescribed under corporate insolvency resolution process.
- On 17th April 2020, Insolvency and Bankruptcy Board of India (Liquidation Process) (Second Amendment) Regulations, 2020 introduced Regulation 47A (Exclusion of period of lockdown) providing for exemption of lockdown period in the wake of COVID-19 in relation to the timelines prescribed under liquidation process.
- On 17th May 2020, as a part of Ease of Doing Business initiatives taken by the Finance Ministry of India as a piece of improvement bundle in the wake of flare-up of pandemic announced an embargo on the fresh proceedings under the Code for next one year in respect of COVID-19 related default coupled with an increase in the threshold of default from previous limit of One Lakh Rupee to One Crore Rupees with an intention to prevent cash-strapped companies from being forced into insolvency in light of instigated economic crisis.(To have a clear interpretation of the above mentioned statements made by Finance Ministry everyone was waiting for a formal Ordinance in this regard).
- On 5th June 2020, finally the hiatus comes to an end with the promulgation of the much awaited The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 (“Ordinance”).
Salient Features of the Ordinance
Keeping in view the unprecedented disruptions caused by the pandemic on the businesses, financial markets and worldwide economy and consequent lockdown in India in force since 25th March 2020 and finding out adequate number of resolution applicants to rescue the troubled corporate debtor in such prevailing challenging circumstances; pursuant to the powers conferred under Article 123 of the Constitution of India the Ordinance promulgated by the President of India provides for:
- Insertion of the Section 10A (Suspension of initiation of corporate insolvency resolution process) in the Code providing for embargo on filing of application u/s 7, 9 and 10 of the Code 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.
- Proviso to Section 10A of the Code provides that no application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the default occurring during the said period.
- Section 10A of the Code will not have any impact on the default committed before 25th March 2020.
- Insertion of sub-section 3 to Section 66 of the Code providing for embargo on filing of application under sub-section 2 to Section 66 by resolution professional in respect of the default against which suspension has been stipulated under Section 10A.
Issues on the Anvil
Though the Ordinance has completely put the blanket suspension of insolvency proceedings under the Code to an end which was interpreted by professionals and practitioners till date due to dubiety and has also provided a breathing space to the lenders to a decent conceivable degree in the pervasive times yet again the Ordinance has open a pandora box giving rise to the plethora of the following ambiguities while interpreting the literal meaning of the Ordinance.
- Calculation of the “SUSPENSION PERIOD” : Though the Ordinance clearly provides for the cut-off date for looking at the default but the question on the table is from when the suspension period of six months (as of now) to be calculated. Whether the suspension period is to be construed from 25th March 2020 itself or from the date of notification of Section 10A of the Code.
- Non filing of application “EVER”: From the Ordinance it is clearly evident that there is no bar on filing of application under the provisions of the Code against the default taken place before or after the suspension period. Clarity is also there on the point that no insolvency proceedings can be initiated against the defaults occurring on or after 25th March 2020 for the suspension period of six months or one year (as the case may be). What gives rise to obscurity is that whether the corporate debtors where defaults continues even after the suspension period will still enjoy the immunity under the provisions of Section 10A of the Code. If such immunity is lifelong for such corporate debtors then the fate of its lenders and stakeholders is really a matter of concern. There is high possibility of the misuse of the protection provided under Section 10A of the Code. Though other routes for resolution of defaults is available with lenders but such a prerogative will cause more sufferings than healing to the lenders.
- No talk about “SPECIAL INSOLVENCY FRAMEWORK” for MSMEs: Survival of MSME’s being one of the greatest concern in the rampant situation and government being repeatedly talking about ways and means to protect them, it was highly anticipated that the Ordinance will come out with the Special Insolvency Framework for MSMEs by way of the amendment under Section 240A of the Code. However at present Ordinance is completely silent with regard to the relaxations for MSMEs.
- Bar on “FILING” of the application: The Ordinance under Section 10A of the Code constrict filing of fresh application on or after 25th March 2020. But what worries more is how to prove whether a particular default is COVID related or not. What parameters are to be considered to reach to the conclusion whether a default is a result of pandemic or not and who will have the responsibility to prove the same. Who will check at the time of filing whether application is filed in respect of COVID related debt or not. How one can practically put a ban on filing?
- Calculating the “DEFAULT AMOUNT”: On 24th March 2020, Section 4 of the Code was amended to increase the threshold limit of default from existing Rs 1 Lakh to Rs 1 Crore. This again opens the doors to the room full of ambiguity i.e What will be the treatment for the defaults under the Code where part of default is falling pre suspension period and other part during the suspension period.
- “BLANKET PROTECTION” under Section 66(3): The exiting provisions of the Section 66(3) of the Code seems to provides lifetime blanket protection to the management of the corporate debtor where default occurred during suspension period. This clear cut gives an opportunity to the corporates to enter into fraudulent transactions thereby defrauding its stakeholders with clarity in the back of their mind of never being caught due to such favouring law even in the situation where such fraudulent transactions is very well evident. Such provisions in long run can prove to be demeaning the very purpose of the enactment of the Code.
With bone of contentions still revolving around the Code and its further movement, the interplay by the Adjudicating Authority will be very extremely interesting to watch. In time length of three years, the Adjudicating Authority has successfully resolved many hazy areas and unsettled issues providing amelioration to the Code. Keeping the intent of balancing the interest of all stakeholders intact, it is expected that legislature and regulators will eventually come out with more clarity in the Indian insolvency space on the concerned issues. Though the calibrated suspension is bought very well keeping in mind the interest of borrowers, lenders, resolution applicants and other stakeholders at large. However, timely address of the present critical issues will provide greater clarity in the minds of the stakeholders to accordingly plan their action foreplay in present time situation.
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