Impact of COVID-19 on Insolvency and Bankruptcy Code, 2016: Relief(s) & Implication(s)
Written by Rahul Kumar
[B.A.LL.B.(H), 4TH Year Student from, Law College Dehradun Faculty of Uttaranchal University]
The widespread novel coronavirus had forced the government to initially lockdown everything in India through its Notification No. 40-3/2020-DM-I(A) dated 24-03-2020. Despite of all the precautionary measures opted by the government and the various authorities, there has been an enumerable rise in the number of cases relating to corona virus in India. Recently on Sunday, the government decided to continue this lockdown for another two weeks extending it to 31st of May with some relaxations in various sectors. The unprecedented spread of this pandemic has impacted each and every sector in India, be it the economic, employment, real estate, trade etc.
But the most vivid sufferers of this lockdown has been, Micro, Small and Medium Enterprises (MSME). They eventually faced the imminent threat of going out of business. Considering the nature of these enterprises, they mostly feared Insolvency. Therefore, in order to curtail their fear, the government came with some steps in order to strengthen them and in the same process The Indian Insolvency and Bankruptcy Code, 2016 underwent some developments.
Increasing the Threshold Amount
It was on 24th March 2020, when the Finance Minister during the media briefing announced that the monetary threshold of default for filing a resolution process under IBC shall be increased to Rupees 1 Crore from the previous threshold amount being 1 lakh rupees. This announcement was brought into force from immediate effect and the Ministry of Corporate Affairs notified the same on the same date i.e. 24-03-2020 vide Notification No. REGD.NO.D.L-33004/99.
It is interesting to note that the amendment of Section 4 for increasing the threshold limit has its direct implication on the Section 7, 9 and 10 of the Code which specifically discuss about filing of the application before the Adjudicating Authority. Now after this change it is clear that the threshold limit to contemplate default amount has now been increased to INR 1 Crore without any rider or exception. Therefor from now onwards all the applications of respective financial creditor or operational creditor or even by Corporate Debtor can only be entertained if the default amount is more than or equal to 1 Crore. This step was basically taken to support the MSMEs sector and such other businesses that have been drastically hit out of this current situation. Also whether this notification is only applicable to MSMEs or to all other businesses as well. Well in my understanding it seems like this notification would be applicable to all the businesses that has been affected due to the current pandemic.
Excluding the Lockdown Period from the timeline period of 330 days
In order to exclude the Lockdown period from the timeline of 330 days a special provision, namely, Regulation 40-C has a been inserted in the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 to exclude the lockdown period from the timelines prescribed under the IBC vide Notification No. IBBI/2019-20/GN/REG059 dated 29.03.2020. The same notification reads as follows:
“40-C. Special provision relating to time-line.— Notwithstanding the time-lines contained in these regulations, but subject to the provisions in the Code, the period of lockdown imposed by the Central Government in the wake of COVID19 outbreak shall not be counted for the purposes of the time-line for any activity that could not be completed due to such lockdown, in relation to a corporate insolvency resolution process.”
Thus, the present timeline of 330 days prescribed in the proviso to Section 12(3) of the IBC for the insolvency resolution process would not include the lockdown period.
In a suo motu action, taking a cue from the Supreme Court, the National Company Law Appellate Tribunal (“NCLAT”) vide order dated 30-03-2020 in Suo Motu – Company Appeal (AT) (Insolvency) No. 01 of 2020 held the following and passed two orders in this effects as:
One of the orders on this point stated that, “the period of lockdown imposed by the Central Government in the wake of Covid-19 outbreak shall not be counted for the purposes of the time-line for any activity that could not be completed due to such lockdown, in relation to a corporate insolvency resolution process”.
It is further ordered that any interim order/stay order passed by this Appellate Tribunal in anyone or the other appeal under Insolvency and Bankruptcy Code, 2016 shall continue till next date of hearing, which may be notified later.”
Suspension of section 7, 9 and 10 for a period of one year
In order to prevent the financial distress faced by the companies due to coronavirus has forced the government to introduce a new provision namely section 10A of the Insolvency and Bankruptcy code with an of suspending Section 7, Section 9 and Section 10 of the Code, 2016 dealing with initiation of Corporate Insolvency Resolution Process (CIRP).
This suspension denotes a bar on the ability of a financial creditor, operational creditor and a corporate applicant seeking initiation of CIRP for a period of six months, but not exceeding 12 months as according to the 1st notification in this regard. But on last Sunday dated 17-05-2020, the Finance minister made it clear that the IBC would remain suspended for another one year making it complete one year suspension from the 1st notification.
The said ordinance aims to suspend Sections 7, 9 and 10 the IBC, to safeguard borrowers from being dragged into insolvency. Section 7 allows a financial creditor to file for initiating the corporate insolvency resolution process against a corporate debtor. Section 9 provides for application of insolvency by an operational creditor, while Section 10 is for initiation of insolvency proceedings by a corporate applicant.
Also in the 5th press conference earlier this Sunday on 17-03-2020, The Finance minister has indicated that in order to protect the MSMEs a new framework for MSMEs will be notified under section 240A of the IBC.
The IBC Ordinance dated 05-06-2020
The president of India promulgated the ordinance on 5th of June 2020, whereby Insolvency and Bankruptcy Code, 2016 is amended and section 10A has been inserted to it. All the recent developments that has occurred to IBC recently is a result of the impact caused by the ongoing Pandemic. It is evident to us that how business, financial markets and the economy has been impacted in the recent few months and in order to tackle the same, a relief by way of this ordinance has been provided.
The insertion of section 10A provides that no application for the initiation of CIRP can be filed for any defaults that has arisen on or after 25th March, 2020 for a period of 6 months which can further be extended for a year.
The proviso to this has also made it clear that No application shall be filed for a corporate debtor any defaults that has occurred during the said period. It has also been clarified by way of an explanation that section 10A would not apply to any default that has occurred before 25th of March 2020.
This ordinance has also inserted a subsection to section 66 of the Act and this, section 66(3) provides for fraudulent or wrongful trading and this puts an embargo on resolution professional for filing application under section 66(2) against all such defaults that are covered under section 10A. It is to be noted that these two changes brought by the way of ordinance is going to prove beneficial, however the lacunas or the void that has been created by these changes would require some due attention and interpretation by the courts.
IMPLICATIONS ARISING OUT OF THE DEVELOPMENTS:
Firstly, It is important to note that the 3rd Annual Insolvency Law Committee Report which was released on 20-02-2020 had already recommended for increasing the threshold amount from rupees one lakh to rupees fifty lakhs. The reason that this committee put forth was to decrease the pressure on the NCLT as increasing the threshold will decrease the number of cases. But in the case due to the increase of the threshold to rupees one crore is going to impact the INC regime. It is to be noted that the operation creditors of corporate debtors in most of the cases are companies itself, hence, they become susceptible to becoming the prospective corporate debtors if their existing dues are not recovered as a result of this increased threshold. In such a case this amendment will prove to be counter productive and against the objectives of IBC.
Secondly, The notification that came on 24-03-2020 via Notification No. REGD.NO.D.L-33004/99 does not provide for the retrospective effect and hence in that case the earlier threshold of Rupees one lakh would continue to apply to cases that are pending. However, the new applications seeking commencement of CIRP would necessarily have to meet the revised criterion of default of minimum Rupees one crore by the corporate debtor.
The proviso to Section 12(3) of the IBC which read as follows:
“Provided further that the corporate insolvency resolution process shall mandatorily be completed within a period of three hundred and thirty days from the insolvency commencement date, including any extension of the period of corporate insolvency resolution process granted under this section and the time taken in legal proceedings in relation to such resolution process of the corporate debtor:”
Therefore, there might occur a financial distress to such companies that are already undergoing CIRP and such companies would be required to complete the same within the stipulated time period of 330 days. Therefore, no measure has been taken to deal in such circumstances.
To this point it becomes important to note what the Supreme Court observed in Committee of Creditors of Essar Steel India Ltd. Through Authorised Signatory v. Satish Kumar Gupta 2019 SCC NCLT 206, whereby the Supreme Court struck down the word “mandatorily” used in the above said proviso as being manifestly arbitrary under Article 14 of the Constitution of India and as being an excessive and unreasonable restriction on the litigant’s right to carry on business under Article 19(1)(g) of the Constitution and held as follows:
“108. …The effect of this declaration is that ordinarily the time taken in relation to the corporate resolution process of the corporate debtor must be completed within the outer limit of 330 days from the insolvency commencement date, including extensions and the time taken in legal proceedings. However, on the facts of a given case, if it can be shown to the Adjudicating Authority and/or Appellate Tribunal under the Code that only a short period is left for completion of the insolvency resolution process beyond 330 days, and that it would be in the interest of all stakeholders that the corporate debtor be put back on its feet instead of being sent into liquidation and that the time taken in legal proceedings is largely due to factors owing to which the fault cannot be ascribed to the litigants before the Adjudicating Authority and/or Appellate Tribunal, the delay or a large part thereof being attributable to the tardy process of the Adjudicating Authority and/or the Appellate Tribunal itself, it may be open in such cases for the Adjudicating Authority and/or Appellate Tribunal to extend time beyond 330 days…”
This is a major implication that remains unanswered and would require courts and tribunals to see as to what can be done.
Also to the other point, all such businesses that are already going CIRP would require to make some changes or modifications in the already submitted plan and the same needs to be addressed considering the current situation. It is important to note that there are no express provisions with regard to such modifications on the Act but the courts would again be required to dwell into it and see how the relief can be provided to them considering the ongoing scenario.
Thirdly, the other major concern that has arisen out of this is that the consequences of suspending the IBC on operational creditors are equally unclear. It is now very much certain that the operational creditors will now insist on shorter payment terms and protection of transactions entered into so that if any case of insolvency arises, they are not left without any prospects of recovering their operational debt. It is equally important to address that the transactions of corporate debtors with operational creditors can be maintained with as little disruption as possible.
Lastly, this ordinance has left a lot of things for the courts to determine and interpret. The ordinance has not provided for any measure as to determine if the default has occurred due to pandemic and that too within the given time frame. The ordinance doesn’t address the concern of the MSMEs who has the most affected ones during this pandemic. Therefore these issues still exists and the take of the courts will be an important factor in determining the questions that has arisen out of such changes.
It is to be noted that the current situation has forced to make a lot of changes in the Insolvency regime in order to protect the interests of the businesses that are affected out of this situation. But it is also pertinent to note that few of the developments have led to a lot of debates owing to the fact that these ordinances and orders have led to some sort of ambiguity with respect to the application of such new provisions.
Further it is also to be noted that if the only objective of the government was to support the MSMEs then the changes would have specifically come to section 240A of the Code. Further it is also unclear as to why do we need to entail a special framework for MSMEs and not including the non-MSMEs to it. It is also to be noted that there is no clarity upon the duration of operation of these notifications. The government has however stated that this is a temporary measure, however it will be important to see as if it gets rolled in future or it stays permanently.
However, keeping in mind the objectives of such developments in order to fight the current situation and strengthen the affected businesses, it is an essential move by the government unlike that in other jurisdictions and it becomes equally important to note that the role of courts and tribunals will be of immense importance to fill the various lacunas that these ordinances have given rise to.
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