Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020: A step in the Right Direction amidst COVID-19- An Analysis – By Harsh Kumar

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Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020: A step in the Right Direction amidst COVID-19- An Analysis

Introduction

The spread of Coronavirus (COVID-19) pandemic across the globe followed by subsequent lockdown has adversely affected the business operations across the world. This has further increased the pressure on the distressed India markets, MSME and other small scale business operations. As a result, various measures are being adopted by government in the form of relief packages and legal amendments to deal with the already distressed market and further strengthening the debt-resolution regime and ease of doing business; the latest amendment being the Insolvency and Bankruptcy Code (“IBC’) Amendment Ordinance, 2020. The amendment to IBC, 2016 is the combination of various reforms in light of the pandemic.

IBC (Amendment) Ordinance, 2020: Insertion of Section 10A and Section 66(3)

The new Section 10A provides for blanket suspension of initiation of Corporate Insolvency Resolution Process (“CIRP”) under section 7, 9 and 10 of the IBC for a period of six months. It states that no fresh applications for initiation of CIRP shall be filed for period of six months commencing from 25th March, 2020. It can further be extended for a period of one year providing a safe harbour to the corporate debtors. The clarification by way of explanation excludes the application for initiation of CIRP filed before 25th March, 2020.

Furthermore, the newly inserted sub-section (3) under Section 66 of the IBC prohibits filing of applications by Resolution Professionals under sub-section (2) for such default against which the initiation of corporate insolvency resolution process is suspended by Section 10A. Section 66(2) of the IBC, 2016 imposes a liability on the director or partner of the corporate debtor to contribute to the debtor’s assets on an application initiated by the resolution professional, if they carried on business with the wilful intent of defrauding creditors or did not exercise requisite due diligence before the commencement of CIRP. The addition of sub-section (3) protects the director or partner from liability in case of such default when CIRP is suspended under Section 10A.

Further, as per the notification dated 24th March, 2020 of  Ministry of Corporate Affairs, the threshold for minimum default was increased from rupees one lakh to rupees one crore.

Also, vide notification dated 29th March, 2020, Regulation 40C was introduced in the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (the “IBBI Regulations”) regarding the exemption of the period of lockdown from being considered under the timelines prescribed in the IBC in relation to a CIRP.

Further, regulation 47A was inserted to the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 to provide a similar exemption of the lockdown period in relation to the timelines prescribed under the liquidation process.

The recent amendments: Failed attempt to ease financial stress?- An Analysis

Addressing ambiguities through clarification: The amendment clearly states that the period of suspension of initiation of CIRP commences from 25th March, 2020, however, clarification regarding the defaults continuing before the aforementioned date was also the need of the hour, but has not been dealt with while introducing the aforesaid amendment

Unwarranted Protection to Promoters/Directors: The amendment to section 66 of IBC, 2016 also offers an easy way out for the promoters/directors/partners of the defaulting corporation or company further putting the creditors’ money at risk. The promoters/directors/partners can now escape their liability and wilfully default the payment of dues without being held accountable for the default resulting in accumulation of debts and increased financial burden.

Suspension of Voluntary CIRP: Further, the suspension of Section 10 (voluntary insolvency application by the corporate debtor) of the IBC, 2016 takes away the autonomy of the company under financial distress to restructure its debt. It would increase the distress of the company, further diminishing the value of its assets.. The creditors would no longer be able to maximise the value of their assets through preparation of resolution plan. Therefore, it would have been in the interest of the Corporate Debtor to continue the operation of Section 10 of the IBC, 2016.

Operational Creditors: Lack of remedies: The recent amendments suspended the initiation of CIRP by Operational Creditors (Section 9) thereby affecting the interests of operational creditors, especially the Micro Small and Medium Enterprises (MSME). The default amount cannot be claimed by the MSMEs even if the threshold limit is breached, thereby opening a wide ray of possibilities regarding wilful default by the corporate debtors. Furthermore, the increased threshold was aimed at providing relief to the MSMEs, however, the resolution of stressed MSME firms have taken a hit as a result of suspension of CIRPs.

Therefore, a different regime of debt resolution must be explored in this regard.

Conclusion

A blanket suspension of the provisions of IBC, 2016 without exploring alternatives to debt restructuring and debt recovery will further aggravate the economic crisis and increase financial distress. Corporate debtors would take an advantage, accelerate the debt during the time period of suspension and would try to find a permanent escape out of incurred debt. Therefore, it is important to look at the existing provisions in law regarding the resolution of debt that strikes a balance between the interests of all the stakeholders and introduce measures to fast-track the resolution process.

 

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