COVID-2019 IMPACT - INSOLVENCY ORDINANCE, 2020

[Dr. Sanjiv Agarwal]

Back drop

Covid-2019 or Corona virus has impacted almost entire world including India. It has changed the way of life and has impacted businesses deeply and adversely so much so that even many resourceful and strong economies are facing its dreaded impact. The economies have been hit by and large in all sectors including corporate performance, banking, liquidity crisis, debt management and commercial defaults.

Covid-19 pandemic has impacted business, financial markets and economy all over the world, including India, and created uncertainty and stress for business for reasons beyond their control. A nationwide lockdown is in force since 25^th March, 2020 to combat the spread of Covid-19 which has added to disruption of normal business operations.

In order to attempt bringing economy back to normal (or near normal) Central Government had announced a stimulus package worth ₹ 20 lakh crore which has since been detailed by the Finance Minster in five tranches, last one being on 17 May, 2019. These inter alia, included various measures to ease out business compliances, steps for ease of doing business, fiscal measures including relaxations, liberal compliance environment, steps to boost demand and enhance liquidity in system by way of economic and fiscal reforms.

Reforms proposed in Insolvency Law

The reforms announced on 17 May, 2017 in relation to Insolvency law, i.e., Insolvency and Bankruptcy Code, 2016 (in short, IBC) may not yield immediate benefits but are aimed to boost demand in mediums to long term, make business environ stronger and resilient and boost business sentiment across the board.

The reforms announced in Insolvency law appear to be both, timely as well as well envisioned. In fact, in the given situation, they are strategic. The major reforms in insolvency and bankruptcy are towards easing the trigger for IBC to get attracted, i.e.,

• Threshold for initiating IBC proceedings raised from ₹ 1 lakh to ₹ 1 crore
• Fresh proceedings under IBC to remain suspended for a period of one year (earlier it was announced to be suspended for six months in March, 2020)
• The threshold trigger to exclude Covid related debts
• Specific framework for micro, small and medium enterprises (MSMEs)

IBC Ordinance, 2020

Central Government has promulgated an Ordinance on 5^th June, 2020 known as the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 (in short IBC Ordinance 2020) to amend the Insolvency and Bankruptcy Code, 2016. This code provides for the provisions relating to corporate insolvency resolution process for corporate persons.

As stated above, in the present backdrop, it is difficult to find adequate number of resolution applicants to rescue the corporate person who may default in discharge of their debt obligations.

As announced on 17^th May 2020,  Government has considered it expedient to suspend under section 7, 9 and 10 of the Insolvency and Bankruptcy Code, 2016 to prevent corporate persons which are experiencing distress on account of unprecedented situation, being pushed into insolvency proceedings under the said Code for some time. Further, it was considered expedient to exclude the defaults arising on account of unprecedented situation for the purposes of insolvency proceedings under the Code.

Since the Parliament is not in session and amendments are of importance, the present Ordinance has been promulgated on 5^th June, 2020 to come into force at once.

The Ordinance has amended IBC as follows:

1. Insertion of new section 10A on suspension of initiation of corporate insolvency resolution process (CIRP), and
2. Amendment of section 66 which deals with fraudulent trading or wrongful trading by insertion of sub section (3) to prohibit the insolvency professionals to initiate application for insolvency

The key features of the amendments to IBC through this Ordinance can be listed as follows:

1. By insertion of section 10A on suspension of initiation of corporate insolvency resolution process (CIRP)

The new section 10A provides  for as follows and shall be operative from 25^th March, 2020

New section 10A reads as follows :

“10A Notwithstanding anything contained in section 7, 9 and 10, no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25^th March, 2020 for a period of six months or such further period, not exceedin one year from such date, as may be notified in this behalf:

Provided that no application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the said default occurring during the said period.

Explanation – for the removal of doubt’s it is hereby clarified that the provisions of this section shall not apply to any default committed under the said sections before 25^th March, 2020”.

Accordingly,

• Section 10A supersedes section 7, 9 and 10 of IBC as it starts with the words ‘not withstanding…………’
• It is a non-obstante provision and overrides the provisions of section 7, 9 and 10 dealing with application by financial creditors, application by operational creditors and application by the corporate debtor respectively.
• No application for initiation of CIRP of a corporate debtor can be filed for any default-

• which arises on or after 25^th March, 2020
• For a period of six months which may be further extended but not exceeding one year (i.e., maximum cooling period will be one year as per Ordinance)

• Section 10A not to apply to defaults committed under section 7, 9 and 10 before 25^th March, 2020.
• No application shall ever be filed for CIRP of a corporate debtor for defaults during the said period

Does this mean that the CIRP can still be initiated for defaults prior to 25 March, 2020? The answer appears to be in affirmative if section 10A is read down harmoniously. There is no immunity provided to such cases.

2. New sub-section (3) of section (66)

New sub-section (3) of section (66) is again an overriding provision which supercedes sub-section (1) and (2) and provides that no application shall be filed by a resolution professional under sub-section (2), in respect of such default against which initiation of corporate insolvency resolution process is suspended as per section 10A.

Thus, a resolution professional has been prohibited to file any application under section 7, 9 and 10 of IBC for defaults covered under new section 10A where CIRP stands suspended.

Suspension of IBC proceedings

The Government’s intention is to temporarily suspend IBC proceedings by way of fresh filing and also excluding Covid related debts from the scope of default with an objective of avoiding any company attracting otherwise avoidable IBC route of debt management. Any such temporary suspension is only to mitigate the risk of insolvency during the current Covid led crises.

Suspending the fresh proceedings for upto a year under IBC may help the defaulting companies but is likely to distort the recovery mechanism as well as market driven financial discipline. It may be noted that what is proposed to be suspended is only the fresh initiation under IBC Code upto a period of one year. Further, relaxations may depend upon the situation which unfolds over a period but atleast approval for one year’s suspension is provided by Ordinance.

The Government fears that in view of Covid-2019, there could be increased number of cases under IBC due to defaults emanating from Covid created situation and as such has proposed embargo on any new filings under IBC. Ideally, instead of suspending the operation of IBC itself, Government should try to provide a platform to redress the debtor-creditor issues. Suspension may not be the desirable answer as the problems will continue till resolution is found. Further, suspension alone does not help as there are other legal remedies available to lenders such as under SARFAESI Act, 2002, Debt Recovery Tribunal etc.

The suspension should not have been made applicable to section 10 of IBC cases for corporate insolvency resolution plans. By doing so, it would be allowing the corporate debtor to accept a slow death and deprive them from a possible resolution in a timely manner.

Today it is not sure whether the impact of Covid will be for a year or even longer. If it goes beyond, the problem would still persist. As such, at this juncture, we are not sure to whether this one year holiday will just be one year only  or it may be further extended as none of us know how Corona will behave in future and how countries will be able to deal with it in terms of spread, prevention and cure.

It may however, be noted that suspension of IBC for one year as well as enhancing the threshold to rupees one crore simultaneously also does not make any sense as if suspension is effected, there was no need to enhance the limit to rupees one crore.

Epilogue

It is expected that the stimulus announced by Central Government in relation to IBC and amendments made through Ordinance will become effective by way of Notification. IBC is a very crucial piece of law and should become integral part of Indian financial and corporate framework.