The Government in a bid to protect viable firms from liquidation in the unprecedented times of COVID-19 pandemic has suspended fresh insolvency proceedings against defaulting corporates with the help of an IBC (Insolvency and Bankruptcy Code) Amendment, 2020 brought through an ordinance. It can be viewed as a short-term relief for stressed corporates.
The Insolvency and Bankruptcy Code was enacted in the year 2016 and its provisions, in respect to corporate insolvency, were enforced with effect from December 1, 2016. The IBC, 2016 was enacted with a view to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interest of all the stakeholders including alteration in the order or priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India (IBBI).
A need was felt to give the highest priority in repayment to last mile funding to corporate debtors to prevent insolvency in case the company goes into corporate insolvency resolution process (CIRP) or liquidation. Before this important legislation, India had an overly complex insolvency regime governed by multiple laws like Companies Act of 1956, Sick Industrial Companies Act of 1985, etc. but none of which provided a complete solution for the same. The Code has been amended so far, five times including the last one by way of the recent IBC (Amendment) Ordinance, 2020.
This amendment in the form of an ordinance is a result of the economic distress caused by the current prevailing Covid-19 pandemic. This code is used to bring insolvency proceedings against defaulting corporates. It also requires availability of interested resolution applicants to take over the management of the insolvent corporates for resolution of their insolvency. The government has felt the need of suspending the operation of Sections 7,9 and 10 of IBC, 2016 for some time. The reason for the same is that the corporates who were making profits before the pandemic are now on the verge of insolvency due to these unprecedented times. Secondly, finding an adequate number of resolution applicants for these insolvent corporates will be difficult during this period of distress.
Section 7 is Initiation of corporate insolvency resolution process by financial creditor.
Section 9 is Application for initiation of corporate insolvency resolution process by operational creditor.
Section 10 is initiation of corporate insolvency resolution process by corporate applicant.
With this ordinance two Sections, viz. 10A and 66(3) have been incorporated in the Insolvency and Bankruptcy Code, 2016.
Section 10(A) states that the defaults arising on or after 25th March, 2020 for a period of six months or such further period as may be notified by the Central Government in this behalf but not exceeding one year from the said date, shall not be considered for CIRP or insolvency proceedings. This ordinance has a retrospective effect because it also affects pending applications, if any, filed between 25th March 2020 and 5th June 2020. These applications will be non-actionable or barred by law as contrary to this ordinance.
The protection under this section will not be applicable on any default arising before 25th March 2020 and to the defaults committed after the end of six months or the extended period, if any notified in due course.
Section 66 (3) states 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.
Whether this short-term relief will be misused by the corporates is yet to be seen. But MS Sahoo, Chairperson, Insolvency and Bankruptcy Board of India (IBBI) says that “I do not think firms will misuse ban on insolvency under IBC”.
His rationale behind this statement as he explained, “the relief is limited to Covid-19 default arising during a short window of time. It neither absolves the debtor of the debt nor suspends the liabilities in respect of Covid-19 default under various other laws. It insulates a firm from insolvency for Covid-19 default, not all defaults. It suspends Covid-19 default for initiation of CIRP (Corporate Insolvency Resolution Process), and not for any other purpose”. Therefore, he does not think the firms would misuse the leeway.
*As per various reports.