Relaxations under Insolvency and Bankruptcy Code (IBC) due to COVID 19 and its impact
Insolvency and Bankruptcy Code (IBC) Ordinance, 2020 (Dated June 05, 2020)
Executive Summary:
-Suspension of fresh insolvency proceedings by a creditor for the defaults committed by a corporate debtor on or after March 25, 2020, for a period of 6 months i.e. September 24, 2020
-Suspension of fresh insolvency proceedings by a corporate debtor for a period of six months
-The resolution professional shall not file an application with the NCLT to order director or partner of the corporate debtor to make contribution to the assets of the corporate debtor in respect of defaults against which initiation of IRP has been suspended.
Detailed Analysis:
Understanding Section 7,9 & 10 of IBC 2016:
Section 7: Initiation of corporate insolvency resolution process (CIRP) by financial creditor:
A financial creditor may himself or through a joint application can file application for initiating insolvency proceedings against corporate debtor if the amount of default exceeds the threshold limit of INR 1 Crore
Financial creditor means a person to whom a ‘financial debt’ is owed. E.g. lenders
Section 9: Initiation of corporate insolvency resolution process (CIRP) by financial creditor:
An operational creditor may himself or through a joint application can file application for initiating insolvency proceedings against corporate debtor if the amount of default exceeds the threshold limit of INR 1 Crore
Operational creditor means a person to whom a ‘operational debt’ is owed. E.g. provider of goods and services
Section 10: Initiation of corporate insolvency resolution process (CIRP) by corporate applicant:
It provides where a corporate debtor has committed a default, a corporate applicant thereof may file an application for initiating corporate insolvency resolution process with the Adjudicating Authority.
Corporate applicant means corporate debtor itself
Relaxations introduced by IBC Ordinance, 2020:
| IBC section reference | Existing provision | Amended provision / Relaxation |
| Section 7, 9 & 10 | If the corporate debtor has committed a default in repayment of debt of INR 1 Crore or more, corporate insolvency resolution process (CIRP) can be initiated against such corporate debtor by the following persons:
1. A financial creditor under section 7; 2. An operational creditor under section 9; 3. The corporate debtor itself under section 10 |
A new provision via section 10 A has been inserted in the IBC. As per section 10 A, no application for initiating insolvency proceedings shall be filed ever under section 7, 9 or 10 for the defaults committed by the corporate debtor from March 25, 2020, for a period of six months i.e. September 24, 2020 or for the extended period as notified not exceeding one year |
| Section 66 | During an IRP, the resolution professional may file an application with the NCLT to order a director or partner of the corporate debtor, to make such contribution to the assets of the corporate debtor as it may deem fit | The resolution professional shall not file such application in respect of defaults against which initiation of IRP has been suspended as per above section |
Impact of Relaxations:
1. Impact on corporate debtors: Prevention corporate debtors from being pushed towards insolvency proceedings due to experiencing stress on account of unprecedent situation.
It shall also be noted that insertion of section 10 A may lead to some difficulty in identification of entities under stress irrespective of COVID 19. For example, an entity which somehow managed to keep their account standard would default now and be exempted from insolvency proceedings forever.
2. Impact on creditors: Any defaults that occurred before March 25, 2020 can still be resolved via bankruptcy code. However, creditors can not initiate insolvency proceedings for defaults committed by corporate debtors from March 25, 2020, for a period of six months.
It shall be noted that bankers (lenders) can proceed to take the corporate debtor to bankruptcy court under RBI’s June 7 Circular for NPA resolution without following the IBC route.
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