As a consequence of the COVID-19 outbreak, World Economy is bleeding and strives to regain the triumph it once had. The Indian Economy is no exception and, like others, has been hit back and forth. Everyone is expecting a survival kit due to a stall of commercial operations for the past few months.
The efficiency of the payment tracking and recovery mechanism under Micro, Small and Medium Enterprise Development Act, 2006 (“MSME Act”) and Civil Courts regarding recovery matters remain questionable across Country. Since its legislation in 2016, Insolvency and Bankruptcy Code, 2016 (“IBC”) has proved efficient and effective for creditors to enforce their rights and recover defaulted debts. However, we are yet to witness the consequences of the recent amendments in IBC triggered due to the COVID-19 outbreak. The main objective behind the IBC Code is to rescue Corporate Debtors in distress and to provide a time-bound insolvency resolution process, as well as to curb down the fraudulent corporate defaulters who have been delaying in making their payments for a long time. These suspensions may not serve the purpose of the Code. Instead of having come to the rescue of MSME’s, it seems more like a distressing plan, which will have to overcome some major consequences after the time limit set, gets exhausted.
AMENDMENTS IN IBC PURSUANT TO COVID-19
The MSMEs have suffered severely because of their limited investments and the small amount of working capital. They, being crucial for the Indian Economy, have been one of the significant areas for concern of the Indian Government during recent times and various amendments have been introduced while keeping in mind the survival and development of MSMEs.
The Notification bearing No. 1076, dated 24.03.2020, was introduced to bring one such amendment in IBC. The relevant text of the Notification dated 24.03.2020 reads as under:
“In exercise of the powers conferred by the proviso to section 4 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), the Central Government hereby specifies one crore rupees as the minimum amount of default for the purposes of the said section.” Minimum default limit under Section 4 of the IBC, raised from One (1) Lakhs to One (1) Crore
As explained by the Hon’ble Union Finance & Corporate Minister during the press briefing held on 24.03.2020, the intent and purpose of the abovementioned amendment is to safeguard the interests of the MSMEs and provide them the survival line. However, it is also relevant to consider if the said amendment reaches out to the already helpless MSMEs or it only overburdens them by putting the encumbrance of the newly increased minimum threshold of INR One (1) crore.
Under IBC a party can either be at the footing of a corporate debtor or a financial creditor or operational creditor (hereinafter collectively referred to as “Creditors”) as the case may be. Post amendment introduced Notification dated 24.03.2020, if the MSME stands at the footing of a debtor and the default amount is less than the revised threshold, its interest may be protected so far as litigation under IBC is concerned, but as it is wisely said that each coin has two sides and the moment the MSMEs stand as a creditor and the default amount that the revised threshold, the very same amendment intended to protect the interest of MSME, seems slightly misplaced at meeting the desired objective.
As a result of the above amendment, MSMEs which are financial creditors or operational creditors will have to initiate their claims under the relevant provisions of the MSME Act or knock the doors of the Civil Courts, which might not be as efficient and effective as remedies provided under the IBC, till 24.03.2020. Also, the MSMEs, which are creditors, may wait till the default by any particular corporate debtor piles up and reaches minimum One (1) crore for seeking relief under IBC.
However, it will have to be borne in mind that The Limitation Act, 1963 will also come into play as the aggrieved has to approach the court within prescribed limitation, else the claim may become time-barred. As a consequence of the amendment vide Notification dated 24.03.2020 and lack of effective and efficient remedy, the creditor (especially MSME) having claims less than one (1) crore against the corporate debtor, may face the depletion of working capital or elapse of substantial time in recovering said debts, which is comparable to reduction of working capital.
DEBT IN IBC POST COVID-19 AND DEFAULT ARISING OUT OF IT
The expression “Debt” has been defined under Section 3(11) of the IBC, “Financial Debt” under Section 5(8) of the IBC and “Operational Debt” under Section 5(21) of the IBC.
It has been clarified by the Hon’ble Union Finance and Corporate Affairs Ministers during the press briefing on 24.03.2020 as under:
“Due to emerging financial distress faced by most companies on account of largescale economic distress caused by COVID 19, it has been decided to raise the threshold of default under section 4 of the IBC 2016 to Rs 1 crore”
… Emphasis Supplied
The perusal of the above leads to understanding that the decision to increase the minimum default threshold under Section 4 of the IBC is solely triggered by reason of the financial distress caused by the COVID-19 outbreak.
It is relevant to note that in a circumstance the corporate debtor owes a debt less than one (1) crore to the creditor for the period prior to March 2020, which in no manner is related or default of which is in no manner related to COVID- 19 outbreak, may also be barred from being initiated under IBC. The corporate debtors, who were not meeting on their obligations for reasons other than COVID-19, may have a tranquil escape from provisions of IBC, due to the amendment vide Notification dated 24.03.2020. Hence, it is of paramount importance that some distinction or clarity regarding the application of the amendment vide Notification dated 24.03.2020, be provided by the Competent Government Authority.
The Hon’ble Union Finance and Corporate Affairs Minister during the press briefing held on 17.05.2020 had announced that it is proposed to exclude COVID 19 related debt from the definition of “default” under the IBC. It is the personal opinion of the author that the said distinction can be simply drawn by clarifying that the Notification dated 24.03.2020 would only have prospective effect i.e., application on the debts whose payments became due post 24.03.2020 and have been defaulted.
Further, on 20th May 2020, the Hon’ble National Company Law Tribunal (NCLT Kolkata Tribunal) in Foseco India Limited v Om Boseco Rail Products Limited, in its order held that the threshold limit increased to 1 crore by notification dated 24th March 2020 is prospective in nature and not retrospective. It will only apply to fresh applications and not to the ones already pending or filed under section 7 or 9 of IBC. The NCLT Kolkata bench observed for it to be a settled judicial position that the law is presumed to apply on a prospective basis, until and unless there is an indication of a retrospective application. NCLAT also upheld the view of NCLT Kolkata vide its order dated 12th October, 2020. On the onset of Covid-19, which was the reason for the insertion of the increased threshold, should have nothing to do with the default which owes its existence even before the onset of the pandemic.
Scenario post notification dated 24th March 2020
1. Yet again, an Ordinancewas promulgated by the President of India on 5 June 2020 by which Section 10A was inserted into the IBC. Section 10A reads as follows:
“10A. Suspension of initiation of corporate insolvency resolution process– Notwithstanding anything contained in sections 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 25th March, 2020 for a period of six months or such further period, not exceeding 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 doubts, it is hereby clarified that the provisions of this section shall not apply to any default committed under the said sections before 25th March, 2020.
However, it is pertinent to note that the date of the initiation of the CIRP is the date on which the creditor (financial or operational) or the corporate applicant makes an application to the adjudicating authority for initiating the process and on the other hand, the insolvency commencement date is the date of admission of the application. The four provisions in question are Section 7, 8, 9 & 10 of the Code. Section 7 deals with the initiation of the CIRP by a financial creditor; Section 8 deals insolvency resolution by an operational creditor; accordingly, Section 9 provides for the application for initiation of the CIRP by an operational creditor; lastly, Section 10 provides for the initiation of the CIRP by a corporate applicant.
The newly inserted Section 10A, that has come into effect on 5th June, 2020, brings up two issues in question. Firstly, whether the bar created is retrospective in nature, as the cut-off date has been fixed to 25th March, 2020. To answer this, it can be noticed that the object of the legislation is, by and large, to suspend the operation of Sections 7, 9 & 10 in respect of defaults arising on or after 25th March, 2020. The explanation to section 10A removes the doubt by clarifying that such bar shall not operate in respect of any default committed prior to 25th March, 2020.
Secondly, whether the provisions of Section 10A stand attracted to an application under Section 9 which was filed before 5 June 2020 (the date on which the ordinance came into force) in respect of a default which has occurred after 25 March 2020.
To settle the abovementioned issue, the Supreme Court of India on 9 February 2021, in Ramesh Kymal v Siemens Gamesa Renewable Power Pvt. Ltd, upheld the decision of NCLAT, stating that in view of the provisions of the newly added Section 10A, which have been inserted by Act 17 of 2020 (the “Amending Act”) will be given a retrospective effect from 5 June 2020, and thus the application filed by the appellant as an operational creditor under Section 9 was not maintainable.
This brings us to a conclusion that the insertion of Section 10A will be given a retrospective effect from 5 June 2020, but will not safeguard a default arising prior to 25th March 2020.
2. However, again on September 15, 2020, The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2020 was introduced in Rajya Sabha. It was introduced to further amend the Insolvency and Bankruptcy Code, 2016.
The above Ordinance gets replaced by the newly introduced Insolvency and Bankruptcy Code (Second Amendment) Act, 2020. It shall be deemed to have come into force on the 5th June, 2020. The bill provides for the following:
(a) to insert a new section 10A in the Code to provide for temporary suspension of sections 7, 9 and 10 in respect of any default arising on or after 25th March, 2020 for a period of six months or such further period, not exceeding one year from such date, as may be notified in this behalf; and
(b) to insert a new sub-section (3), in section 66 of the Code to provide 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.
Certain provisions are temporarily suspended, i.e., Sections 7, 9 & 10 of the Insolvency & Bankruptcy Code, 2016. The newly added Section 10A and Section 66(3) completely and indefinitely bars initiation of insolvency proceedings and filing of an application vis-à-vis the same, for any defaults occurring during the aforesaid suspension period. The powers of the financial & operational Creditors to apply for the Insolvency Proceedings as well as filing an application by a resolution professional has been taken away by the Ordinance, which will most likely trigger the Creditor’s control.
It can be rightly said that such complete suspension of insolvency proceedings and filing of an application for six (6) months, which now further stands extended for additional three (3) months, has raised various difficulties for the MSMEs involved in the framework contemplated by the I&B Code, and further, the objective of protecting the defaulting corporate entities during the Covid-19 pandemic will turn out to be stressful for many.
This increased threshold may benefit corporate debtor or companies or Limited Liability Partnerships (“LLP”) that want to pull out themselves from the economic downturn as a result of the suspension of commercial operations due to the continued lockdown. However, these amendments brought in the Insolvency and Bankruptcy Code, 2016 (“IBC”) provides a tranquil escape from remedies under IBC to various corporate debtors or companies or LLPs, which may have defaulted on the debts becoming due prior to 24.03.2020. The said situation may not be very favorable for any creditor. The objective behind all these promulgations was to safeguard the MSME’s from the stress of corporate insolvency resolution (CIR) proceedings. However, the newly inserted Section 10A and Section 66(3) fails to meet that objective. What if the MSME is the operational creditor and now they will be barred from taking recourse under the IBC against defaulting parties? This suspension will only encourage non-payment/defaults by the willful defaulters to MSMEs, further hurting the financial position of MSME sectors.
 Ministry of Corporate Affairs Notification March 24, 2020,
 The Economic Times, “Govt raises default threshold to Rs 1 cr for invoking insolvency proceedings against firms”, (March 24, 2020)
 Company Appeal (AT) (Insolvency) No. 557 of 2020
 Inserted by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2020 dated 05.06.2020
 The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2020 (Bill No. XXXI of 2020)