JUDICIAL RESPONSE:

1. Suo moto cognizance by Hon’ble Supreme Court in WP(C) No. 03/2020 dated 23.03.2020: Under exercise of power conferred under Article 141 and 142, Extension of limitation period in all proceedings irrespective of the limitation prescribes or not under the General or special law whether condonable or not.

2. Suo moto cognizance by NCLAT in Company Appeal (AT) No. 01 of 2020 dated 30.03.2020:

To adhere to the prescribed timelines for taking the ‘Resolution Process’ to its logical conclusion in order to obviate and mitigate such hardships, this Appellate Tribunal in exercise of powers conferred by Rule 11 of National Company Law Appellate Tribunal Rules, 2016 r/w the decision of this Appellate Tribunal rendered in “Quinn Logistics India Pvt. Ltd. vs. Mack Soft Tech Pvt. Ltd. in Company Appeal (AT) (Insolvency) No.185 of 2018” decided on 8th May, 2018 do hereby order that the period of lockdown ordered by the Central Government and the State Governments including the period as may be extended either in whole or part of the country, where the registered office of the Corporate Debtor may be located, shall be excluded for the purpose of counting of the period for ‘Resolution Process under Section 12 of the Insolvency and Bankruptcy Code, 2016, in all cases where ‘Corporate Insolvency Resolution Process’ has been initiated and pending before any Bench of the National Company Law Tribunal or in Appeal before this Appellate Tribunal.

LEGISLATIVE RESPONSE:

1. To curtail the panic among the MSME sector and alleviate the imminent threat of insolvency, a slew of measures have been taken to provide a cushion to the companies likely to face the downturn. Among these measures were the increased threshold of invoking insolvency to Rs 1,00,00,000 (Rupees one crore only) from the earlier amount of Rs 1,00,000 (Rupees one lakh only).

The Report of the Insolvency Law Committee dated 20.02.2020 had also recommended the increase in the threshold limit for initiating application under the Code and thereby noted the following:

“That due to the low threshold of default, a large number of applications were being filed for initiation of CIRP. This large number of applications is adding pressure on judicial infrastructure, which is causing delays both at the stage of admission and during litigation in the CIRP. These delays cause uncertainty for investors and have the potential to hinder a value maximizing insolvency resolution. Further, due to the low threshold for default, there is a chance that solvent debtor companies would be pushed into the CIRP.

This may entail significant costs, especially since “it will usually be far less costly to provide mechanisms outside corporate insolvency law for the resolution of disputes over debts and for the enforcement of undisputed debts on default” for solvent debtor companies. Thus, in such cases, the initiation of CIRP may result in sub-optimal outcomes.

The Committee agreed that the success of the Code should be measured in terms of its ability to resolve distress in a value-maximizing manner for all stakeholders. This will be adversely affected if the system remains burdened, and value destructive delays ensue. The Committee also felt that if the mechanism under the Code results in sub-optimal outcomes, it is likely to lose credibility amongst investors, which would be further value destructive for the assets under the Code. Given this, the Committee agreed that there is a need to review the minimum default threshold for admitting a case under Section 4 of the Code.

In this respect, the Committee recommended that it would be appropriate to notify a higher default threshold of INR 50 lakhs. This would significantly ease the burden on the Adjudicating Authorities while ensuring that cases that require recourse to the Code continue to have access to it.”

Section 4(1) of IBC provides for the threshold limits for triggering the insolvency proceeding. Section 4(1) of the IBC reads as follows:

“4. (1) This Part shall apply to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of the default is one lakh rupees:

Provided that the Central Government may, by notification, specify the minimum amount of default of higher value which shall not be more than one crore rupees.”

Exercising the powers conferred upon it under Section 4 of IBC, the Central Government vide Notification dated 24.03.2020 in the Official Gazette of India, has increased the minimum amount of default for the purpose of initiating a proceeding under IBC to Rs 1 Crore , which is the maximum threshold limit that the Central Government is empowered to prescribe.

 “1205(E).—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.”

2. Notification dated 29.3.2020 for inserting Regulation 40C in the IBBI (Insolvency Resolution for Corporate Persons) Regulations, 2016, whereby timelines have been relaxed for any activity that could not be completed due to such lockdown. These are post-CIRP timelines are provided under Regulation 40A of the above Regulation.

Model time-line for corporate insolvency resolution process

40A:

The following Table presents a model timeline of corporate insolvency resolution process on the assumption that the interim resolution professional is appointed on the date of commencement of the process and the time available is hundred and eighty days:

Section / Regulation Description of Activity Norm Latest Time-line
Section 16(1) Commencement of CIRP and appointment of IRP …. T
Regulation 6(1) Public announcement inviting claims Within 3 Days of Appointment of IRP T+3
Section 15(1)(c) / Regulations 6(2)(c) and 12 (1) Submission of claims For 14 Days from Appointment of IRP T+14
Regulation 12(2) Submission of claims Up to 90th day of commencement T+90
Regulation 13(1) Verification of claims received under regulation 12(1) Within 7 days from the receipt of the claim T+21

 Special provision relating to time-line

40C: Notwithstanding the time-lines contained in these regulations, but subject to the provisions in the Code, the period of lockdown imposed by the Central Government in the wake of COVID19 outbreak shall not be counted for the purposes of the time-line for any activity that could not be completed due to such lockdown, in relation to a corporate insolvency resolution process.”

3. In similar fashion, another Notification dated 17.04.2020 47A is inserted in the IBBI (Liquidation Process) Regulation, 2016

“47. Model time-line for liquidation process.

The following Table presents a model timeline of liquidation process of a corporate debtor from the liquidation commencement date, assuming that the process does not include compromise or arrangement under section 230 of the Companies Act, 2013 (18 of 2013) or sale under regulation 32A:

Section / Regulation Description of Activity Norm Latest Time-line
Section 33 and 34 Commencement of liquidation and appointment of liquidator LCD T
Section 33 (1) (b) (ii) / Reg. 12 (1, 2, 3) Public announcement in Form B Within 5 days of appointment of liquidator. T+5
Reg. 35 (2) Appointment of registered valuers Within 7 days of LCD T + 7
Section 38 (5) Withdrawal/ modification of claim Within 14 days of submission of claim T+44
Reg. 30 Verification of claims received under regulation 12(2)(b) Within 30 days from the last date for receipt of claims  T + 60

 Exclusion of period of lockdown.

47A. Subject to the provisions of the Code, the period of lockdown imposed by the Central Government in the wake of COVID-19 outbreak shall not be counted for the purposes of computation of the time-line for any task that could not be completed due to such lockdown, in relation to any liquidation process.”

4. It is to be noted that these extensions of time limits as provided by the above orders and notifications are three fold. Firstly, Hon’ble Supreme Court order has granted an extension of limitation to file any petitions, applications, suits and appeals. This would mean that in calculating the three years limitation period for filing the insolvency petition under the Act, the period of lockdown by virtue of Covid-19 outbreak, would be excluded.

Secondly, the Hon’ble NCLAT order has been granted exclusion of the period of lockdown for the purpose of counting of the period for ‘Resolution Process under Section 12 of the Insolvency and Bankruptcy Code, 2016, in all cases where ‘Corporate Insolvency Resolution Process’ has been initiated and pending before any Bench of the National Company Law Tribunal. This would mean an extension to be provided beyond the time limit prescribed under Section 12 of the Code i.e. 330 days, to all the cases where CIRP has been initiated.

Thirdly, by virtue of the Notifications dated 29.03.2020 and 17.04.2020, the post CIRP timelines have been relaxed wherein the period of lockdown by virtue of the Covid-19 outbreak, shall not be counted for the purpose of computation of the time-line for any task that could not be completed due to such lockdown.

REMARKS ON THE ABOVE CHANGES:

IMPLICATIONS OF INCREASED THRESHOLD LIMIT

It is pertinent to note that Section 7(1) of the IBC envisages initiation of Corporate Insolvency Resolution Process (“CIRP”) against a corporate debtor by a financial creditor either by itself or jointly with other financial creditors. The Explanation to Section 7(1) of the IBC provides that for the purpose of financial creditors, the default would include a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor.

Such an explanation is significantly absent from Section 8 of the IBC, which lays down provisions for operational creditors. Section 8(1) of the IBC provides that an operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor in such form and manner as may be prescribed.

In absence of a provision of joint action by operation creditors, the increased threshold limit of Rupees one crore would essentially drive out the operational creditors from the realms of IBC as most of the operational debts would fail to meet the one crore mark individually, especially with respect to MSME.

The increase of the threshold is expected to be lowered down with effect from a later date after due consideration of the situation at hand with respect to the Covid-19 outbreak.

EFFECTS ON PENDING AND FUTURE CASES

The said Notification dated 24.03.2020 does not provide for retrospective application of the revised limits. Therefore, the earlier threshold of Rupees one lakh would continue to apply to cases that are pending. The new applications seeking commencement of CIRP would necessarily have to meet the revised criterion of default of minimum Rupees one crore by the corporate debtor.

The financial distress may also pose difficulties for companies undergoing CIRP to complete the process within the period of 330 days prescribed in the proviso to Section 12(3) of the IBC even after the exclusion of the lockdown period. Section 12(3) of the IBC which read as follows:

“Provided further that the corporate insolvency resolution process shall mandatorily be completed within a period of three hundred and thirty days from the insolvency commencement date, including any extension of the period of corporate insolvency resolution process granted under this section and the time taken in legal proceedings in relation to such resolution process of the corporate debtor:”

In this regard, it is pertinent to refer to the judgement in Committee of Creditors of Essar Steel India Ltd. Through Authorised Signatory v. Satish Kumar Gupta, whereby the Supreme Court struck down the word “mandatorily” used in the abovesaid proviso as being manifestly arbitrary under Article 14 of the Constitution of India and as being an excessive and unreasonable restriction on the litigant’s right to carry on business under Article 19(1)(g) of the Constitution and held as follows:

“108. …The effect of this declaration is that ordinarily the time taken in relation to the corporate resolution process of the corporate debtor must be completed within the outer limit of 330 days from the insolvency commencement date, including extensions and the time taken in legal proceedings. However, on the facts of a given case, if it can be shown to the Adjudicating Authority and/or Appellate Tribunal under the Code that only a short period is left for completion of the insolvency resolution process beyond 330 days, and that it would be in the interest of all stakeholders that the corporate debtor be put back on its feet instead of being sent into liquidation and that the time taken in legal proceedings is largely due to factors owing to which the fault cannot be ascribed to the litigants before the Adjudicating Authority and/or Appellate Tribunal, the delay or a large part thereof being attributable to the tardy process of the Adjudicating Authority and/or the Appellate Tribunal itself, it may be open in such cases for the Adjudicating Authority and/or Appellate Tribunal to extend time beyond 330 days…”

LATEST DEVELOPMENT:

In the press release dated 24.03.2020, Hon’ble Finance Minister Nirmala Sitharaman indicated “If the current situation continues beyond April 30, 2020, we may consider suspending section 7, 9 and 10 of the IBC 2016 for a period of six months so as to stop companies at large from being forced into insolvency proceedings in such force majeure causes of default.”

In a major relief for corporate borrowers hit hard by the Covid-19 pandemic, the government has decided to amend the insolvency law to suspend up to one year provisions that trigger insolvency proceedings against defaulters.

An ordinance would be promulgated to suspend three sections of IBC for up to one year and a decision in this regard was taken by the Union Cabinet. Section 7, 9 and 10 of the IBC would be suspended for six months and the suspension time can be extended up to one year. An enabling provision with respect to extending the time would be part of the ordinance.

Section 7 and 9 pertain to initiation of corporate insolvency proceedings by a financial creditor and an operational creditor, respectively. Section 10 relates to filing an application for insolvency resolution by a corporate.

The Covid-19 outbreak and the nationwide lockdown to curb spreading of infections have significantly impacted economic activities and the latest decision in a way provides more leeway for corporate borrowers in repaying their loans. The amendments are likely to be brought into force in the next few weeks.

THE WAY FORWARD:

The exclusion of lockdown period and the increased threshold limit are welcome steps taken by the legislature to ensure that the Micro, Small and Medium Enterprises have enough cushion to recover from the financial distress caused by the COVID-19 pandemic and would also de-clutter the cases under IBC by filtering out the frivolous ones. The low threshold of Rupees one lakh was hitherto criticized for potentially pushing an otherwise strong enterprise into liquidation for a default of a small amount at the instance of a single operational creditor.

Nevertheless, in the times of the unprecedented downturn being experienced on account of the COVID-19 pandemic, the aforesaid measures would prove to be beneficial for resurrection of the enterprises facing the heat. After all, the key objective of the IBC is to ensure that the corporate debtor keeps operating as a going concern.

Also, economic laws such as the IBC was expected to usher a ray of hope for the debt ridden enterprises. As the Code is newly formulated and has invited the interference of various stakeholders, stringent mechanisms and specific methodologies have to be incorporated in the most effective manner so as to fulfill the actual legislative intent behind framing of a Code. In such scenarios, the Adjudicating Authorities ought to function more like professional bodies possessing the skill set to be able to facilitate the smooth and proper implementation of the Code in both letter and spirit. Moreover, with the Code becoming one of the most effective economic reforms with respect to insolvency and bankruptcy, there is a need for development of new and smart practices to adapt to the versatilities and the dynamism brought about by the Code.

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