pri Conundrum around IBC (Amendment) Ordinance, 2020 Conundrum around IBC (Amendment) Ordinance, 2020

Eventually, the IBC (Amendment) Ordinance, 2020 (Ordinance) is out to surcease the anticipations and discussions around suspension of Sections 7, 9 and 10 of Insolvency Bankruptcy Code, 2016 (Code)

Covid 19, pandemic has impacted the business, economy, and financial market worldwide. In India for combating the spread of disease, nationwide lockdown was announced on 25th March, 2020 which resulted in disruption of normal business operations which could have landed bonafide business houses in CIRP. To mitigate such circumstance Government of India had come up with reform in the Code through this Ordinance.

The Ordinance is introduced with an explicit objective to rescue the Corporate Debtor who may default in discharging its debt obligations due to lockdown. The Ordinance has put to rest the blanket suspension which was initially anticipated due to various news circulated in market.

The central government in pursuant to power conferred under Article 123 of constitution promulgates the ordinance with followings amendment to the Code;

Insertion of Section 10A to Insolvency Bankruptcy Code (“Code”) :

The Section inculcates the suspension of Section 7, 9 and 10 of the Code for the default arising on or after 25th March, 2020 for the period of six months or for such other period as maybe further notified, majorly prompting to the period equivalent to countrywide lockdown. It is also clarified that, the suspension period may not last beyond one year from such date.

Proviso to Section 10A of the Code: The proviso provides that no application shall ever be initiated under Corporate Insolvency Resolution Process (“CIRP”) for the defaults triggered during such said period, i.e. from 25th March, 2020 till six months or  such further date as may be notified.

Insertion of sub-section 3 to Section 66 of the Code:

The new insertion of sub section 3 to Section 66 of the Code provides for embargo on application to be filed by a resolution professional under sub-section 2 to Section 66 of the Code the in respect to the default against which CIRP is suspended as per Section 10A of the Code.

Ordinance Ambit: Ordinance is perceived as an answer to numerous uncertainties and has brought an end to various suspicions around initiation of Corporate Insolvency Resolution Process during or post Covid era but yet the Ordinance has stirred up a hornet’s nest with following ambiguities around  its literal interpretation;

Indeterminable Suspension Period: The Ordinance specifies for suspension of Section 7, 9 and 10 for a fixed term of six months or more as may be specified. However, the Ordinance is silent on the start date of the suspension period whether it to be considered as 25th March, 2020 or the date of notification for the count of Suspension Period. The Ordinance only calibrates around the suspension for six months for the default occurred during the Covid era.

Silence with respect to increased threshold limit: The Central Government in the recent past issued a notification for increasing the threshold limit from INR One Lakh to INR One Crore for initiating insolvency proceedings. The increase was introduced interms of Section 4 of the Code. However, the Ordinance gives recognition to default period and exempted pre suspension period from the purview of suspension but ambiguity remain continued for initiating the insolvency proceedings under Section 7, 9 or 10 of the Code for default date prior to 25th March, 2020 considering the originally prescribed threshold limit as the notification already silent on its retrospective effect. Though recently NCLT, Chennai Bench in M/s. Arrowline Organic Products Private Limited Vs. M/s. Rockwell Industries Limited has given its passing comment that said notification has prospective effect.

No significance given on continuous defaults: Proviso to the newly inserted Section 10A of the code clearly imposes the lifetime restriction on filing of Insolvency proceedings for defaults occurred during the suspension period. However, lifetime suspension would strictly restrict the initiation of proceedings for continuous defaults also which will continue to exist even after expiry of suspension period. Furthermore, the Ordinance did not point out the parameters to differentiate  between defaults persisting from Covid or Non-Covid debts in order constructively impose the lifetime suspension on filing of application before Adjudicating Authority for Covid related debts and release all Non-Covid debts from the ambit of lifetime suspension. Presently, the Ordinance, if read in its literal sense would be unreasonable towards lenders or creditors as their claim falls within scope of blanket defaults with a default date post 25th March, 2020 or continuing.

 Section 66 (3) of the Code provides lifetime suspension:  A new sub section (3) to Section 66 of the Code, is inserted through this Ordinance. The Provision to Section 66 deals with the instances of fraudulent  or wrongful trading. The sub section (1)  and (2) to Section 66 of the Code entitles the Resolution Professional to file an application before Adjudicating Authority if during CIRP process  it is found that any business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose and further power conferred to Adjudicating Authority  that on application by Resolution Professional,  it may by an order direct that a director or partner of the corporate debtor, as the case may be, shall be liable to make such contribution to the assets of the Corporate Debtor as it may deem fit.

The sub section (3) added to the code by the ordinance, prohibits the filing of application under sub section (2) in respect of such defaults against which initiation of Corporate Insolvency Resolution Process is suspended as per Section 10A. Prospectively, the insertion of sub section (3) could have been introduced sighting the burden on  director(s) or partner(s) to make contribution to the assets of the Corporate Debtor if directed by Adjudicating Authority, considering the financially distressing situation due to unprecedented pandemic. However prima facie, sub section (3) provides for complete lifetime suspension to filing of application by Resolution Profession which may in long run proves out to be defeating the purpose of enacting the Code and further it may  give an opportunity to Corporate Debtor to enter into defrauding transaction.

Lastly to sum up, the Ordinance has come up with suspension of Section of 7, 9 and 10 and however there is no blanket suspension as primarily anticipated. The Ordinance has certainly succeeded in cushioning Corporate Debtor from burden of Insolvency Proceedings and discharging from default debt obligation arising due to uncertain financial distress but Ordinance has not vigilantly captured every aspect connecting or pertaining to initiation of Corporate Insolvency  Resolution Process during the pandemic. It may require further clarification around untouched aspects and grey areas left open.

Disclaimer: The information shared in this article is from general awareness prospective. Nothing contained herein, is to induce or mislead.

Author Bio

Qualification: Student - CA/CS/CMA
Company: Securitas India
Location: New Delhi, New Delhi, IN
Member Since: 14 Mar 2020 | Total Posts: 4
Ms. Ankita Mullick is a paralegal and aspirant Company Secretary core competence and experience in Corporate Litigation including insolvency Bankruptcy Code, Mergers Amalgamation, Corporate Restructuring including other litigation matters involving representation before NCLT, High Court and Supreme View Full Profile

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July 2021