Covid-19 pandemic has impacted business, financial markets and economy all over the world, including India, and created uncertainty and stress for business for reasons beyond their control. A nationwide lockdown is in force since 25th March, 2020 to combat the spread of Covid-19 which has added to disruption of normal business operations.
Reforms proposed in Insolvency Law
The reforms announced in Insolvency law appear to be both, timely as well as well envisioned. In fact, in the given situation, they are strategic. The major reforms in insolvency and bankruptcy are towards easing the trigger for IBC to get attracted, i.e.,
The reforms announced on 17 May, 2017 in relation to Insolvency law, i.e., Insolvency and Bankruptcy Code, 2016 (in short, IBC) may not yield immediate benefits but are aimed to boost demand in mediums to long term, make business environ stronger and resilient and boost business sentiment across the board.
Central Government has promulgated an Ordinance on 5th June, 2020 known as the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 (in short IBC Ordinance 2020) to amend the Insolvency and Bankruptcy Code, 2016. This code provides for the provisions relating to corporate insolvency resolution process for corporate persons.
As stated above, in the present backdrop, it is difficult to find adequate number of resolution applicants to rescue the corporate person who may default in discharge of their debt obligations.
As announced on 17th May 2020, Government has considered it expedient to suspend under section 7, 9 and 10 of the Insolvency and Bankruptcy Code, 2016 to prevent corporate persons which are experiencing distress on account of unprecedented situation, being pushed into insolvency proceedings under the said Code for some time. Further, it was considered expedient to exclude the defaults arising on account of unprecedented situation for the purposes of insolvency proceedings under the Code.
Since the Parliament is not in session and amendments are of importance, the present Ordinance has been promulgated on 5th June, 2020 to come into force at once.
The Ordinance has amended IBC as follows:
a) Insertion of new section 10A on suspension of initiation of corporate insolvency resolution process (CIRP), and
b) Amendment of section 66 which deals with fraudulent trading or wrongful trading by insertion of sub section (3) to prohibit the insolvency professionals to initiate application for insolvency
The key features of the amendments to IBC through this Ordinance can be listed as follows:
a) By insertion of section 10A on suspension of initiation of corporate insolvency resolution process (CIRP)
The new section 10A provides for as follows and shall be operative from 25th March, 2020
New section 10A reads as follows :
“10A 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 exceedin 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 doubt’s 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”.
Does this mean that the CIRP can still be initiated for defaults prior to 25 March, 2020? The answer appears to be in affirmative if section 10A is read down harmoniously. There is no immunity provided to such cases.
b) New sub-section (3) of section (66)
New sub-section (3) of section (66) is again an overriding provision which supercedes sub-section (1) and (2) and provides 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.
Thus, a resolution professional has been prohibited to file any application u/s 7, 9 or 10 of IBC for defaults covered under new section 10A where CIRP stands suspended.
It is expected that the stimulus announced by Central Government in relation to IBC and amendments made through Ordinance will become effective by way of Notification.