Insolvency and Bankruptcy Code, 2016A new-fashioned mechanism for resolution of distressed assets.

It’s been 4 years since the inception of the code and it has shown unfailing progress in addressing the intent behind its enactment. Being a new enactment, periodic amendments have been made to structure the code as per the current conditions.

Recently, in the “Atmanirbhar” package announced by the Finance Minister, Nirmala Sitaraman, some proposed modifications in the code were disclosed. The Finance Minister in her speech on 17.05.2020 announced the following:

  • Minimum threshold to initiate insolvency proceedings has been increased to Rs 1 crore from Rs 1 lakh.
  • Some special insolvency framework u/s 240A will be announced.
  • Suspension of fresh initiation of insolvency proceedings up to one year, depending upon the pandemic situation.
  • Empowering CG to exclude COVID related default.

In connection with the above announcements, on 05.06.2020 ““The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020” was brought in force, which states as under:

“Insertion of Section 10A: Notwithstanding anything contained in section 7, 9 and 10, no application for initiation of CIRP shall be filed, for any default arising on or after 25th march, 2020 for a period of 6 months or such further period, not exceeding 1 year from such date, as may be notified

Provide that no application shall ever be filed for initiation of CIRP for the said default occurring during the said period”

“Insertion of Section 66(3): No application shall be filed by a RP under section 66(2), in respect of which initiation of CIRP is suspended as per section 10A.”

Consequence of Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020

There has been an unfortunate impact on the economy due to the current pandemic, COVID-19. It is evident that several defaults have occurred and numerous will occur until sometime. To protect the defaulters from the going into insolvency, just because of the defaults that have or may occur due to the pandemic this ordinance has been brought in force.

Pros of Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020

  • No fresh application for COVID defaults- Section 10A comes as a big relief to all the corporates which might have or will default because of the harsh conditions created by the pandemic. Since, no application can be filed under section 7, 9 and 10 for the default that may be committed from 25th march, 2020 to 25th September, 2020.
  • Protection to directors and Partners- Section 66(3) has been inserted to protect the directors or partners of the corporate debtor from any proceedings initiated, related to the above specified time period, by the Resolution Professional under section 66(2). A reason behind this amendment is that an unplanned situation has emerged and no director or partner can be held responsible for any potential losses that may have occurred because of the pandemic.
  • No blanket ban on IBC- Past the announcement by the financial minister on 17.05.2020, there were talks that a blanket 1 year ban for fresh insolvency under IBC may be imposed. However, fresh insolvency has been suspended for only the defaults may occur during the above specified time period.
  • Insolvency Proceedings can be initiated for the previously committed defaults- Application under section 7, 9 & 10 can still be filed for the defaults committed prior to 25th March, 2020. However, threshold limit of 1 lac for filing the application has been increased to 1 crore w.e.f 24th march, 2020.
  • Time period of 6 months may be extended- Depending on the upcoming situation, there is a provision to extend the time period from 6 months to upto 1 year.

Cons of Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020

  • Suspension of Section 10- Initiation of corporate insolvency by the corporate applicant (corporate debtor himself) is the only way by which a company can declare itself insolvent in case it has committed a default but imposing the suspension on section 10 has taken away the only right available with the corporate applicant.
  • Loophole in the 1st provision of Section 10A: It is provided that no application shall ever be filed for initiation of CIRP for the said default occurring during the said period. This provision can be used by companies to intentionally commit default and guard themselves from the CIRP proceedings.

For any clarification please reach out to me on vishalhirawat@yahoo.com

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2 Comments

  1. S S RAVICHANDRAN says:

    Sir, One of my client is a operational creditor of a corporate debtor. The default is Rs.2,75 lakhs and a notice in Form 3 on 21.03.2020 and the same has been received by the party is on 23.03.2020. the default occurred is well before 24.03.2020 and the notice were also issued. But a time limit of 10 days has not expired on 24.03.2020.

    What is the course of action?. Can the client file a petition U/s 9 of IBC?.

    1. vishalhirawat says:

      In the notification dated 24.03.2020, the date of applicability has not been mentioned. In such case the date of notification will be taken as the effective date.
      In your case, since no application had been moved with the NCLT prior to notification, the limit of 1 cr. Will be applicable. Hence, the operational creditor cannot proceed with the application for the dues of 2.75 lac.

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