In pursuance of the objective of preventing increased number of defaults by various enterprises amidst financial distress faced by the companies due to the Corona pandemic, the Government of India on 22nd April 2020 proposed to introduce Section 10 A under the Insolvency and Bankruptcy Code, with the objective of suspending Section 7, Section 9 and Section 10 of the Code, 2016 dealing with initiation of Corporate Insolvency Resolution Process (CIRP). This suspension denotes a bar on the ability of a financial creditor, operational creditor and a corporate applicant seeking initiation of CIRP for a period of six months, but not exceeding twelve months. This proposition has been approved by the Union Cabinet and is expected to be promulgated in the near future by the way of an ordinance duly approved by the President.
The said ordinance aims to suspend Sections 7, 9 and 10 the IBC, to safeguard borrowers from being dragged into insolvency. Section 7 allows a financial creditor to file for initiating the corporate insolvency resolution process against a corporate debtor. Section 9 provides for application of insolvency by an operational creditor, while Section 10 is for initiation of insolvency proceedings by a corporate applicant.
As per Section 5 of the IBC Amendment Act 2020, it is precisely the date of admission of an application when the insolvency commencement date is said to have arrived and the role of IBC kicks in, implying that the moratorium can be declared by the adjudicating authority only after the admission of such application is made. As detailed in Unilever Industries Private Limited & Ors. v. Kwality Limited the purpose of a moratorium is to keep the corporate debtor‘s assets together and ensure that the company continues as a going concern. Section 14 of the Code prevents a creditor from initiating or continuing a suit, transferring or alienating any asset by the corporate debtor and even protects from losing a property to any recovery action where it belongs to the third party. All such measures avert an immediate collapse of the corporate debtor.
LACUNA WITH THE PROPOSAL
Since the moratorium period which acts as a protective measure that triggers only during the period whilst the resolution scheme is ongoing, the shielding rationale reflected by Section 14 of the code cannot be given effect under the current circumstances purely for the reason that the law nowhere explicitly mentions if the moratorium can be exercised without the filing of the CIRP under the concerned Sections 7, Section 9 & Section 10. The Government also simply reckons the fact that if there is no admission there will be no moratorium and this generates a major up-and-coming lacuna with the legislature in the current times.
The aforementioned contention becomes more noticeable for the reason that the basic characteristic of the Code of having a Creditor-centric approach appears to be disrupted. The concept of creditor in possession and control was introduced which empowers the creditors through a Resolution Professional to have control over the assets and protect them from being disposed or transferred or to prevent the assets from being devalued. By the means of this approach, the government banks upon the idea that suspension of section 7, section 9 and section 10 will not lead to any circumstances that will prevent loss of assets when no one will actually be in control over them.
However, owing to the circumstances around the Covid-19 lockdown, trouble lies with transportation facilities, reduced workforce, ill functioning of logistics & poor cash flow- this proliferate difficulties for sick and vulnerable entities to maintain themselves as a going concern and engage themselves in paying regular wages to the workers, generating revenue incomes from day to day activities, etc. One must acknowledge that once the period of suspension ends, a high rise of insolvencies in the large, medium and even small-scale industries will be observed. At this time, the legislature is silent in providing remedies under situations where the entities have an inclination towards passing a resolution plan but lack the mechanism to perform the same or where the entities are ready to sit across the table willing to negotiate and seek relief for scaling down the debt or making changes in the balance sheet during the period of insolvency by transferring or disposing the assets. Hence the current mechanism is opined to be ill-equipped to deal with the aforementioned difficulties and unprepared for the onslaught of suits arising post the expiry of the suspension period.
The present mechanism can be said to have a myopic approach which is aimed at reducing the burden of new suits before the NCLT, as only the motions pending before it may continue. This puts to the fore a need for remedy that enables the corporate debtor to enter any sort of negotiation or be armed with the ability to seek respite under an alternative mechanism, similar to the very nature of remedy provided through the Code.
ALTERNATIVE MECHANISM UNDER THE COMPANIES ACT
If we look upon section 7, Section 9 and Section 10 of the Code, their mere suspension does not takes away the alternative remedy available with the Companies Act, 2013. It is for the reason that suspension of these three sections says that the IBC cannot have its play but the remedy under Section 230 of the Companies Act, 2013 which provides for a compromise, composition or an arrangement between the company and any class of its creditors and members continues to exist. Moreover if we were to draw a comparison between the mechanisms under the IBC and the Companies Act, there is a paradox in terms of the decision-making authority for a firm.
According to the Bankruptcy Law Review Committee Report dated November 4, 2015 since an operational creditor cannot wait for better future outlook of the corporate debtor and run with the risk of delayed payments, they cannot be a part of the Committee of Creditors (CoC). As the result of this, the right to vote over matters of CIRP is confined to the financial creditors of a firm. On the other hand, in context with the Companies Act, 2013 as per schemes of arrangement or compromise provided for under Section 230(1), there is an explicit mandate for creditors to meet and approve the scheme by a supermajority vote of 75 per cent. The ‘creditor’ here is an umbrella which includes under its ambit every class of creditor i.e. unsecured, secured, statutory creditors so on and so forth.
This brings us to the fundamental question the suspension of initiating insolvency action under the IBC contributes towards solving the dilemma in the backdrop of the pandemic, excessive defaults and problems for enterprises in maintaining as a going concern. The implication of the suspension brings us back to the old regime of Section 230 under the Companies Act, which is far more strenuous, complex and a costly way in reaching the relief sought.
In light of the discussion made above, it is observed that the present mechanism of suspending initiation of CIRP revolves around the idea that it would protect the interest of small and medium enterprises and prevent fresh default and bankruptcy by entities having tendencies to fail and become an NPA. This intends to assistthe corporate debtor in gaining control over the assets and abstain creditors from selling or transferring their assets. However, this appears to be a short sighted approach in dealing with issues amidst lockdown as once the expiry period is over the entire burden of backlog will fall upon the shoulders of NCLT which is ill-equipped in terms of its institutional preparation.
Furthermore, in context of currently sick and vulnerable entities, strife in keeping them as a going concern still persists, it is wished before the government to facilitate means for quick sale of business assets that possess an entrepreneurial value and also to make the process for negotiations smoother without altering the nature of remedy provided by the code. This entire prevailing mechanism is probable to observe some unsmiling implications vis-à-vis India’s rank with the ease of doing business catalog as well. The entire rationale behind this is also to ensure that the principle of Ubi jus ibi remedium is sustained which presumes that if there is no remedy available to enforce a right, from point of law that right ceases to exist. So when the numerous insolvencies turning up in the near term, until a viable mechanism is introduced to deal with the situation the entire purpose of the insolvency regime would become fructuous. Until such time, the eyes are yet upon the government to mark a way forward with the upcoming policy decisions and find what upholds next.
Author : Name: Vimlendu Agarwal | College: Gujarat National Law University | Course: B.B.A. LL.B. (Hons.), II Year