Recommendations of Insolvency Law Committee and subsequent Notifications and The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020

All are aware that the Insolvency Law Committee (“Committee”), in third report dated 20th February, 2020 recommended certain amendments in the IBC Code mentioning the object of the amendments. The Committee’s recommendation for said amendment was for smoother functioning of the Code.

“First Recommendation”

To increase threshold limit from Rs. 1 lakh to Rs. 50 lakh, for admitting a case under Section 4 of the Code.

Reasons behind recommendation: The committee note 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.
  • further, due to the low threshold for default, there is a chance that solvent debtor companies would be pushed into the CIRP.
  • 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.

“Second Recommendation”

Operational creditors should be allowed to have recourse to CIRP on a minimum default of INR 5 lakh only.

Reasons behind recommendation: it was noted that

  • the Committee was conscious that one of the successes of the Code has been that it has made debt enforcement more credible, especially for operational creditors that are empowered to initiate CIRP under the Code.
  • in the shadow of this mechanism, operational creditors have the bargaining power to reach out-of-court settlements with large corporate debtors.

“Third Recommendation”

Suspending section 7, 9 and 10 of the IBC 2016 for a period of 6 months so as to stop companies at large from being forced into insolvency proceedings in such force majeure causes of default. 

Reasons behind recommendation: it was noted that

  • due to the emerging financial distress faced by most companies on account of the large-scale economic distress caused by COVID 19,

Notification S.O. 1205 (E) dated 24th March 2020

The Central Government on 24 March, 2020 via Ministry of Corporate Affair Notification S.O. 1205 (E) in exercising its power conferred under proviso to Section 4 of Insolvency Bankruptcy Code, 2016 enhanced the “minimum default threshold from INR One Lakh to INR One Crore”.

That the said notification came into motion post Finance Minister announcement made by the Finance Minister on 24 March, 2020, wherein the Ministry  highlighted the amendment as a measures for protection of the interest of medium, small and micro enterprises during this COVID 19 outbreak and prevent such small and medium enterprises from trigging insolvency proceedings when there is already a financial distress in the industries.

Section 4 of the Code earlier stated that the prima-facie threshold to file any application under the Code was a minimum default of Rs 1,00,000/-. However, the proviso to the section conferred upon the Government the right to alter the said amount at its own discretion. The proviso is ad verbatim produced below:

“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.”

The amendment of Section 4 of the Code for increasing the threshold limit has its direct implication on the Section 7, 9 and 10 of the Code which specifically discuss about filing of the application before the Adjudicating Authority.

Impact of the Amendment by said Notification:

No doubt the said amendment in section 4 will relieve the overburdened Adjudicating Authority and to protect the MSME’s and industry from the default arose due to present epidemic, but it is adverse implication of debt enforcement mechanism provided by the Code, to the MSME or to operational creditor.

Whether the amended has a retrospective or a prospective effect i.e. is it applicable to all the already pending cases or onto the cases for which demand notice under Section 8 of the code has been issued?

The Committee already enlightened the same in its report and stated that a “grace period may be provided within which such creditor in a class may modify and file its application in accordance with the above-stated threshold requirements. However, if the creditor is unable to fulfil the threshold requirements to file such modified application within the grace period provided, the application filed by such creditor would be deemed withdrawn.”

However, there is no grace period provided in the said notification by the Ministry.

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 inserts Section 10A by which Sections 7, 9 and 10 of the Code has been temporarily suspended for filing fresh application before adjudicating authority.

It was mentioned in the ordinance that it is considered expedient to suspend section 7,9 and 10 of the Insolvency and Bankruptcy Code, 2016 to prevent corporate persons which are experiencing distress on account of unprecedent situation, being pushed into insolvency proceedings under the said Code for some time.

Moreover, it is also mentioned that it is difficult to find adequate number of resolution applicants to rescue the corporate person who may default in discharge of their debt obligation.

The Section 10A, along with its proviso and explanation reads as under:

“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 exceeding 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 doubts, 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.”

The ultimate result of the said ordinance is

  • 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.
  • No Application shall ever be filed for initiation of CIRP for defaults occurring during the said period.
  • This suspension of Sections 7, 9 and 10 shall not applicable to any default before March 25, 2020.

Certain Ambiguities/Question Mark(?) regarding application of the provisions of Section 10A of the Code.

1. How the Adjudicating Authority will decide that the occurrence of the default happened before or after 25th March 2020 and whether the onus of proving the same would lie upon the Corporate Debtor only when an Application in this regard is filed and comes up for adjudication before the Adjudicating Authority.

2. What will the position of default occurred on or after 25th March 2020 and remain continues after the expiry of such protection i.e. 6 months or extendable upto 1 year. Whether creditor (Financial or Operational) will be precluded from filing an application seeking initiation of CIRP regardless of the Corporate Debtor having recovered financially and whether such Corporate Debtor should continue to enjoy the Ordinance’s protection thereafter also.

3. It is not clear that the six-month period (or further period upto 1 year) would begin, i.e., from March 25 2020 or the date when the default occurs.

4. Where default is in two parts for one transaction i.e. one part is before March 25, 2020 (Rs. 55 lakhs) and second one is after March 25, 2020 (Rs. 50 lakhs), which one shall be considered for application the provisions of Section 10A.

5. It is mentioned in the ordinance that it is difficult to find adequate number of resolution applicants to rescue the corporate person who may default in discharge of their debt obligation. Therefore, protection to Corporate Debtor through section 10A was inserted. But question arises herein that whether the difficulty to find adequate number of resolution applicants to rescue the corporate person, is only for fresh corporate debtor. Whereas existing corporate debtors is also facing the same situation i.e. difficulty to find adequate resolution applicants to revive them. What measures has been taken by the Government in the existing caproate debtor cases.?

6. Whether it will not be advisable to extend the period of CIRP more than 270 days to find the adequate number of resolution applicants to rescue the corporate person who may default in discharge of their debt obligation, despite of restriction of fresh filing under section 7, 9 and 10 of the Code.

Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.

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