Today the world is going through one of the biggest crisis in human history because of the dreaded virus. The lack of a viable cure has forced the world to rely strictly on the social distancing norms which has resulted in a complete halt of the economy in different parts of the world. While India still grapples with the fight against the novel coronavirus, there is yet another battle that needs recognition. The one, which preys on corporate humans. India’s growth engine was sputtering well before the threat of outbreak arrived. Now with over a month of lockdown the businesses have closed, unemployment has risen and productivity has fallen. While scientists all over the world occupy themselves in the fight against the virus. There has been a spate of relaxations in corporate and tax laws including Insolvency and Bankruptcy Code, 2016 (IBC) championed by Finance Minister, Nirmala Sitharaman seeking to keep the economy afloat. The first move saw the increase in the threshold amount for initiating the Corporate Insolvency Resolution Process (CIRP) under section 4 from one lakh to one crore in order to protect the interests of MSME’s that form the major chunk of our economy.[1]
Recently, on 24 April, a government official hinted at the introduction of Section 10A in the IBC as another move to safeguard the businesses from the rigours of IBC. Section 10A seeks to eclipse section 7,9,10 that provides for filing of applications for initiating the CIRP in case of a default for a minimum period of six months.
The Authors in this Article have analysed the effects of introduction of Section 10A and the lacuna that it seems to create.
Section 10A vis a vis the Pandemic
The newly introduced ‘Section 10A’ is being widely acclaimed by experts. The lockdown saga is expected to strike the revenues of the small as well as big corporate houses which would have resulted in multitude of applications for the initiation of the CIRP, had the NCLT resumed its functioning post lockdown. The Ministry of Corporate Affairs in an anticipatory move to safeguard the corporates from this lethal blow is said to bring in ‘Section 10A’ which is to eclipse Sections 7,9 and 10 for a minimum period of six months until further orders. Therefore, taking away the power of the creditors, both financial and operational of being in control. Further, it also abducts the prerogative of the corporate debtor under Section 10 to voluntarily file for CIRP.
It’s justifiable that the government foreseeing the inundating applications post the lockdown saga endeavoured to suspend Section 7 and 9 so as to revive economic activity. Suspension of IBC for 6 months removes an element of risk for a company while it is trying to secure necessary financing, renegotiating loans, and attempting to secure other reliefs from banks. However, suspension of Section 10 falls short of such justifications. Section 10 is enacted to afford an opportunity to the company to restructure its debt and revive the company through the resolution process. It grants a locus standi to the Corporate Applicant to initiate a CIRP against itself in cases of irretrievable financial distresses. Existing management of a corporate is a best judge of its financial stability and when the management is of the view that resolution under IBC is the best solution then no further time should be wasted on any other efforts for debt resolution. This would only lead to deterioration in value by adding another six months while it stays barely afloat, to the distressed life of the Corporate.
Solely, suspending the aforementioned provisions of IBC will not lead to the objective sought to be achieved by this move. Therefore, along with the insertion of this section there is a need to introduce an alternative mechanism. One ideal solution for safeguarding the interests of the creditors is to have a bank’s director or an institutional director to be a part of the Board of directors till the time Section 10A is in operation. For making it enforceable this mechanism should be introduced as a part of the changed law.
Alternate Remedy:
The suspension of the above-mentioned provisions do not completely bar the creditors from effectuating their claims against the wilful defaulters. These creditors could exercise their right by filing a summary suit under Order XXXVII (37) of the Code of Civil Procedure, 1908 or a standard commercial suit as amended by Commercial Court Act, 2015. The remedy of filing a civil suit is generally seen as a remedy of last resort. However, after the enforcement of the Commercial Court Act, 2015 the time period between filing of the suit and obtaining a decree has drastically reduced.
One factor that might act as a roadblock for creditors from proceeding under the Commercial Courts Act is the requirement to pay ‘ad valorem’ Court fees on the amount claimed. The said ‘ad valorem’ amount payable is approximately 1% of the total amount claimed in terms of the Court Fees Act[2], which are comparatively very high than the mandated sum of Rs.25000 and Rs.2000 to be paid by financial and operational creditors respectively for filing an application under the Insolvency Bankruptcy Code.
An amendment in this regard should be considered by the Centre while bringing in Section 10A. This will only make sure that while those MSME’s, affected harshly by the pandemic do not face rigorous action under the IBC, the right of the creditors against wilful defaulters does not go undressed.
Concluding Remarks:
The steps taken by the government, be it raising the monetary threshold under Section 4 of the Code from one lakh to one crore or suspension of sections 7, 9 and 10 are necessary in the current scenario. But, then it poses the question to the object of the Insolvency and Bankruptcy Code, 2016. The act was conceived by the Legislature so that creditors could take control over the possessions of the Corporate Debtors. With suspension of the aforementioned rights, the creditors will lose their right over the possession of the defaulting Company. Introduction of Section 10A would require the Legislature to enumerate further provisions in order to achieve the object for which Section 10A is being conceived.
The abovementioned suggestions and the lacunas should be considered while bringing in ‘Section 10A’ or further, any incomplete provision to avoid addition of any such conundrum to what may be the World’s worst recessions.
[1]https://economictimes.indiatimes.com/news/economy/policy/govt-raises-default-threshold-to-rs-1-cr-for-invoking-insolvency-proceedings-against-firms/articleshow/74796076.cms?from=mdr
(last accessed on 8th May, 2020)
[2] Section 7(i) of the Commercial Courts Act, 2015 r/w Schedule I of the Court Fees Act.
Article is Authored by Animesh Upadhyay & Mudit Ahuja. Mudit Ahuja is 4th year Law student of ILS Pune.
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