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Legislations, The Law

The Insolvency and Bankruptcy Code Ordinance 2020

The outbreak of COVID 19 led to a nationwide lockdown to control the spread of the virus. The lockdown resulted in disruption of business and a bad state of economic activities. To control the misuse of the resolution process and protect innocent corporate debtors from the push, an Ordinance was promulgated to suspend all filing of resolution file for six months.

By: Anukriti Mathur

 The Insolvency and Bankruptcy Code was enacted in the year 2016 and its provisions, in respect of the corporate insolvency, were enforced with effect from December 1, 2016. Before the Code, India had various laws governing insolvency and bankruptcy. The provisions of Insolvency for were in Partnership Act 1932, Companies Act 2015, Sick Industries Act, 1985, etc. The enactment of the IBC led to a single code governing all issues related to Bankruptcy and insolvency. This led to a time-bound process and maximize asset value for the collective satisfaction of the creditors. It is also to encourage resolution over liquidation to prevent corporate deaths and promote entrepreneurship. The Code has been amended five times by now. The amendment in form of the recent IBC (Amendment) Ordinance, 2020 was promulgated on June 5, 2020.

Reasons for Amendment:

1. To provide a better environment for the IBC

2. Enhance the corporate insolvency procedure and correct minor procedural glitches,

3. To make the code more acceptable with Covid-19 Pandemic which impacted business, financial market, and economy all over the world

4. To smoothen up the disruption caused in business due to nationwide lockdown.

5. To avoid increasing resolution application and rescue corporate debtor hit by the 

6. To suspend section 7, 9, and 10 of IBC, 2016 for protecting the corporate debtor from unnecessary push

7. considered necessary to exclude the defaults arising on account of the pandemic.

Clarifications have been issued that the ordinance 2020 will not affect any defaults made before March 25, 2020, as they, not defaulters due to COVID 19. This indeed is positive but the perpetual suspension of creditor rights for 6 months led creditors to look for options to explore alternatives for recovering money. 

Unless this is amended, it will leave creditors with limited options for a holistic debt restructuring. If the perpetual suspension continues, RBI must consider easing the provisioning norms for such defaulted assets.

This affects the right of the debtor who himself wants to quit the market with dignity and don’t want to drag the trauma of a failed business. 

Alternate Remedies

The suspension of the Code leads to creditors search for alternative means to recover money. As the ordinance provides for a bar to all transactions, the following are alternatives left:

  • The available means in the hand of the creditor are to file suit under the Commercial Courts Act, 2016 which may provide remedies timely.
  • Alternatively, CPC under order XXXVOO provides for summary trials to the recovery of debts. 
  • SARFASI to is an option of recovery for a secured creditor
  • Corporate debtors whose rights are being taken away by the Ordinance for initiation of the insolvency process under the Code may avail other remedies like voluntary liquidation under the Code and the winding-up mechanism for specified companies defined under the Companies Act, 2013 read with the Companies (Winding-up) Rules, 2020 which have come into force from April 1, 2020.

In essence, the Ordinance would not in any manner affect the rights of a creditor, and neither would the debtor be absolved of any litigation for recovery of monies.

Our views on the Ordinance

  • The proviso to section 10A attempts to widen the scope of the operative/enacting part of the section in so far as it protects any default occurring during the suspension period even beyond the expiry of such suspension period. It is a settled principle of interpretation of statutes that the ambit and the scope of the enacting section cannot be widened or curtailed by the proviso when the enacting part is not susceptible to several possible meanings. One can hope that ambiguity arising under the Ordinance may be clarified when the Ordinance becomes an amendment act or by judicial review.
  • The underlying rationale of the newly inserted sub-section 3 to Section 66 of the Code, via the Ordinance, is to boost the confidence of the directors or partners of companies to use their best endeavours to continue trading during this unprecedented market situation, without the threat of personal liability, if at all the company goes into insolvency.
  • Pending applications i.e. those applications which are already filed with the NCLT, but are yet to come up for hearing or applications which have come up for hearing(s) but are pending admission or rejection, will remain unaffected. The NCLT, Kolkata Bench in the matter of Foseco India Ltd. vs. Om Boseco Rail products Ltd. has held that the increased threshold limit of Rs.1 crore under the Code does not apply retrospectively. This order proceeds on the well-settled law that a statute is presumed to be prospective, unless it is held retrospective, either expressly or by necessary implication. Even NCLT, Chennai Bench has concurred with this view in the matter of M/s. Arrowline Organic Products Pvt. Ltd. vs. M/s. Rockwell Industries Ltd.

The Ordinance aligns with the aggregate moratorium of 6 months on payment of installments in term loans as well as the exclusion of the period for classification of an asset as NPA under the RBI’s COVID-19 Regulatory Package.

Thus, the majority of the financial creditors may not be moved by the Ordinance. However, the Ordinance is likely to be detrimental to the interests of operational creditors. Be that as it may, it will be interesting to see what treatment is accorded to MSMEs, vis-a-vis special framework for MSMEs under the proposed Section 240A.

  • The Ordinance could have provided clarity on the possible issues that may arise due to COVID-19 about various stages specific to a resolution plan viz. where resolution proposal is submitted to the CoC, but not approved by the CoC; where resolution application is approved by the CoC, but pending approval of the NCLT and where the resolution plan is approved by the NCLT but remains to be implemented.
  • The Government could consider bringing into force the fresh start process chapter and also have a statutory amendment qua pre-package insolvency regime under the Code.

Endnotes

  • Foseco India Ltd. vs. Om Boseco Rail products Ltd Order dated May 20, 2020, in C.P. (IB) No. 1735/KB/2019
  • M/s. Arrowline Organic Products Pvt. Ltd. vs. M/s. Rockwell Industries Ltd Order dated June 2, 2020, in C.P. in I.A./341/2020 in IBA/1031/2019

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