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IBC Amendment Ordinance 2020: No fresh insolvency for default after lockdown declaration

Why it would be advisable for stakeholders to adopt the strategy to wait and watch for some time rather than taking any immediate action or a knee-jerk reaction based on the instant Ordinance.

Published: 08th June 2020 08:03 PM  |   Last Updated: 08th June 2020 08:03 PM   |  A+A-

Many businesses will be hoping to gain succor from the Insolvency and Bankruptcy Code.

Many businesses will be hoping to gain succor from the Insolvency and Bankruptcy Code. (Photo | Reuters)

Express News Service

The instant Insolvency and Bankruptcy Code (Amendment) Ordinance (IBC) has been one of the most awaited in the past two months. It could prove to be a game-changer and be essential for the very survival of numerous corporate debtors across the country.
 
Article 123 of the Constitution of India grants the President of India certain law-making powers to promulgate ordinances when either of the two Houses of Parliament is not in session. The fundamental reason for bestowing the executive with the power to issue ordinances is to deal with situations where an emergency in the country necessitates urgent action, such as the unprecedented economic and health crisis faced by the nation in the wake of the pandemic COVID-19. 

The Crux of the Amendment Ordinance 2020

By virtue of the said powers vested in him under the Constitution of India, the Hon'ble President of India has promulgated the IBC Ordinance 2020 on 05.06.2020 to effectively suspend the operation of Sections 7, 9 & 10 of the Insolvency and Bankruptcy Code, 2016 with respect to defaults arising on or after 25.03.2020 for a period of six months, extendable up to a maximum of one year from such date as may be notified. The promulgation of this Ordinance has resulted in the insertion of new clauses, i.e., Section 10A and Section 66(3) in to the Insolvency and Bankruptcy Code, 2016. 

ALSO READ | Is IBC suspension antithetical to pandemic protection?

Window of Reprieve for Corporate Debtors

On prima facie perusal of the aforementioned provision, it can be inferred that no applications seeking to initiate the corporate insolvency resolution process of a corporate debtor can be filed in case the default arose on or after 25.03.2020 until a minimum of 6 months. This period, where there is a bar on the initiation of the CIR Process in case the defaults occur after 25.03.2020, shall be extended to a maximum of 12 months, i.e., 24.03.2021. However, the exact time period, i.e., the window of reprieve provided to the corporate debtors during the COVID-19 pandemic has not been notified yet. Clarity on the same is awaited. 

No Bar in Case of Default Arising before 25.03.2020

Also, the instant Ordinance also allays and assuages the fear of the creditors to a great extent by clearly enunciating that the newly inserted provision of Section 10A shall not be applicable to any defaults which were committed prior to 25.03.2020. Thus, creditors would be free to file applications under S. 7, 9 and 10 of the IBC, 2016 in case the corporate debtor committed any defaults in payments prior to 25.03.2020.

The IBC Amendment Ordinance, 2020 – A COVID-19 a Relief Package?

The instant Ordinance looks to provide some relief to those corporate debtors who are directly affected due to the COVID-19 pandemic which has resulted in widespread disruption of business operations across the country. The Ordinance also takes cognizance of the fact that it would be difficult to find an adequate number of resolution applicants to rescue the corporate person who may default in the discharge of their debt obligation during these difficult times. 

Thus, this Ordinance largely looks to prevent corporate persons which are experiencing distress on account of this unprecedented situation, from being pushed into insolvency proceedings under the IBC, 2016 for some time, thus giving them a breather in which to recoup and resuscitate their business. 

The Ordinance Silent on Special Framework for MSMEs 

The instant Ordinance is silent about any special insolvency resolution framework for MSMEs u/s. 240A of the IBC, 2016 which was also in the pipelines as per Atma Nirbhar Bharat Abhiyan reforms announced by the Union Minister for Finance and Corporate Affairs Nirmala Sitharaman on 17.05.2020. Thus, with the advent of the latter framework and progress on the instant Ordinance, the effectiveness of these measures in assisting the ease of doing business would have to look to be seen.  

The Grey Areas of the IBC Amendment Ordinance, 2020

However, there are some ambiguities prevalent in the Ordinance. For instance, the expression “no application shall ever be filed’ as used in first proviso to S. 10A cannot be taken to mean that abatement/relaxation/suspension of trigger clauses is available even after the prescribed time period from 25.03.2020 ends. If such an interpretation is taken, the provision becomes counter-intuitive. A blanket, forever/perpetual protection would actually incentivize a corporate debtor to accelerate default so as to bring it during the prescribed period and avail a permanent abatement. This may not be the intent of the law. Thus, some clarity on the interpretation of the phraseology of the proviso clause in Section 10A is also keenly awaited. 

Impact on MSMEs and Operational Creditors

The moratorium provided by the Reserve Bank of India for a period of six months had already cushioned the corporate debtors to some extent from the financial creditors who were mostly banks and financial institutions. Thus, this Ordinance would have more of an adverse impact on the operational creditors. It is to be noted that operational creditors are mostly Micro, Small, Medium Enterprises (MSMEs). Thus the instant ordinance coupled along with the amendment increasing the minimum threshold of default from Rs. 1 lakh to Rs. 1 crore could be a double-edged sword for MSME’s. 

The Ordinance is also largely silent about the fate of the Operational Creditors. It kind of leaves the Operational Creditors (OC) who had issued demand notices prior to the amendment of the minimum threshold in a limbo. Section 5(11) of the IBC, 2016 defines “initiation date” “as the date on which a financial creditor, corporate applicant or operational creditor, as the case may be, makes an application to the Adjudicating Authority for initiating corporate insolvency resolution process;”  

On perusal of the aforesaid provision, it can be inferred that the date of initiation in case of OCs is the date on which the Section 9 Application is filed before the Adjudicating Authority which is only after the issuance of the Form 3/Demand Notice u/s. 8, thus the fact that a demand notice had been sent prior to the modification of the minimum threshold from Rs. 1 lakh to Rs. 1 crore becomes superfluous and is likely to become an issue of litigation; as on the date of filing the Section 9 application the defaulted amount should be more than Rs. 1 crore as per the Ordinance dated 24.03.2020 related to the raising of the minimum threshold of default. It could be presumed that if the Operational Creditors have issued Demand Notices u/s. 8 of the IBC, 2016 pursuant to defaults which arose before 25.03.2020, then those OCs can proceed with the filing of an application u/s. 9 of the IBC, 2016, provided that the amount in default is more than Rs. 1 crore. 

However, if the demand notices were sent during the lockdown period for defaults which occurred on or after 25.03.2020, then there would be a bar on the filing of a S.9 Application. 

The Conundrum of the Minimum Threshold of Default

There had been some debate as to whether the Notification dated 24.03.2020 regarding the raising of the minimum threshold of default from Rs. 1 lakh to Rs. 1 crore is prospective or retrospective in nature. The Hon’ble NCLT of the Kolkata and Chennai Benches vide their Orders dated 20.05.2020 (M/s. Foseco India Limited v M/s. Om Boseco Rail Products Limited) and 02.06.2020 (M/s. Arrowline Organic Products (P) Ltd v. M/.s Rockwell Industries Limited) respectively have brought some quietus to this issue.  

The Hon’ble Adjudicating Authorities after considering the text of the said notification along with the provisions pursuant to which it was issued, held that the law did not expressly confer any power on the delegate to issue the impugned notification in a retrospective fashion. They categorically held that the Notification dated 24.03.2020 is only prospective in nature, thereby allowing the pending cases before the various Adjudicating Authorities across the country to reach their logical conclusion without their very maintainability on the grounds of minimum threshold of default being challenged, as on date. 
    
Amendment to Section 66 of the IBC, 2016

The Ordinance also envisages the amendment of Section 66 of the IBC, 2016. The relevant extract of the clause (3) which is newly inserted therein, is reproduced below:

In Section 66, after sub-section (2) following sub-section shall be inserted:
“(3) Notwithstanding anything contained in this section, no application shall be filed by a resolution professional under sub-section (2) in respect of such default against which initiation of corporate insolvency resolution process is suspended for Section 10 A.”

The aforesaid provision provides relaxation from wrongful trading provisions, i.e., resolution professionals will be barred from initiating wrongful trading applications against directors of companies where the IBC process is suspended. This is certainly a matter of concern. 

Conclusion

It would be advisable for stakeholders to adopt the strategy to wait and watch for some time rather than taking any immediate action or a knee-jerk reaction based on the instant Ordinance. Some clarifications from the concerned Government Ministry and the Insolvency and Bankruptcy Board of India could be expected, as the implications of the Ordinance on various stakeholders are multi-fold and would have to be addressed appropriately and the ambiguities properly cleared, failing which there could be some lethal issues for the creditors at large which will eventually have to be decided by NCLT’s, NCLAT and ultimately the Hon’ble Supreme Court of India. 

Key Highlights of the Ordinance
*  Suspension of S.7, 9, 10 of IBC, 2016 in case of defaults which arose on or after 25.03.2020. 
*  Time period in which suspension of initiation of CIRP will be effective is yet to be notified – It is for a minimum of 6 months and could be extended up to a maximum of 1 year.
*   Applications seeking to initiate CIRP for corporate debtors is allowed in case the following conditions are satisfied:
i.    The default arose before 25.03.2020
ii.    The amount of default is more than Rs. 1 crore. 

Anant Merathia and Poornima Devi are advocates practising in the Madras High Court. The views expressed are personal. 



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