Authored By: Ghanishtha Mishra
The paper extensively explains the IBC amendment ordinance 2020 promulgated by the president. It elaborates on legal provisions involved and how they are altered to suit the situation. It clears all the doubts arising from the changed law and lays down the questions which remain unanswered. Further the paper critically analyse the amendment made and concludes it to be highly beneficial.
COVID- 19 has hit a pause button on all activities going on around the world and has brought human life to stagnation. Most human activities are carried on to earn livelihoods. The world has turned to a division of labour long back. Not only are individuals dependent on others but countries are also dependent on other countries may it be raw material or finished product. No country in the world is self-sufficient. Today, production units are located in different corners of the world and hence the goods need to be transported to consumption centers, this generates the need for finance, trade, and transportation. Due to COVID, these global supply chains now stand disrupted. For example, China- the native place of Coronavirus is also the global manufacturing hub. As soon as it announced a lockdown in January, supply chains were affected across the globe. Given such a scenario, it is very clear that business transactions from debtors to creditors cannot be carried on smoothly. Changes in society call for changes in laws.
LEGAL PROVISIONS INVOLVED
Article 123(1) empowers the president to promulgate an ordinance in case parliament is not in session. Recently, the president promulgated Insolvency and Bankruptcy Code Ordinance, 2020 to amend Insolvency and Bankruptcy Code, 2016 considering lockdown due to COVID- 19 and its impact on the economy. Changes brought by ordinance are :
Applicability of section 7, 9, and 10 are selectively suspended. (Section 7 enables financial creditors to file for insolvency against corporate debtors, section 9 provides for the same by operational creditors and section 10 relates to the initiation of insolvency proceedings by a corporate applicant.)
Section 10A is inserted which prohibits the filing of an application for initiation of insolvency resolution process of a corporate debtor for the default occurring on or after 25th march 2020, for six months, that is till 24th September 2020 and may be extended for up to twelve months, that is, till 24th March, 2021 (called as disruption period hereafter), by notification. Section 66(3) is inserted for relaxation from wrongful trading provisions.
Besides the legal provision there exist some salient features of the ordinance, such as no application shall ever be filed for initiation of corporate insolvency resolution process (CIRP) for defaults occurring during the disruption period.
Applications for CIRP are entertained for defaults occurring before the 25th of March, for instance, cases under RBI’s June 7 circular, where the 180-day timeline ended in January.
Adjudicating authority (NCLAT in most cases) will determine the date of occurrence of default. The burden of proof will lie on the corporate debtor.
The centre increased the threshold for insolvency plea to Rs 1 crore from Rs 1 lakh (not done through aforesaid ordinance).
The lockdown period is being excluded from the limitation period and from timelines specified in IBC, but the clock starts ticking as soon as the disruption period is over and hence creditors will be allowed to file applications for initiating CIRP.
SIGNIFICANCE OF THE ORDINANCE
Indian economy is full of large and small-scale industries. A large chunk of the contribution comes from the medium and cottage industries or the unorganized sectors. Working capital is needed to buy raw material, labour and other inputs. To start a business, capital is purchased on loans taken from banks. Likewise, almost all businesses work on loans on which they pay interest. Interest is paid out of revenue generated from sales. In the present situation, COVID-19 has stopped most sales and as a result, turned these loans into Non- Performing Assets (‘NPA’). In such a situation when all the corporate entities are chagrined, initiation of CIRP by banks or other creditors will make the situation worse.
Before March 2020, the Indian economy was not doing so well, businesses were already stressed due to the slowing Indian economy. Lockdown added to the misery and many firms with heavy borrowing and huge lending became the first ones to fall. For example collapse of Yes Bank in March, 2020 due to aggressive lending practices followed by diminishing scrip of IndusInd Bank. Since all these firms are interlinked via credit, a domino effect is created and the failure of one firm leads to that of the next and so on and so forth. This happened in the USA in 2008 in the Lehman brother holdings case. In fact collapse of IL&FS bank in 2018 gave rise to India’s “Lehman moment”. Hence firms cannot be burdened by making them fight against CIRP initiated against them.
COVID-19 has stopped the inflow of money and taught the human race to stick to necessities and give up luxuries. In this case, few sectors such as travel and tourism, hospitality industry, airways, sports, and entertainment industries, hyper-local marketplaces which are devoted to providing luxuries are avoided by the general masses. Now one cannot expect such industries to pay interest when the inflow of money is zero.
The government played their cards right by responding to the changes brought about by coronavirus. Besides changes brought in IBC, the government has further told public sector banks to build “resilient credit risk control systems’’ as part of the EASE 2.0 program for high value loans. Despite all the measures the amendment still has certain flaws. Initiating CIRP in various instances protect firms in various ways, for example, as soon as insolvency resolution process starts, moratorium becomes effective which prohibits continuation or initiation of any legal proceedings against the debtor, transfer of its assets, recovery of property from debtor and so forth. Section 10 of IBC allows corporate debtor to initiate CIRP against itself. The Section 10A of the ordinance suspended section 10 henceforth not allowing corporate debtors to gain aforementioned legal protection, which seems unjustified.
To relax the payment pressure, RBI has allowed all kind of banks to extend the moratorium period for 3 months, making it a total of 6 months. For this period, it seems that ordinance will not be of much use but it must be noted that extending moratorium is at the discretion of banks.
Operational creditors are mostly suppliers of goods or services and fall under the category of MSMEs and these operational creditors are left with no legal recourse under IBC to extract their credits from corporate entities. However, the MSMED Act ensures timely recovery of the dues preventing them from suffering financial distress.
Section 66(3) of IBC may give undue advantage to directors and partners of corporate debtors for not being held liable in the future for any fraudulent activities committed during the disruption period. Insertion of sub-section 3 is against the principle of section 66 and hence requires clarification.
Government also increased the threshold for initiating CIRP from 1 lakh to 1 crore but failed to explain its applicability, though all the notifications are applied prospectively, it being a subordinate delegated legislation and due to judicial interference may be applied retrospectively.
The drafting of the ordinance is not very impressive and creates confusion. The expression ‘no application ever be filed’ raises the question whether the creditors are allowed to initiate CIRP after the disruption period is over for the default occurred in the disruption period. The limit of default under section 4 has been increased from one lakh to one crore, now what if part of default occurred before the 25th of March and rest of the default occurred after 25th of March, in this situation what will one expect the adjudicating authority to do?
Various provisions may act as an alternative to IBC for recovering one’s money such as ‘the Companies Act’ which provides the framework for ‘schemes’. These schemes are aimed at compromise or arrangement between a company and its creditors. Initiating the insolvency process under IBC is a criminal proceeding. Since IBC is not available for some time at the service of creditors, the civil procedure could be used for recovering a debt. Order 37 of the civil procedure code allows the creditor to file a summary suit. Summary procedures apply to all suits pertaining to the recovery of money that arise from a written agreement. Negotiable Instruments Act, 1881, can be used for the recovery of money arising from instruments such as cheque. The SARFAESI Act can be used by financial institutions to recover their lending.
Despite minor ambiguities created by the ordinance, many big firms have welcomed this step with open arms. If this step would have not been taken, the judiciary would have been overburdened with CIRP applications and corporate applicants might have faced unavailability of resolution professionals.
To negate the confusion and ambiguity of all sorts it would have been better that instead of adding section 10A, a proviso in section 3 (12) should have been added stating that – defaults arising on or after 25th March 2020 for period of 6 months, or for period extending to one year as notified by government shall not be considered for the purpose of calculating the minimum amount of default under section 4 of IBC, 2016.
Another alternative was to just change the definition of the term ‘default’ for the same time period as stated in the ordinance. Definition of default for the disruption period should only include those defaults that were inevitable despite the stagnation in the economy due to lockdown, this could be ascertained easily by looking at accounts of the corporate debtor. This would have not allowed debtors who were defaulting before coronavirus took over, escape from law.
The government should ensure that adequate number of resolution professionals should be available for corporate debtors defaulting before the disruption period.
COVID 19 has created a situation of helplessness and fear in the country. In such a situation we need a vigilant government to take steps like this which benefit all. The Finance Ministry has taken many steps to alleviate corporate entities and help them overcome the loss incurred during the pandemic period. Though the stalwarts of corporate law are not very happy by the drafting of the ordinance but, they can sense the good intention behind the same. The ordinance is as simple as extending the time period for debtors to make the payment but very significant for businessman across the board. In light of the falling economy and shocking lockdown, it would not be wrong if it is said that this amendment has been one of the most awaited in the past two months.
The author is currently an undergraduate student at National Law University, Nagpur.