Turncoat Effect of the IBC: Post COVID-19
In a world wrecked by a health crisis, economic crisis, and political tension, good governance is mankind’s best hope. Governments, all over the world are trying their best to devise strategies to deal with the current blaze. The corporate sector is facing a huge loss, as the focus on the modern economy seems misplaced. In these challenging times, the government has been introducing various changes in the regimes in order to tackle the debt default triggered by the COVID-19.
The Insolvency and Bankruptcy Code, 2016 is one of the pioneer legislation which was passed in May 2016, to resolve claims involving insolvent companies and to tackle loan problems that were affecting banking in India. The IBC process has changed the debtor-creditor relationship and changed the direction of the flow of credit markets in India. At present, businesses are at a standstill, companies are facing great difficulty in the performance of a contract and which might trigger the creditors to initiate the insolvency proceedings against these debtors. Therefore, to provide some breathing space to the corporate debtors, the government has considered introducing various changes in the Insolvency and Bankruptcy Code since the lockdown has started.
CHANGES BROUGHT IN THE IBC POST COVID-19
The first step taken by the government towards this issue was to modify the threshold limit for invoking insolvency proceedings. Section 4 of the IBC provides the Central government power to increase the minimum amount of default by not more than one crore rupees.[i] By using this power, the government has through a gazette notification on March 25 modified the pecuniary threshold limit to ₹1 Crore from the existing threshold of ₹1 Lakh.[ii] This was done to protect and safeguard the Micro, Small & Medium Enterprises (MSME) to prevent any kind of defaults occurring against them. However, multiple implications were derived related to this amendment as it raised several questions concerning its applicability and how it is going to have a huge impact on operational creditors.
The next step taken was to make the filing of default record mandatory. The National Company Law Tribunal (NCLT) on May 12, 2020, passed an order directing the financial creditor to file a default record from Information Utility (IU) during the time of filing an application under section 7 of the code. The Authorized Representatives whose cases are pending for admission are also directed to file default records before the next date of hearing.[iii] It is believed that this amendment will help in the smooth and effective working of the Corporate Resolution Insolvency Process (CIRP) in a time-bound manner.
During the unveiling of the 20 Lakh Crore economic package, the Finance Minister announced various changes that are to be introduced in IBC laws to provide some relief to the companies. Announcements related to the suspension of insolvency proceedings, exclusion of COVID-19 debt from default, and special insolvency framework for MSMEs under section 240A of the code were made which were to be promulgated through an ordinance.
THE INSOLVENCY AND BANKRUPTCY CODE (AMENDMENT) ORDINANCE, 2020
Following the announcement made by the Finance Minister, an ordinance has been passed by the government on June 5, 2020, to further amend the Insolvency and Bankruptcy Code.[iv] Due to the nationwide lockdown, it is difficult to find an adequate number of resolution applicants to rescue the corporate person who may default in the discharge of their debt obligation. Hence, a need to suspend sections 7, 9 and 10 of the code was considered necessary to prevent the corporate person who is experiencing distress being pushed into the insolvency proceedings. A new section, i.e. section 10A has been inserted in the code according to which no application for initiation of CIRP of a corporate debtor shall be filed for a period of six months or more but not exceeding one year, for any default arising on or after March 25, 2020. It is further mentioned in the ordinance that no application shall ever be filed for the defaults which are occurring during the said period.
Section 7 of the IBC allows a financial creditor to initiate a corporate insolvency resolution process against the corporate debtor. Section 9 provides for the application of insolvency by an operational creditor, while Section 10 is for the initiation of insolvency resolution proceedings by a corporate applicant. The ordinance has further inserted sub-section (3) to Section 66 of the code. It states that no application shall be filed by resolution professional under sub-section (2) to initiate CIRP for any default occurring in the prescribed period.
AMBIGUITIES UNDER THE ORDINANCE
Certain ambiguities have been highlighted under the ordinance. It is argued that suspension of all three provisions may not be the best solution to tackle the present situation as it opens up a gate to two roads. First, along with the creditors, corporate debtors are also not allowed to initiate CIRP. There is a possibility that if financially stressed companies are stopped from approaching the NCLT, it would worsen their stress as the value of assets will be deteriorated. Second, this might be a relief to many companies who are impacted by the COVID-19 outbreak but this also leaves the door open for fraud. There is also a possibility that the promoters of the company that can repay dues could force a default and never be held accountable during this period.
Further, banks and NBFCs can still escape this clause because they have to give a six months moratorium to their borrowers to pay off their loans. The impact of this ordinance is likely to be more on the operational creditors, foreign lenders and bond investors. Although they have other measures outside IBC like civil courts (DRT), it is considered to be time-consuming and that is the reason why IBC came into force. So now going back to the old laws doesn’t seem a good option for these creditors. Another point that needs to be considered is now that the ordinance is introduced and it covers defaults arising on or before 25th March, then whether the updated minimum threshold will be applied to cases before 25th March or not. Because the government notification failed to clarify the applicability of the increase.
The whole nation is going through a tough time. One can only hope that these measures prove to be useful in easing the distress and improving the financial situation of firms. However, it is suggested that instead of putting a complete suspension on CIRP, more time or grace period for debtors to pay back their debts could have been given. A balanced approach is required for better functioning of the code. Along with the efforts to protect companies/corporate debtors from unprecedented distress, the government shall focus on the creditor’s rights as well. However, a much-awaited relief in the form of special insolvency framework for MSMEs under section 240A was also expected in the ordinance as announced by the finance minister.
[i] Insolvency and Bankruptcy Code S4 (2016) [ii] https://www.ibbi.gov.in/uploads/legalframwork/48bf32150f5d6b30477b74f652964edc.pdf [iii] https://ibbi.gov.in//uploads/legalframwork/e3daa98bab56a6098c4e9356b93095bb.pdf [iv] https://ibbi.gov.in//uploads/legalframwork/741059f0d8777f311ec76332ced1e9cf.pdf
ABOUT THE AUTHOR
This blog has been authored by Shaivi Awasthy who is a 3rd Year B.A., LL.B. (Hons.) student at ILS Law College, Pune.
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