The COVID-19 pandemics has impacted businesses and financial markets across the globe, including India, and created uncertainty for businesses for reasons beyond their control. To address the plight of those affected, further amendments have been made to the Insolvency and bankruptcy Code (hereinafter “IBC”) on June 5, 2020, by way of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 [No. 9 of 2020].
The Ordinance passed suspends the initiation of fresh insolvency proceedings for a period of six months to protect companies and businesses from the impact of Covid-19, applying to defaults arising on or after March 25, 2020. It is effective immediately, and allows the government to extend the suspension up to one year.
The reason for passing this Ordinance has been stated as the pandemic having created stress and uncertainty for business, and the nationwide lockdown having added to the disruption of normal business operations. As a consequence, it would be difficult under the circumstances to find an adequate number of resolution applicants for a distressed or defaulting business. [See opening text of the IBC (Amendment) Ordinance, 2020, No. 9 of 2020].
The Ordinance has thus been promulgated in an effort to aid struggling businesses so that they are not made to face bankruptcy proceedings on defaults made by them during the period of the pandemic.
The Ordinance makes the following to amendments to the IBC:
Suspension of Initiation of Corporate Insolvency resolution Process: A new Section 10A is inserted in the Code which states:
“Notwithstanding anything contained in Sections 7, 9 an 10, no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25th March, 2020, for a period of six months or such further period, not exceeding one year from such date, as may be notified in this behalf.”
It is further provided that the protection is not just for now, but that no application shall ever be filed for defaults during this period. It is clarified that the section does not apply to any defaults committed before this period. [See S. 2, IBC (Amendment) Ordinance, 2020, No. 9 of 2020].
In the IBC, Section 7 allows financial creditors to file for insolvency against a corporate debtor, Section 9 provides for application of insolvency by an operational creditor, and Section 10 deals with the initiation of insolvency proceedings by a corporate applicant. Thus, suspension of these provisions will lead to no bankruptcy proceedings being initiated against defaulting debtors during the ongoing period of the pandemic, and give them lasting protection for this time as the section expressly states that no application shall ever be filed for defaults during this period.
Amendment to Section 66: A sub-section (3) is added to Section 66, which disallows the Resolution Professional from filing an application under Section 66(2). The inserted Section 66(3) reads:
“Notwithstanding anything contained in this Section, no application shall be filed by a Resolution Professional under sub-section (2), in respect of such default in which initiation of corporate insolvency resolution process is suspended as per Section 10A.” [See S. 3, IBC (Amendment) Ordinance, 2020, No. 9 of 2020].
Section 66 deals with fraudulent and wrongful trading. This includes actions made to defraud the creditors of corporate debtors, and to identify and hold them liable. The language of the amendment implies that Resolution Professionals are prohibited from filing applications of wrongful/fraudulent trading against corporate debtors during the period of the pandemic.
Corporate debtors are being given huge protection and safety for defaults in this period, as they cannot be dragged to bankruptcy proceedings being faced for circumstances entirely beyond their control.
The addition of Section 66(3) also protects the actions of corporate debtors towards the creditors during this period, safeguarding them from potential proceedings under Section 66 dealing with fraudulent and wrongful trading.
Creditors have the security that any defaults that occurred before March 25, 2020 can still be resolved via the IBC, which is a relief for many as when there was first mention of the suspension of IBC proceedings for one year, the fear was that there would be a blanket ban on initiating proceedings for the entire period.
The Ordinance thus provides clarity with regard to the extent of its applicability, and gives wide protection to corporate debtors.
Despite some obvious benefits to corporate debtors and MSMEs that have been the intent behind this Ordinance, a large amount of criticism and concern has begun to develop around this amendment. Some of the potential issues are:
• The suspension of voluntary initiation of insolvency proceedings by companies themselves, implying that the company itself feels that it is in need of starting these proceedings based on its financial situation, is not a wise move.
• Operational creditors, including suppliers of goods and servives, who are aimed to be protected, can also not file for insolvency against defaults. In case of a default against their services, they will have no legal recourse within the IBC.
• Liabilities will continue to accumulate with no method of resolution or legal remedy pursuable for defaults as a consequence of this ordinance.
• The proviso under Section 10A provision stating that “no application shall ever be filed for initiation of corporate insolvency process of a corporate debtor for…default…occurring during the said period” is a dangerous provision, almost encouraging default in this period since the debtor can never be made liable.
• The addition of Section 66(3) protecting the fraudulent and wrongful trading actions of corporate debtors towards the creditors during this period, is again a provision that raises a red flag providing undue protection.
• A large amount of debate is occurring with regard to defaults that may be continuing in nature, meaning they originated before or continued after the protected period of the Ordinance. From the language of the Ordinance, it appears that safeguards are in place only for defaults that occur during the specified period, not before or after. Therefore, liability will likely arise for continuing defaults that lie outside the protected period.
The Ordinance has led to a situation where certain parties have been given absolute protections while others are left with no legal recourse whatsoever, creating something of an imbalance in the law relating to the insolvency resolution process.
By Shiv Mangal Sharma
Advocate Supreme Court