SUSPENSION OF INSOLVENCY REGIME DURING THE PANDEMIC

Introduction

One of the main purposes and objective of Insolvency and Bankruptcy Code, 2016 [i](hereinafter referred as “IBC”) is to resolve claims relating to an insolvent company. It provides speedy and effective method of resolving insolvencies rather than tilting towards the delayed and cumbersome procedure of court.

The era of Insolvency and Bankruptcy Code, 2016 embarks a better relationship between creditor and debtor where both these, can initiate recovery proceedings against each other in case of insolvency and bankruptcy. IBC aims to protect the interest of small investors and offer economically viable arrangements of resolving insolvencies. The bad loan problems have been tackled effectively with the introduction of IBC.

Position of IBC before Insolvency and Bankruptcy (Amendment) Ordinance, 2020

IBC provides for a time bound mechanism to insolvency proceedings. Companies need to complete insolvency proceeding within 180 days in case of large companies. However, in case of small companies whose annual turnover does not exceed Rs. 1 crore, then the whole insolvency proceeding needs to wrap up in 90 days. In both cases, the extension in time can be made if creditor does not raise objection. Also, IBC provides for liquidation in case a debt resolution does not take place. [ii]

This was the position prior to the emergence of Coronavirus pandemic. However, the situation changed after the promulgation of Insolvency and Bankruptcy (Amendment) Ordinance, 2020 [iii]by the President of India on June 05, 2020.

Objective of Insolvency and Bankruptcy (Amendment) Ordinance, 2020

1. To support Indian Businesses who suffered from financial crisis because of pandemic which created uncertainties and is out of their control.

2. To combat the spread of Covid-19 which has added to disruption of normal business operation.

3. To exclude the default arising on account of unprecedented situation which resulted into initiation of insolvency proceeding against the insolvent under IBC.

4. To prevent corporate person which are experiencing distress, from being pushed to insolvency proceeding on account of unprecedented situation.

Position of IBC after Insolvency and Bankruptcy (Amendment) Ordinance, 2020

1. Insolvency and Bankruptcy (Amendment) Ordinance, 2020 suspended Section 7, 9 and 10 of Insolvency and Bankruptcy Code, 2016 toprevent corporate person which are experiencing distress, from being pushed to insolvency proceeding on account of unprecedented situation.

2. Insolvency and Bankruptcy (Amendment) Ordinance, 2020 inserted new Section 10A [iv]to Insolvency and Bankruptcy Code, 2016 with head Suspension of initiation of corporate insolvency resolution process.

3. Insolvency and Bankruptcy (Amendment) Ordinance, 2020 amended Section 66 [v]of Insolvency and Bankruptcy Code, 2016 and inserted sub- section (3) after sub section (2).

Prohibition of Insolvency Proceedings against the corporate debtor

Section 10A of Insolvency and Bankruptcy (Amendment) Ordinance, 2020 states that no application for initiation of the corporate insolvency resolution process (“CIRP”) can be filed against a corporate debtor for default arising on or after 25^th March, 2020 for a period of six months and not exceeding one year from such date. However, no such protection has been granted to corporate debtor who are in default before 25^th March, 2020.

Looking at international measures in light of Covid-19, a permanent prohibition seems unprecedented. Countries such as Singapore, Germany and United Kingdom have proposed or carried out changes to the insolvency regimes to address the impact of the pandemic in the form of restrictions to insolvency proceedings, however, a complete and permanent prohibition appears to have no parallel.[vi]

Protection against wrongful trading

Section 66(3) ofInsolvency and Bankruptcy (Amendment) Ordinance, 2020 states that no application can be made by resolution professional under Section 66(2) in respect of such default against which initiation of the corporate insolvency resolution process is suspended as per Section 10A of Insolvency and Bankruptcy (Amendment) Ordinance, 2020.

Relaxations from wrongful trading have also been granted in many other jurisdictions such as Australia where the Coronavirus Economic Response Package Omnibus Act 2020 was introduced as a safe harbour provision, so that directors can no longer be held liable for incurring debts while insolvent in relation to any debt incurred by the company in the initial six months period as being insolvent trading, commencing on March 25, 2020. This measure has also been announced in New Zealand and the United Kingdom.[vii]

Consequences of Insolvency and Bankruptcy (Amendment) Ordinance, 2020

Insolvency and Bankruptcy (Amendment) Ordinance, 2020 surely provides relaxation to the corporate debtor but it never intended to provide a blanket protection to them. Insolvency and Bankruptcy (Amendment) Ordinance, 2020 primarily aimed at two things, firstly, to support the Indian businesses and secondly, to prevent backlog of cases. It is not correct to say that all door is closed for the creditor to recover their amount. There are still many ways by which a creditor can recover his money. These are:

1. The introduction of the Ordinance would bring the out-of-court restructuring regime under the Prudential Framework for Resolution of Stressed Assets dated June 7, 2019

2. Where no restructuring is feasible for companies defaulting during the Specified Period, the lenders would have to rely on applicable recovery and enforcement tools such as the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, and Recovery of Debts Due to Banks and Financial Institutions Act, 1993, in addition to civil courts and arbitration, where applicable.

3. The Ordinance places no prohibition on insolvency/ bankruptcy proceedings of personal guarantors under the IBC. 

4. While the ability of companies to file themselves into insolvency under IBC has been prohibited, if a need is felt that the company should be liquidated, the (now almost forgotten) winding up procedure under the Companies Act and voluntary liquidation under IBC continues to be available (creditors cannot file for winding up under the Companies Act and voluntary liquidation is not available for companies in default).[viii]

Conclusion

The Insolvency and Bankruptcy (Amendment) Ordinance, 2020 is a breath-taking sign of the corporate debtor. However, some of the lenders are conscious about their money as there seems no end of pandemic in near future. Also, there is continuous extension of the time period by the government for initiation of the corporate insolvency resolution process.

Though there are various ways apart from the ways provided by Insolvency and Bankruptcy Code, 2016 for recovery of money by the lenders. It must be clear that Insolvency and Bankruptcy Code, 2016 was never meant to be a recovery tool rather it is a tool of reorganisation and restructuring of corporate debt.

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[i] Act 31 of 2016.

[ii] Available at: https://www.business-standard.com/about/what-is-ibc#collapse, last visited: 29-07-2021 (13:04 pm)

[iii] No. 9 of 2020, New Delhi, the 5th June, 2020/Jyaishtha 15, 1942 (Saka), Available at: https://ibbi.gov.in/legal-framework/act.

[iv] Inserted by Act No. 7 of 2020, sec 2, (w.e.f. 05-06-2020).

[v] Inserted by Act No. 17 of 2020, sec 2, (w.e.f. 05-06-2020).

[vi]  Cyril Shroff & Dhananjay Kumar, Indian Insolvency Law responds to the COVID-19 Pandemic- Part-II, https://corporate.cyrilamarchandblogs.com/2020/06/indian-insolvency-law-responds-to-the-covid-19-pandemic-part-ii/, Last visited: 29-07-2021 (13:52pm).

[vii] Ibid.

[viii] Ibid.