IBC Amendment Ordinance 2020 – A Protection for All?
Khushnuma Khan (Founder, K K Associates, Advocates & Solicitors)
The impact of COVID-19 pandemic has rendered several businesses reach the verge of disruption and has caused considerable deficit in the financial economy of the country. In order to boost the business sector several financial packages were announced by the Finance Minister as part of Atmanirbhar Bharat, which included suspension of CIRP Proceedings under the Insolvency and Bankruptcy Code for a period of 1 year.
In pursuance of aforesaid announcement, on 5th June 2020, an Ordinance titled “Insolvency And Bankruptcy Code (Amendment) Ordinance 2020” came to be promulgated by insertion of section 10A which has practically suspended the applicability of section 7, 9 and 10 of the Insolvency & Bankruptcy, 2016 (“the Code”) for initiation of fresh bankruptcy proceedings against persons impacted because of COVID-19, for at least six months, upto a maximum of one year. Section 10A has been introduced with a view to provide protection to the corporate persons experiencing distress on account of unprecedented situation, from being exposed to insolvency proceedings under the Code for upto a period of 1 year and has also sought to restrain the RP from filing applications under section 66(2) of the Code.
The provisions of the sections of the Ordinance dated 5th June reads as follows:
Insertion of a new Section 10A
“10A: Notwithstanding anything contained in sections 7,9 and 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:
Provided that no application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the said default occurring during the said period.
Explanation – For the removal of doubts, it is hereby clarified that the provisions of this section shall not apply to any default committed under the said sections before 25th March 2020.\"
The aforesaid new section covers the default of a corporate debtor which arises after the 25th March 2020 emerging due to the impact of COVID 19 and shall remain suspended for six months or upto a period of one year. Nevertheless, there seems to be no escape for the defaults which are prior to this date and are effectively enforceable under the IBC as more specifically provided in the Explanation of the section. The section lacks clarity as to what “date” will be considered for the purpose of calculating the period of six months or one year after 25th March 2020. Presumably, the Adjudicating Authority will have to decide upon the date of default on a case to case basis. In any event the introduction of this new clause has come as a breather to the business community who feared getting entrapped into the insolvency maze.
The proviso to section 10A of the Ordinance, specifies that no Application shall "ever" be filed for initiation of CIRP against a corporate debtor for the said default occurring during the said period (6 months or extendable up to 1 year). However, what would be the situation if even after the expiry of the said period - the default remains to be continued. Whether a creditor will be precluded from filing an application seeking initiation of CIRP regardless of the Corporate Debtor having recovered financially, for the reason that the default occurred after 25th March 2020, and whether such Corporate Debtor should continue to enjoy the Ordinance's protection.
On the other hand, RBI’s has vide its Notifications dated April 17th 2020 and 23rd May 2020, granted relief of 180 days to the borrowers facing stress on account of the economic fallout of the pandemic, from their accounts being declared NPA. Would it mean that after the completion of 180 days such defaulting accounts can still be taken to the bankruptcy court where reasons of default are not related to COVID-19, therefore ordinance will have no escape to such defaulters?
The premise of the amendment is to provide relief from the stress arising because of the pandemic, but the suspension of right to initiate CIRP under 7, 9 and 10 of the IBC does not take away the legal right of recovery which is provided under alternate laws of recovery of debts. Financial Creditors can turn to recovery process through section 19 of Recovery of Debts Due to Bank and Financial Institution Act or under section 13 and 14 of the SARFEASI Act. Similarly, Operational Creditors can look upon remedies under the Commercial Courts Act for recovery. SMEs can fall back to the recoveries under Samadhan Scheme.
It is worth noting that Section 10A further provides that “no application shall ever be filed for initiation of corporate insolvency process of a corporate debtor for the said default occurring during the said period”. Which means that defaults that have occurred between March 25, 2020 over the next six months to one year, Financial or Operational Creditor can never initiate insolvency proceedings. Thus for e.g. a Corporate who fails to perform its financial contractual obligations or corporate guarantees due to the COVID 19 force majeure, shall be protected under section 10A and be exempted from IBC perpetually.
Insertion of Sub-section (3) of Section 66
The Ordinance also inserts sub-section (3) to Section 66 of the principal Act thereby prohibiting the Resolution Professional from filing an application under sub-section (2) of Section 66 of the Code. The provision of sub-section (3) under Section 66 reads as under :-
"(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 as per section 10A."
This would imply that the Directors/Partners of a Corporate Debtor can engage in a fraudulent transactions during the period of application of Section 10A causing defaults and yet enjoy the protection afforded to the Corporate Debtor under Section 10A; with the statutory protection extending even at a later stage, even if such Corporate Debtor enters CIRP. The insertion of sub section (3) to Section 66 appears to downgrade the powers of a Resolution Professional from a custodian of the process to a silent participant witnessing potential frauds.
Conclusion
The protection under the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020, with a permanent immunity to the defaulters from the default arising during the COVID 19 pandemic may be a welcome step but it will have its own consequences with more questions than answers over the period of time. The corporate lenders and debtors may require to look for options and possibilities of restructuring of those debts for which no insolvency proceedings could ever be filed. The question will still remain to be considered that even after restructuring those debts whether they will continue to be treated as protected within the proviso to section 10A or beyond its purview.