Developments in Insolvency regime during pandemic- Conundrum

Developments in Insolvency regime during Pandemic- A Conundrum

The unprecedent pandemic Coronavirus (COVID’19) and consequent nationwide lockdown have caused a deleterious effect on Indian economy. The global pandemic is exacting a terrible human toll and menacing the Indian economy. This time has witnessed the closure of offices and workplaces, the business becoming nonoperative, complete disruption in the supply chain, financial crunch in all sectors, the frustration of contracts etc. There are companies and business which have became virtually paralyzed owing to the consequences of Covid’19 as they didn’t have means for their basic sustenance.This pandemic has left its impact on all sectors of the economy but nowhere is the hurt as much as the Medium,Small and Micro Enterprises (MSMEs) of India. All evidence available , such as thousands of stranded migrant workers across the country, suggests that MSMEs have been the worst casualty of Covid-19 induced lockdown.

In an attempt to revive the economy as also to protect otherwise depleting MSME sector ,the government of India ,vide Notifications No. 1205(E) dated 24.03.2020 increased the threshold amount of default for triggering corporate insolvency resolution process under the Insolvency and Bankruptcy Code ,2016(IBC) from Rs 1 lakh to Rs 1 crore. [Insolvency and Bankruptcy Code ,2016 ,   is the bankruptcy law which seeks to consolidate the existing framework by creating single law for insolvency and bankruptcy, and a one step solution for resolving insolvencies which previously was a long processthat didn’t offer an economically viable arrangement.  ] The government increased the threshold primarily to help the MSME sector and therefore , it should have taken recourse to Section 240A of IBC in order to bring respite to MSME sector ,however ,it seems like that the same was found to be premature then. This increment threshold runs contrary to what has been stated in Insolvency committee report,2020 where it has been proposed that operational creditors be  given voting rights in future. This threshold further dilute the bargaining of operational creditors unlike financial creditors , who could make joint application under Section 7 of IBC if the same reaches threshold level even if their individual claim is below the threshold amount, the operational creditors do not enjoy such right of filling joint application under Section 9 of IBC.

Post making announcement of stimulus financial package, the Finance minister made an announcement that there shall be an embargo on the initiation of fresh insolvency proceedings for a period of one year. In as much as the same is concerned with application to initiate corporate insolvency resolution process under Section 7 and 9 by the Financial creditor and the operational creditor respectively, the embargo has created some conundrum, and clarification should be issued by the competent authority. The objective of IBC is rehabilitation and revival of Corporate Debtor by keeping it as going concerned. Undoubtedly, for successful rehabilitation, revival, and restructuring of Corporate debtor, there has to be a resolution applicant that needs to permeate funds in the business of the corporate Debtor. Amidst the spread of pandemic and cessation of work because of consequent lockdown, taking over the business of the Corporate debtor may not be in the list of the resolution applicant because of financial crunch.

Resultantly, if there are no successful resolution applicants or if the resolution plan fails, the debtor goes into the liquidation.

The supremacy of resolution over liquidation cannot be determined as has been held in various cases. From the aforesaid viewpoint, the embargo seems to be justified. However what about the defaults that took place prior to the lockdown? The announcement of embargo came as a blow to the banks and financial institutions,which were waiting to initiate actions against those Corporate debtors who defaulted in repayment of their dues which were scheduled to be repaid during pre-lockdown period. Does lockdown give license to such companies also to take shield under this embargo? The ordinance, which is yet to come should address this issue as well.

It appears that the embargo is applicable to an application under SECTION 10 of IBC by virtue of which a corporate applicant can initiate a corporate insolvency resolution process against itself on the basis of the fact that its financial and operational viability is no longer secure.

The fundamental rights enshrined in the Constitution of India give one right to conduct any business and therefore right to close one’s business is also implicit in it. The present embargo would be against the constitutional realms as there could not be any justified ground to impede such a right. The application of embargo would essentially mean coercing a viable business to operate, which shall only bring uncalled ramifications for all stakeholders. The ordinance should address this issue and exclude the application made under section 10 of IBC.

The finance minister further stated that there shall be a separate framework for MSMEs under section 240A of IBC, which shall be introduced by promulgating an ordinance.

There exist no clarity as to why there should be a separate  framework for MSME from non- MSMEs. The details regarding the special framework are still awaited.

Now, when there would be special framework for MSMEs as also the fact that there would be the suspension of fresh insolvency proceedings, the Notification No.1205(E) Dated 24.03.2020 increasing the threshold of default amount from Rupees 1 lakh to Rupees  1 crore becomes infructuous and should be done away with.

Thus the changes brought in IBC regime, which is considered to be a raindrop in desiccated land, is actually not so and needs more clarity so as to safeguard the interest of all stakeholders.

Author: Aditi Trivedi,
Faculty of law, Delhi University ,1st year law student

Leave a Comment