Insolvency and bankruptcy (amendment) ordinance 2020

Insolvency and bankruptcy (amendment) ordinance 2020

  • INTRODUCTION

The Novel Covid-19 has created a havoc around the world. More than lakhs of people has affected due to this. Due to which the lockdown has been announced and the economy get stuck, and because of which the corporate person is facing many problems.

As it is always said that law must be dynamic in nature so that it can be change according to the need of society, and in the present situation the finance ministry has shown their dynamism and the Government of India has come with  the Amendment ordinance to the Insolvency and Bankruptcy Code, 2016 (hereinafter IBC 2016). Under Article 123 of the Constitution of India, 1950 the president has the power to promulgate the ordinance when both the houses of Parliament are not in session. The main objective behind this ordinance is to stop the Corporate Insolvency Resolution Process (hereinafter CIRP)

  • HIGHLIGHTS OF THE AMENDMENT

Two section has been added to the Code to deal with present situation of the pandemic and to save and safeguard the interest of the corporate persons. The newly added section are:

  1. Section 10A has been inserted to the IBC 2016, with the help of which no CIRP application can be filed under section 7,9,10.
  2. The second provision which is added to the IBC is section 66(3), with this provision the insolvency professionals (IP) will not be able to file the CIRP application against the corporate person who does any misconduct or fraudulent act.
  • CRUX OF THE ORDINANCE

The President Ramnath Kovind has signed the ordinance on 5/06/2020 with which it debars the CIRP application for the period of six months from the date of lockdown i.e from 25/03/2020 to 24/09/2020 which may further extend for maximum period of one year i.e. till 24/03/2021.

  • PROVISO OF SECTION 10A

For the suspension of the CIRP process the section 10A was introduced to the IBC 2016. The same section under ordinance says that:

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“No applications can ever be filed under section 7,9 and 10 of the Insolvency and bankruptcy code 2016 for six months i.e. till 24/09/2020 and can be extend for the 12 months that is till 24/03/2021. The default occur on or after the 25th march by the any company then such companies will be protected under this ordinance. However, the exact time period, i.e., the window of reprieve provided to the corporate debtors during the COVID-19 pandemic has not been notified yet. Clarity on the same is awaited.”

  • PERPETUAL APPLICABILITY OF SECTION 10A

As per section 10A the CIRP Application can’t be file for six months which may extend for the one year. However the proviso to the section 10A says that “no application shall ever be filed for initiation of CIRP for default occurring during Exempted Period’ and therefore the proviso substantially enlarges the scope that is sought to be achieved by the main Section. The language of proviso seems to put a blanket, forever exemption for defaults committed during the Exempted Period. It is a well settled rule of interpretation that a proviso cannot substantially enlarge the main provision[1].

The words “no application shall ever be filed” creates such huge interpretational issues that it can be taken as there is full abetment or the suspension of the CIRP Application even after the default exempted period. If the proviso has interpreted in this manner then the alternate source available for the creditors is that, they can file a civil cases under the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act)/ Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI Act).

  • SUSPENSION OF VOLUNTARY INSOLVENCY

Under section 10A of the IBC ordinance bars the fresh application of the CIRP UNDER SECTION 7(financial creditors, section 9(operational creditors), and section 10 (corporate debtor)

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The inclusion of the section 10 under the present ordinance seems to be unreasonable and constricting one. As it will going be a hurdle for the companies stuck in debts as the section 10 is the great option for such companies for viable exit by using voluntary CIRP.

  • NO TALK ABOUT PERSONAL GUARANTORS[2]

The provisions of the Code relating to personal guarantors to corporate debtors came into effect on 1 December 2019. However, it has not been experimented with widely by the creditors. The Ordinance does not bar initiation of insolvency proceedings against personal guarantors to corporate debtors. As to how far the initiation of insolvency proceedings against personal guarantors, while the corporate debtors are exempted from the same, is legally tenable, may lead to interpretational issues.

  • AMENDMENT TO SECTION 66 OF IBC 2016

The present ordinance also made the amendment to the section 666 of the insolvency and bankruptcy code. The subsection (3) is added to the original section 66A the same section can be read as:

“(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 for Section 10 A.”

The wording of the section 66(3) prohibits the insolvency professionals to file the application under section 66(2) for the any fraudulent trade or for the wrongful trading. The amended section provides the undue protection to the directors or the parteners of the corporate debtors from being held liable even if they committed any fraudulent trade during the pandemic situation. If the section 66(3) is going to protect the debtors under section 10A even if they committed any fraudulent transaction then the insertion of section 66(3) will be the contrary to the purpose of section 66.

  • IMPACT ON MSME AND OPERATIONAL CREDITORS:

The ordinance has created an adverse impact on the operational creditors as the operational creditors are maily concern to the MSME sector. The ordinance is greatly silent about the fate of operational creditors. It does not mentioned any thing about those operational creditors who have already serve the demand notice before the 25/03/2020.

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As because of the ordinance the MSMEs will not be able to invoke the cases under section 9 of IBC, 2016, so that they may prone to wilful NON-PAYMENT by debtors.

However, there is no relaxation of section 16 of the MSME Act which calls for payment of interest to MSMEs for delay in payments. Therefore, those who owe money to MSMEs would still need to pay interest under the said provisions of the MSME Act. This should act as a deterrent against non-payment to MSMEs.[3]

CONCLUSION:

The amendment to the IBC 2016 is the good step taken by the government of india. But the ordinance instead of providing solutions to the problem creating a great havoc. The interpretation issues in section 10A will directly be depend upon the adjudicating authority for the purpose of interpretation.

Also nothing is provided to the MSME sector under section 240A of the code. Which was also in the pipeline as per the Atmanirbhar Bharat Abhiyan reform. Also the amendment to the section 66 is the totally contrary to the main objective of the code. In short instead of giving answers to the questions the present amendment ordinance creating the more questions which are still unanswered.

[1] Dwarka Prasad Vs. Dwarka Das Saraf, 1975 AIR 1758

[2] https://www.lexology.com/library/detail.aspx?g=f9ef4870-60e5-454c-bf20-cfaa85e47f61

[3] https://www.legaleraonline.com/articles/ibc-amendment-ordinance-2020-uncertain-times-uncertain-measures ( accessed on 14/06/2020)

Author: Amey Jadhav,
Maharashtra National Law University, Aurangabad/ 1st year

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