INSOLVENCY AND BANKRUPTCY CODE AMENDMENT, 2020: AN ULTIMATE PROTECTION TO CORPORATE DEBTORS by Amey Prakash Jadhav

Posted on: July 17, 2020 Posted by: admin Comments: 0

Author : Amey Prakash Jadhav, Student at MNLU, Aurangabad

ABSTRACT

The economic development of the country depends upon the legal system in that country, and hence after the introduction of Goods and Service Tax (GST) the Insolvency and bankruptcy code, 2016 will be considered as the greatest legal reform which helps for the economic development of the country. The basic motive behind the introduction of Insolvency and bankruptcy code was to make a single law which governs the issues related to the insolvency. In the present situation of the novel COVID-19 pandemic, the businesses are suffering a lot, and hence the government of India has come with the amendment to the Insolvency and bankruptcy code, 2016 to ensure and protect the corporate debtors. Hence the amendment comes up with the insertion of section 10A which ban the initiation of the Corporate Insolvency Resolution Process against corporate debtors. But the amended sections has a great issue of interpretation issues and instead of giving answers to the present situation it creates great chaos and left behind with more question than answers. Therefore in this paper, we will try to understand and interpret the proviso of the sections added by the amendment and the loopholes and drawbacks in the Insolvency and Bankruptcy Code, 2016 (amendment) ordinance, 2020.

INTRODUCTION TO INSOLVENCY AND BANKRUPTCY CODE, 2016

The ‘Insolvency and Bankruptcy code’, 2016 (hereinafter IBC, 2016) was the creative step taken by the government “to simplify the process of insolvency and bankruptcy proceedings” in India. With the enactment of the code, the equal distribution of rights between the debtors and creditors is possible. Insolvency and bankruptcy are not novel concepts; therefore it is quite evident that there have been laws governing these issues before the formation of IBC, 2016. However, the problem before the enactment of the code was that one specific act wasn’t there that dealt with all the arms of the single issues. The Insolvency and Bankruptcy Code, 2016 has repealed much existing Act, including the presidency town insolvency act, 1909 which provides more protection to the debtors also, the Sick Industrial companies (special provision) repeal Act, 2003.

Until 2016 the arrangement for the matters related to the insolvency was authoritatively added to the Companies Act, 2013. The motivation behind this demonstration can be isolated into the accompanying two objectives[1]

  1. That the insolvency procedure must be finished within the stipulated time limit
  2. With the aim that the monetary dangers to the remote speculators are diminished.
  3. And to protect the companies, to survive in the market.
SILENT FEATURES OF THE INSOLVENCY AND BANKRUPTCY CODE, 2016
  1. The main aim behind the enactment of the IBC, 2016 was to provide same kind of security and the balance between creditors and debtors.
  2. To complete the process of insolvency within the stipulated period
  3. To increment the accessibility of creditors
  4. To set the administrative authority i.e. “Insolvency and Bankruptcy Board of India”
  5. To build up the easy recovery system
  6. The maximization of the value of the assets of the persons is an important objective of the code.
BACKGROUND FOR INSOLVENCY AND BANKRUPTCY CODE, 2016 (AMENDMENT) ORDINANCE, 2020

Since 25th March 2020, India announced the nationwide lockdown due to the widespread of novel COVID-19, and since then the honorable Finance Minister had come with many changes to the IBC, 2016. At the first instance, the Finance Minister increased the threshold limit to Initiate Corporate Insolvency Resolution Process (hereinafter CIRP) FROM One Lakh to One Crore under section 4 of the code. The Section 4 of the Code states that: “This Part shall apply to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of the default is one lakh rupees: Provided that the Central Government may, by notification, specify the minimum amount of default of higher value which shall not be more than one crore rupees”[2]. But due to the continued spread of the novel, the COVID-19 government continues the lockdown for more than three months and because of which the businesses suffered a lot. Even though the threshold was increased still many companies and corporate persons have to face the CIRP against them. With the detailed study of the present situation, the government had come with the amendment to the IBC, 2016. On 5th June 2020, the president signed the amendment Ordinance and it came into force.

INTRODUCTION TO INSOLVENCY AND BANKRUPTCY CODE, 2016 (AMENDMENT) ORDINANCE, 2020

On 5th June 2020, the government of India has come up with the amendment to the Insolvency and Bankruptcy Code, 2016 which thereby suspends the initiation of CIRP. The present amendment ordinance is part of the government’s AtmaNirbhar economic reform. Under the provision of Article 123 of Constitution of India, 1950 the president has the power to pass or promulgate an ordinance when both the houses of parliament are not in session.[3]The present ordinance suspended the initiation of the CIRP process under section 7[4], 9[5], and 10[6].

The new section has been added to the code for the suspension of the CIRP under the above-mentioned sections the section added is section 10A. Also, the amendment to section 66 has been brought in the present amendment ordinance.

HIGHLIGHTS OR CRUX OF THE AMENDMENT

The crux of the amendment ordinance is as follow:

  1. Section 10A has been inserted for the suspension of the CIRP under section 7,9,10 of the code from the date 25/03/2020 till the next six months i.e. 24/09/2020. Also, this suspension may extend further till the period 1 year by the due notification. This means it can be extended up to 24/03/2021.
  2. The interpretational issue of the proviso of section 10A
  3. Insolvency professionals (IP) will not be able to file a CIRP application under section 66(3) which were added to the Code by the amendment ordinance according to which the IPs will not be able to file CIRP application for the fraudulent or wrongful trading.

In short, the financial creditors, operational creditors, and corporate debtor itself are restricted to file CIRP applications for six months.

PERPETUAL APPLICABILITY OF SECTION 10A

As mentioned under section 10A the suspension of the CIRP will be in place from 25th March 2020 for the six months that is up to 24th September 2020 this period will be known as the Exempted Period and this period may extend up to one year that is till 24th March 2020.

The proviso under section 10A says that “no application shall ever be filed for initiation of CIRP for default occurring during Exempted Period”[7]. Due to the language issues in the proviso, the many interpretational issues have arisen. The basic interpretation of the proviso gives the meaning as the amendment provides the puts blanket over recovery, which means the default occurs during the exempted period for the same the financial or the operational creditors will not be in a position to file the CIRP application against such a default. It is a well-settled rule of interpretation that a proviso cannot substantially enlarge the main provision[8]

The wording of the proviso of section 10A that is “no application shall ever be filed” creates the interpretational issue. As per the interpretation of the forever protection granted to the default occur during the exempted period then there will a permanent ban on filing of CIRP application. If such an interpretation is taken into consideration then the creditors left with only one option that is to file a civil case. Then creditors may file a civil proceeding under the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act) or they can file a civil suit under Recovery of Debt Due to Bank and Financial Institution Act, 1993. (RDDBFI Act)

The preamble of the ordinance only talks about the situation of the economy and the business during the COVID-19 pandemic, and it is silent about the default which has been created before or after the exempted period. There is no distinction made between pre and post COVID-19 outbreak. Hence with the detail interpretation of the proviso of section 10A we come up with four conditions with regards to the concept of “filing ever” are as follow[9]:

  1. If the default has been created before the exempted period/ disruption period, and cured it within disruption period or continue then surely there will not be abetment of filing the CIRP application
  2. If the default has been created during the exempted period/ disruption period and cured it within disruption period then surely there will be an abetment of filing the CIRP application
  3. If the default has been created after the exempted period/ disruption period, then surely there will be no abetment of filing the CIRP application
  4. The real interpretational issue comes up in a condition where the default is created during the exempted period/ disruption period and continues even after the disruption period. If the default has continued beyond the disruption period, it has occurred after the disruption period as well. Intuitively, if the disruption period is admittedly over, there is no reason for the debtor to take succor behind the disruption. Hence, such a debtor will be liable to suffer insolvency filings.

With the help of the above interpretation, the interpretational issues may resolve.

AMENDMENT TO SECTION 66 OF INSOLVENCY AND BANKRUPTCY CODE, 2016: AN ULTIMATE PROTECTION TO CORPORATE PERSONS 

The amendment to section 66 of the IBC, 2016 has not been entirely clear. As per the provision under section 66 of the code, the insolvency resolution Professional can take an action against the fraudulent and wrongful trading. The present ordinance also come up with the amendment to section 66 of the Code. Subsection (3) has been added to section 66. The same amended section 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 the corporate insolvency resolution process is suspended for Section 10 A.

The amendment to section 66 prohibits the Insolvency Resolution Professional to file an CIRP application under section 66(2) for any fraudulent or wrongful trading. The amendment to section 66 of the Code gives undue protection to the directors and the partners of the companies from being held liable even if they commit any kind of wrongful trade during the exempted period. Interpretation of section 66(3) says that it is going to offer protection to the corporate debtors under section 10A of the code even if they commit any fraudulent transaction or business: if this is the case then the section 66(3) going to be contrary to the main purpose of section 66.

DRAWBACKS IN THE INSOLVENCY AND BANKRUPTCY CODE (AMENDMENT) ORDINANCE, 2020

Although the main motive behind the amendment to the IBC, 2016 is to protect the corporate persons and to maintain the stale economic condition in the COVID-19 pandemic situation. But there are certain drawbacks in the ordinance which may affect the efficient working of Code for the better economic conditions are as follows:

  1. Suspension of section 10 of the Code (Suspension of individual insolvency)

The present ordinance takes one step ahead in banning the CIRP application. The present amendment not only prohibits corporate creditors but also prohibits corporate debtors. The ordinance suspends section 10 of the Code which enables the corporate debtors to file voluntarily the CIRP application against default caused by themselves. The rationale behind such suspension is not clear. If a corporate debtor determines that notwithstanding Covid-19 and its impact, the best course of action is to subject itself to an insolvency proceeding, then the Ordinance should perhaps have allowed this flexibility[10]. Thus the suspension of section 10 of the Code is considered as a drawback under an amendment ordinance.

  1. Impact on MSME Sector And Operational Creditors

In the press conference dated 25th March 2020 the honorable finance minister declare the increase in the minimum threshold to file CIRP application was raised from one lakh to one crore[11]. The intention behind the increase of threshold was to protect the MSME sector for the insolvency process. But in the current amendment ordinance government of India does not provide any kind of protection to the MSME sector. It is right to say that, The ordinance has created an adverse impact on the operational creditors as the operational creditors are mainly concern with the MSME sector.

The ordinance is greatly silent about the operational creditors who have submitted their demand notices on or before the 25th March 2020. The amendment does not provide any protection to the MSME sector and also there is no suspension of section 16 of the Micro, Small and Medium Enterprises Development Act, 2006 which calls for payment of interest to MSMEs for the delay in payments. Therefore, those who owe money to MSMEs would still need to pay interest under the said provisions of the Micro, Small and Medium Enterprises Development Act, 2006.

Hence the press release of honorable Finance Minister dated 25th March 2020 and the provision of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 are contradictory to each other

  1. No talk about the Individual Insolvency

Section 78 of the IBC, 2016 talks about individual insolvency. This type of insolvency process is against the individual person or the partnership firm. Press release dated 25th March 2020 of the honorable Finance Minister, in which the threshold for initiation for CIRP has been increased up to rupees one crore, but the threshold for the individual insolvency was not increased and it was only one thousand rupees. In the current amendment ordinance also, there no specification with regards to the individual insolvency. Hence the initiation of insolvency application against individual and partnership firms is very much there and it is with the minimum threshold limit of one thousand rupees.

Hence it is to be considered as the greatest drawback of the Insolvency and Bankruptcy (Amendment) Ordinance, 2020.”

CONCLUSION

The main intention behind introduction of the Insolvency and Bankruptcy code, 2016 was to protect the interest of both corporate debtors and creditors equally as the older act such as Presidency Town Insolvency Act, 1909 and others too are providing little bit more protection to the corporate debtors. The present amendment ordinance is to protect the interest of companies and promoter from liability.

The main intention behind the ordinance is to ban the initiation of CIRP applications as on 25th March, 2020 the finance minister increased the minimum threshold limit up to one crore for the corporate insolvency. But under the provision of section 7 of the Code the financial creditors are able to initiate the CIRP application jointly for the default occur. Hence even if the threshold was increased it is not the complete solution for stopping of CIRP applications from the financial creditors and therefore the government of India comes up with the amendment to the Code. There is a contrary view with respect to the real impact of Ordinance as financial debt defaults are expected to be lower due to moratorium on payment of principal loan amounts extended by RBI regulated entities coinciding with the Suspension Period.

But however it is to be insure that section 10A does not become a tool for regaining the defaulter’s paradise. Interpretational issues in the proviso of Section 10A has created a great chaos and hence now it is totally depend upon the adjudicating authority i.e. NCLT and NCLAT how they interpret. According to section 10A the corporate debtor himself will not be able to file an CIRP application for voluntary insolvency. The motive behind suspension of voluntary insolvency is not clear.

The insertion of section 66(3) is an unnecessary amendment to the code as it is a contrary provision to the section 66.

The provision of the section 66 is that the Resolution Professionals (RPs) will be able to file and CIRP application against any fraudulent or the wrongful trade. But due to the amendment the RPs will not be able to do so. And hence it is an unnecessary blanket to the directors and the partners of the companies.

Further all the applications filed between 25th March 2020 to 5th June 2020 will stand null due to the amendment ordinance. Also the ordinance does not provide any special framework for the MSME sector under section 240 of the Code, which was the main motive of the AtmaNirbhar Bharat Abhiyan, but government fails to achieve it.

And hence as a conclusory remark it is right to say that the amendment ordinance creates more questions and chaos rather than answering the same.

FOOTNOTES

[1]SonamChandwani, KS Legal & Associates, “Insolvency and Bankruptcy Amendment of 2020”, Published on 16th June, 2020, https://s3.amazonaws.com/documents.lexology.com/16fdfc18-31d8-43c0-9e6d-e0f8a57dd7da.pdf?AWSAccessKeyId=AKIAVYILUYJ754JTDY6T&Expires=1593946842&Signature=gnldIpL2v5h3k6QoA16IOyUwKZ0%3D (Accessed on 05/07/2020)

[2]Section 4 of the Insolvency and Bankruptcy Code, 2016.

[3]Article 123 of the Constitution of India, 1950.

[4]Under section 7 of the IBC, 2016 the financial creditors were allowed to file the CIRP application against the default.

[5]Under section 9 of the IBC, 2016 the operational creditors were allowed to file the CIRP application against the default

[6]Under section 10 of the IBC,2016 the operational debtor is allowed to file the voluntary CIRP application for the Insolvency.

[7]Section 10A of the Insolvency and Bankruptcy (Amendment) Ordinance, 2020.

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

[9]Vinod Kothari consultant, “implication of IBC ordianace, 2020- Quick round up”, published on 5th June 2020, http://vinodkothari.com/2020/06/implications-of-ibc-ordinance-2020-quick-round-up/ (lastly accessed on 7/07/2020)

[10]Trilegal, “Covid-19: Insolvency and Bankruptcy Code amended to suspend initiation of insolvency proceedings for six months”, published on 25th June 2020, https://www.trilegal.com/pdf/create.php?publication_id=14&publication_title=covid-19-insolvency-and-bankruptcy-code-amended-to-suspend-initiation-of-in (lastly accessed on 08/07/2020)

[11] Press released dated 25th March 2020, https://www.newindianexpress.com/business/2020/mar/25/insolvency-and-bankruptcy-code-threshold-raised-to-rs-1-crore-to-protect-msmes-finance-minister-2121164.html (lastly accessed on 08/07/2020)

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