INTRODUCTION
The global spread of Covid-19 pandemic and the subsequent lockdown hampered the working of various sectors across the economy. The government had taken many steps and introduced several relief packages to support the economy. As part of the economic relief package, the Finance Minister had announced an ad-hoc suspension of Sections 7, 9 and 10 of the Insolvency and Bankruptcy Code, 2016 (IBC)1 . The main intention behind the decision was to avoid initiation of any fresh insolvency petitions against companies for a period of one year and to keep all Covid-19 related debt outside the purview of IBC.
The latest amendment by the government was the "Insolvency and Bankruptcy Code, Ordinance, 2020", through which Section 10(A)2 and Section 66(3)3 were inserted. The addition of section 66(3) of IBC is for the protection of partner/director of a Corporate Debtor from any liability in case any default occurs when Corporate Insolvency Resolution Process (CIRP) gets suspended u/s 10 A of IBC. Further, regulation 40 C was also introduced in IBBI Regulations, 2016, for providing exemption from the lockdown period.
SECTION 10(A) - A BANE OR A BOON?
This new section provides that no application u/s 7, 9 & 10 of the IBC shall be filed against a corporate debtor for any default which has been committed on or after 25th March 2020. Further, a proviso has also been provided under the new ordinance which states that "no application shall ever be filed against a corporate debtor during this period i.e., from 25th March 2020 till the suspended period. In order to avoid any confusion, the ordinance also states that any application filed against a corporate debtor prior to the period of 25th March 2020 shall be held maintainable.
Even though the ordinance plays a great role in safeguarding the economy of India from any kind of domino effect happening because of the force majeure events, it leaves room for diverse interpretations for lot of issues at the hand.
WHETHER AMENDMENTS ARE PROSPECTIVE OR RETROSPECTIVE IN NATURE?
The ordinance stands silent on the maintainability issue with respect to the applications filed and pending prior to the date of its promulgation.
However, this issue was resolved by the NCLT Chennai Bench in the matter of Arrow line Organic Products Private Limited v. M/s Rockwell Industries Limited4 , where it was upheld that "the ordinance shall have retrospective applicability to all applications irrespective of their date u/s 7, 9, & 10 of IBC". Though the above interpretation stands contradictory to the order passed by the NCLT Kolkata in the matter of Foseco India Limited v. Om Boseco Rail Products Limited5 where it was upheld that "the ordinance will not have retrospective applicability in the absence of a specific mention".
The present article deals with the importance and intent behind the amendments.
DIFERRENT SITUATIONS FOR INTERPRETATION
The three situations which are likely to happen and will remain a point of debate post Covid-19 are:
- Default accruing prior to 25th March 2020.
- Default accruing during suspension period.
- Default accruing beyond suspension period.
Defaults committed before 25th March 2020, are explicitly stored in the declaration attached to this section. Thus, the criteria created by Article 10A for filling insolvency applications does not apply to breaches committed before 25th March 2020, and implicitly also to breaches committed after the end of the six months or the extended period. However, the submission of such claims for default which begins during this period from March 25, 2020 and until the end of six months or the extended period, as the case may be, is contextually limited. The provision of Article 10A further explains this position. Therefore, outstanding claims that were also submitted between March 26, 2020 and June 05, 2020, under such defects will be rejected by law in violation of this order. This order is essentially retroactive as it also has an impact on pending claims, if any, filed between March 25, 2020 and June 5, 2020. As per the amendment, the insolvency proceedings against the corporate debtors may be initiated if the default amount reaches Rs.1 Crore. In cases where the default amount is less than the prescribed amount, no application can be filed for the same. This will result in loss to some financial creditors since they won't be able to recover the debt that debtors owe them. All the above three scenarios will remain a point of debate during litigations, until matters are settled by the adjudicating authorities.
INTENT AND OBJECTIVE BEHIND THE AMENDMENT
No insolvency law can ignore the business; if there is no business, no insolvency is possible. While analysing the ordinance we need to keep the core objectives of the IBC in mind which are:
- Resolution over liquidation.
- Maximisation of Assets of the Corporate Debtor.
- Promoting Entrepreneurship.
We need to understand that IBC has been designed in such a manner that it can deal with both kinds of circumstances: 1. If a firm/business entity is doing well. 2. If a firm/business entity is not doing well.
Rescuing the life of the business is the prime objective of the code. Currently, pushing firms into liquidation will lead to pre-mature liquidation and realisation of the pre-mature debts of the businesses. Thus, every effort shall be made to save the life of the firm and IBC shall not be used as a weapon to take the pre-mature life of the firm. Everyone needs a fair chance to survive, hence, we need to look from the objective and prospective positions of the firm. Let's understand it with the help of an example.
MISTAKE CAN BE RECTIFIED VS MISTAKE CANNOT BE RECTIFIED
Scenario1: If there was no such ordinance and normal IBC would have been into effect it would "push many viable firms under liquidation".
Scenario 2: Currently when IBC is not in force, it has stopped "many viable firms from going into liquidation". So, in the first scenario if you liquidate a viable firm, it will end the life of the firm and that mistake cannot be rectified. On the other hand, in the second scenario if you are not able to liquidate a viable firm for a particular time, that mistake can be rectified. Hence, it is important to increase the barriers in the insolvency process for preventing the liquidation of viable firms.
CONCLUSION
At a time when there has been a general slowdown of business all over the world, such provisions will give a breathing time to the distressed businesses. The pandemic has affected not only businesses but also the social life and health of human beings. Imagine a situation with no suspension of provisions, no resolution and eventually only liquidation - a downright depressing picture indeed. We are in the fourth year of the existence of IBC and today we are in the situation of Health Crises Vs Financial Crises and Livelihood Vs Life.
The value of the enterprise is very important which needs to be considered first. We need to decide "Are we ready to preserve the price or Are we looking for the price?". In this author's opinion the ordinance is a right step because with ambiguity reigning around us for now we need to safeguard entities from being pushed into liquidation, so that the objective of the resolution can be achieved.
Footnotes
1. https://ibbi.gov.in//uploads/order/0fd02d6fd104fcdd63936eb4cb23021b.pdf.
2. https://ibbi.gov.in//uploads/legalframwork/741059f0d8777f311ec76332ced1e9cf.pdf.
3. ibid.
4. IA/341/2020.
5. CP (IB) No. 1735/KB/2019.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
We operate a free-to-view policy, asking only that you register in order to read all of our content. Please login or register to view the rest of this article.