Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020
On 5th June, 2020, the Insolvency and Bankruptcy Code (Amendment) Ordinance was promulgated to amend the provisions of the Insolvency and Bankruptcy Code (“Code”). The rationale for the said amendment is to prevent corporate persons experiencing financial distress on account of the unprecedented Covid-19 situation from being pushed into insolvency proceedings.
New Section 10A
The said ordinance enables the government to notify a period of 6 months to a maximum of one year, during which the initiation of corporate insolvency resolution process (“CIRP”) under Sections 7, 9 and 10 of the Code, for any default in payment to creditors, arising on or after 25th March 2020 can be suspended (‘Suspension Period’). This is done by way of inserting a new section 10A in the Code, which has the effect that no application shall ever be filed for initiation of CIRP for a default occurring during the Suspension Period. However, if the default in payment occurred prior to 25th March 2020, there is no bar on invoking the provisions of the Code.
The insertion of Section 10A provides for a permanent immunity against initiation of insolvency proceedings against any debtor committing a default of payment of debts from 25th March 2020 for the period that may be notified (i.e) a minimum period of 6 months and a maximum one year. This step by the government will act as a breather for debtors who are unable to meet their debts given the on-going Covid crisis.
Areas that would get settled with judicial intervention
The language adopted in the newly inserted provision adds ambiguity with respect to defaults that are committed during the Suspension Period and continue beyond the Suspension Period, or if the new provision will act as a blanket and permanent immunity against such defaults. The Ordinance also fails to address the aspect of initiation of insolvency proceedings against personal guarantors of corporate debtors, while corporate debtors are exempted/protected under the said ordinance. It is only judicial interpretation and precedents that will settle these questions.
Avenue for closure by Corporate Debtor themselves
The Ordinance also prevents filing for insolvency proceedings by corporate applicants under Section 10 of the Code. As an alternative, corporates will now have to consider winding up proceedings under the Companies Act, 2013 if they are insolvent, and voluntary liquidation under the Code, if they are solvent.
Personal liability of Directors
The Ordinance also limits the power of a Resolution Professional, during the Suspension Period, to be able to file an application seeking an order from NCLT, to require the director of a corporate debtor to be personally liable for the liabilities of the corporate debtor, if such director knew that the CIRP could have been avoided by the corporate debtor, if he had not exercised reasonable due diligence as a director, in minimising the potential loss to creditors.
Protection from CIRP
The Ordinance does act as a saviour to corporates, from initiation of CIRP, who are battling and struggling to cope with the unprecedented situation and can now breathe a sigh of relief, and enables the promoters to hold on to their companies, and not be pushed into insolvency for defaults committed during the Suspension Period. Just as any other enactment, judicial interventions when these provisions are called into question, as situations that may arise due to Covid are not within comprehension of everyone today, will test the extent of protection the amendments under this Ordinance has sought to provide.
The provisions of Section 10A with respect to defaults occurring during the Suspension Period deal with suspension of initiation of CIRP of the debtor company. It is not the end of the road for creditors, who can still avail alternative legal recourse remedies such as:
a) Financial creditors may pursue restructuring/rearrangement schemes, initiate actions under the SARFAESI Act, 2002, and
b) Operational creditors can explore options such as reference to arbitration if terms of the agreement permit for the same, filing of summary suits, civil suits for recovery of debts, dispute resolution mechanism provided under Section 18 of the Micro, Small and Medium Industries, Act, 2006.