DEVELOPMENT IN INSOLVENCY AND BANKRUPTCY CODE, 2016: FIRST RAMIFICATION POST COVID.

A law is always meant to ease the ongoing activity, in whichever field it applies on. The aim of any legislation brought into the society is to make things easier for  the citizens and related parties. The biggest segment of these affected parties are the large companies, corporations, MNC’s etc. The government always tries to make sure that these corporations feel safe and satisfied as they are the biggest contributors in the growth of the country’s GDP and therefore economic development.

It was because of this only, the government introduced Insolvency and Bankruptcy Code, 2016 which seeks to consolidate the framework and create a single legislation for insolvency and bankruptcy of the corporations. The Code is considered to be the biggest reform in the insolvency and bankruptcy sector of the country. As the name suggests, the Code governs the interest of the creditors and stakeholders in a company, to revive the company within a specific period of time, to maximize value of assets to corporate persons and also to get required or necessary relief to the creditors who have been waiting for payments for a long period of time. 

With the present scenario of medical emergency due to outbreak of pandemic COVID-19 in the country, some necessary measures and changes are to be made in order to overcome the pandemic situation and fight along this disease both physically, mentally and economically. It can very easily be said that the business corporations and entities are really having a hard and difficult time in coping up with the present situation. Every single industry, be it food, electronics, clothing etc. is affected due to the outbreak of pandemic COVID-19 as people are becoming more conscious and cutting their spending as much as possible, which is directly affecting the sales and retails consumption. The creditors and stakeholders who are currently holding huge shares are facing unaccountable losses during this time.

          One of the most important one of these changes is the ordinance of Insolvency and Bankruptcy Code (Amendment), 2020 which has created the biggest havoc within the system. The ordinance was passed by Finance Minister on 24.03.2020 regarding the threshold limit to file application under IBC which was made 1 Crore from 1 lakh. Later, it was also held that for a year IBC is to be suspended. The ordinance was said to be a very necessary part of the Act as it struck right on the position of filing for insolvency due to any default. It is only because of the current situation, such a relief has been promulgated by the Ministry.

          The Ordinance explicitly suspends any fresh proceedings of bankruptcy against any person for minimum of 6 months to maximum of 1 year. The said provision has been specifically inserted to help the individuals affected because of the COVID-19 pandemic in the country.  Even before the ordinance was passed by the government, several changes were made during the transit of passing the ordinance. The amendments are as follows:-

  1. The limit threshold for filing the petition increased from 1 lakh to 1 crore as after 24th March 2020.
  2. IBBI (insolvency resolution process for corporate person) in its 3rd amendment regulations introduced 40c special provision relating to timeline which provides an exemption of lockdown which was in relation to timelines mentions under CIRP on 29th march, 2020.
  3. For the ease of business, the Ministry increased the minimum threshold of initiating the insolvency proceedings from 1 lakh to 1 crore.
  4. Finally an ordinance was passed by the Ministry of Finance suspended any new insolvency proceedings against any individual for minimum of 6 months to maximum of 1 year. (Section 10A)

The major part of the ordinance which focuses on is insertion of Section 10A which talks about suspension of any new insolvency proceedings and Sub Section 3 under Section 66 which restricts Corporate Insolvency Resolution Profession (CIRP) or Insolvency Resolution Professional (IRP) from filing an application for any such default as per Section 10A of the Act. The recent amendment focuses mainly on ease of doing business for individuals and corporation and not to worry on payback schemes and other liabilities which are due upon such individuals or entities. Moreover, there has been specific mentioning or categorization of MSME’s who are said to be the most affected industry or sector during this pandemic COVID-19.

The question which is before the Hon’ble Courts is whether the said notification of 24.03.2020 for increasing the threshold prospective or retrospective in nature. The notification is completely silent of this issue with respect to its applicability. It was first decided by the NCLT Kolkata Bench in the case of M/s Foseco India Ltd. v. M/s Om Boseco Rail Products Ltd. on 20.05.2020, where the Hon’ble Tribunal observed and held that the notification unless explicitly mentioned, shall be presumed to be prospective just as any other amendment unless it is mentioned expressly to be retrospective in nature.  The same was also observed by the NCLT Chennai Bench in the case of M/s. Arrowline Organic Products (P) Ltd v. M/.s Rockwell Industries Limited on 02.06.2020, where the Hon’ble Tribunal observed that the notification bearing no.S.O.120 (E) issued by the Central Government through Ministry of Corporate Affairs may be read and can only be considered as prospective in nature. The NCLT Bench again in very recent case of M/s Siemens Gamesa Renewable Power Pvt. Ltd. v. Ramesh Kymal which was decided on 09.07.2020, emphasized and cleared any further doubt with respect to the ordinance suspending the proceedings as per Section 10A of the Code. The Tribunal while deciding whether insolvency proceedings initiated after 25.03.2020 but before 05.06.2020 i.e. the date of publishing of the ordinance, would fall under the category of Section 10A of the Code clarified that any such proceedings of insolvency in accordance to the Insolvency and Bankruptcy Code, 2016 is initiated on or after 25.03.2020, shall stand suspended for a minimum of 6 months to maximum of 1 years as such proceedings shall fall under the category of Section 10 A of the Code.

However, every ordinance, act or legislation introduced will follow the path of criticism which will assist in making it much more applicable and beneficial to the general public through amendments. The Insolvency and Bankruptcy (Amendment) Ordinance, 2020 surely have its own part of questioning as it suspends one of the crucial aspects for the creditors. It is for this only that a PIL has been filed in Madras High Court titled as Gagan Bothra v. The Central Government and Ors., against the 05.06.2020 ordinance. The Bench of Chief Justice AP Sahi and Justce Senthikumar Ramamoorthy has sought response from the Government on the said matter.

In totality it is clearly notified and recognized that Section 7, 9 and 10 of Insolvency and Bankruptcy Code, 2016 shall deemed to be suspended for minimum of 6 months which may extend for 1 year. The CIRP is suspended from all its proceedings but the date of its suspension is yet to be notified. The only scenario where an application shall be entertained to initiate CIRP is only when the default arose before 25.03.2020 and the default amount is more than 1 crore. This surely brings out plethora of questions and confusions which are necessary to be dealt with as soon as possible in order to clarify and initiate the proceedings accordingly. Some serious reading shall also bring myriad of doubts on the language used in the ordinance which might create some ambiguity along its path. It is still a question which needs to be answered in a quick and with a clear proposition to stabilize and control the situation of panic and miscommunication.

WRITTEN BY SHRAVAN CHANDRASHEKHER, ASSOCIATE, H.K. LAW OFFICES

Published by meghachaturvedi

Associate Partner, H.K. Law Offices

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