Implications of The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020

Businesses reaching the verge of disruption and considerable deficit in the financial economy are two major impacts that COVID-19 pandemic has rendered. To boost the business sector, several financial packages were proclaimed by Ministry of Finance as part of Atmanirbhar Bharat, which included the suspension of Corporate Insolvency Resolution Proceedings (CIRP) under the Insolvency and Bankruptcy Code, 2016 (“the Code”) for a period of 1 year.

In pursuance of the aforesaid announcement, an Ordinance titled The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 came to be promulgated on 5th June 2020 by insertion of section 10A which has practically suspended the applicability of section 7, 9 and 10 of the Code for initiation of CIRP against the default of a corporate debtor which arises after the 25th March 2020 emerging due to the impact of COVID 19 and shall remain suspended for six months or up to a period of one year. Section 10A has been introduced to protect the corporate persons experiencing distress on account of the unprecedented situation, from being exposed to insolvency proceedings.

The section lacks clarity as to what “date” will be considered for calculating the period of six months or one year after 25th March 2020. Presumably, the Adjudicating Authority will have to decide upon the date of default on a case to case basis. In any event, the introduction of this new clause has come as a breather to the business community fearing such proceedings.

It is worth noting that Section 10A further provides that no application shall “ever” be filed for initiation of corporate insolvency process of a corporate debtor for the said default occurring during the said period” (6 months or extendable up to 1 year). However, what would be the situation if even after the expiry of the said period - the default remains to be continued.

What if Corporate Debtor has recovered financially, then also a creditor will be debarred from filing an application seeking initiation of CIRP, only because default occurred after 25th March 2020, and will he continue to enjoy under Ordinance's protection. For instance, if any Corporate disregards its contractual obligations or corporate guarantees due to the COVID 19 force majeure, shall be safeguarded under section 10A and be exempted from IBC perpetually.

Also, Ordinance restrains the RP from filing applications under section 66(2) of the Code by inserting sub-section (3) of Section 66 thereby prohibiting the Resolution Professional from applying under of Section 66(2) of the Code.

This implicates that the Directors/Partners of a Corporate Debtor can engage in fraudulent transactions during the said period prescribed under Section 10A causing defaults and yet will enjoy the statutory protection extending even at a later stage, even if such Corporate Debtor enters CIRP later. The insertion of sub Section 66(3) appears to downgrade the powers of a Resolution Professional from a custodian of the process to a mute partaker witnessing the potential frauds.

Conclusion

The protection under the Ordinance with a permanent immunity to the defaulters from the default arising during the COVID 19 pandemic may be a considerable step but it will have its repercussions. The corporate lenders and debtors may require looking for options and possibilities of restructuring of those debts for which no insolvency proceedings could ever be filed. The premise of the ordinance was to provide relief from the stress arising because of the pandemic, but the suspension of the right to initiate CIRP does not take away the legal right of recovery which is provided under alternate laws of recovery of debts. Financial Creditors can turn to recovery process through section 19 of Recovery of Debts Due to Bank and Financial Institution Act or under section 13 and 14 of the SARFEASI Act. Similarly, Operational Creditors can look upon remedies under the Commercial Courts Act for recovery. Small and medium enterprises can fall back to the recoveries under the Samadhan Scheme.

The question will remain prevalent that even after restructuring those debts whether they will continue to be protected by the proviso to section 10A or it will be dealt beyond its purview