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Insolvency and Bankruptcy Code, Amendment Ordinance 2020: Analysis and Implications

On 5th June 2020,the Hon'ble President of India signed in the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 [Ordinance][1]to implement the already-talked-about emerging financial distress faced by most of the companies on account of large-scale economic distress caused by coronavirus related lockdown and accordingly, amend the Insolvency and Bankruptcy Code, 2016 [Code]. The instant Ordinance has been one of the most awaited in the past two months. The Ordinance was part of the Atamnirbhar package which was announced [2] by the Finance Minister on 17th May 2020 to provide relief to the companies who are on the verge of insolvency[3].
 
The fundamental reason for granting the executives with the power to issue Ordinances is to deal with situations where an emergency in the country necessitates urgent action, such as the unusual economic and health crisis faced by the nation in the wake of the coronavirus related lockdown. By virtue of the said powers vested in him under the Constitution of India, the Hon'ble President of India has inserted a new section under the Code i.e. section 10A[4]. Section 10A of the Code states that no applications can be filed under section 7, 9 and 10 of the Code for a default arising on or after 25th March 2020 for a period of six months, extendable up to a maximum of one year.

No bar in case of default arising before 25th March 2020

The Ordinance provides a relief to the creditors to a great extent by clearly expressing that the newly inserted provision of Section 10A shall not be applicable to any defaults which were committed prior to 25th March 2020. Thus, creditors would be free to file applications under section 7, 9 and 10 of the Code in case the default in payments arises by the corporate debtor prior to 25th March 2020.

Increase in Threshold Limit

The Ordinance could be a double-edged sword for many small and medium scale industries as the newly inserted provision of section 4 of the Code deals with the threshold limit or pecuniary limit for filing an application under the Code. Prior to the notification by the Central Government (CG), the threshold limit was Rupees One Lakh which has now increased by an unprecedented 100 times to Rupees One Crore[5].
 

Analyzing and Determining the Threshold Limit:

  • Under section 7 of the Code, a financial creditor either by itself or jointly with other financial creditors or any other person on behalf of the financial creditor as may be notified by CG may file an application for initiating corporate insolvency resolution process against a corporate debtor before the adjudicating authority when a default has occurred.
     
  • Explanation. - A financial creditor may satisfy the minimal requirement either individually or along with defaulted debts of other financial creditors and file a section 7 application of the Code if the default arises before 25th March 2020.In any case, the sum included for meeting the threshold shall include defaulted sums only and not otherwise.
     
  • The Ordinance is however largely silent about the fate of section 8 and 9 of the Code andit kind of leaves the Operational Creditors (OCs) who had issued demand notices prior to the amendment of the minimum threshold in a limbo. It could be presumed that if the OCs have issued Demand Notices under section 8 of the Code pursuant to defaults which arose before 25th March 2020, then those OCs can proceed with the filing of an application under section 9 of the Code, provided that the amount in default is more than Rupees One Crore.
     
  • If incase, the demand notices were sent during the coronavirus related lockdown period for defaults which occurred on or after 25th March 2020, then there would be a bar on the filing of a section 9 application under the Code.
     
  • It may also be worthwhile to consider whether process under the Code is set in motion with issuance of demand notice or it is set in motion only after filing of application before the NCLT.
     
  • The Honble NCLT of the Kolkata and Chennai Benches vide their Orders dated 20.05.2020 in case of M/s. Foseco India Limited v M/s. Om Boseco Rail Products Limited[6]and on 02.06.2020 in case of M/s. Arrowline Organic Products (P) Ltd v. M/.s Rockwell Industries Limited[7]respectively have categorically held that the Notification dated 24.03.2020 is only prospective in nature, thereby allowing the pending cases before the various Adjudicating Authorities across the country to reach their logical conclusion without their very maintainability on the grounds of minimum threshold of default being challenged, as on date.

Amendment to Section 66 of the Code

  • The Ordinance also inserts sub-section (3) to Section 66 of the Code thereby prohibiting the resolution professional from filing an application under sub-section (2) of Section 66 of the Code. The provision of sub-section (3) under Section 66 is reproduced below:
    (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 corporate insolvency resolution process is suspended as per section 10A.
     
  • The insertion of sub section (3) to section 66 provides relaxation from wrongful trading i.e. the resolution professional will be barred from initiating wrongful trading applications against the Directors/Partners of the corporate debtor where the initiation of corporate insolvency resolution process is suspended.

Additional Relief under Code:
  • As per regulation 40C of the Code, the period of lockdown imposed by CG in the wake of coronavirus outbreak shall not be counted for the purposes of the time-line for any activity that could not be completed due to such lockdown, in relation to a corporate insolvency resolution process.
     
  • As per regulation 7, sub-regulation (2), clause (ca), the following shall be inserted, namely:— Provided that for financial year 2019-2020, an insolvency professional shall pay the fee under this clause on or before 30th June,2020.
     
  • No additional fees will be charged for late filing during the moratorium period from 1st April 2020 to 30th September 2020 in respect of any documents, returns, statements etc., required to be filed in the MCA-21 registry, irrespective of its due date.
     
  • The Code is now also made applicable to Union Territory of Jammu and Kashmir pursuant to Jammu Kashmir Reorganization (Adaptation of Central Laws) Order, 2020.

Conclusion:

The initiatives taken underthe Insolvency and Bankruptcy Code(Amendment) Ordinance, 2020, in such difficult times are noteworthy but it will have its own consequences with more questions than answers over a period. The multifold increase in the threshold limit and insertion of section 10A of the Code shall be a respite to many industries which get dragged into insolvency.

 However, at the same time we may not ignore the fact that the same industry will now find it difficult to recover its dues from its debtors which would put them under additional stress and cash crunch thus, causing a cascading effect.

However, some clarification from the concerned Government Ministry and the Insolvency and Bankruptcy Board of India could be expected in the near future. The corporate lenders and debtors may now be forced to consider options and possibilities of restructuring/amicably settling debts for which no insolvency proceedings could be filed or protected within the proviso to Section 10A or beyond its purview.

Key Highlights of the Ordinance
  • Suspension of section 7, 9, 10 of the Code in case of defaults which arise on or after 25.03.2020.
  • Time period in which suspension of initiation of CIRP will be effective is yet to be notified – The current suspension is for a minimum of 6 months and could be extended up to a maximum of 1 year.
  • Applications seeking to initiate CIRP for corporate debtors is allowed in case the following conditions are satisfied:
    • The default arose before 25.03.2020
    • The amount of default is more than Rupees One Crore. 
Source:
  1. https://ibclaw.in/wp-content/uploads/2019/08/IBC-Ordinance-2020-05.06.2020.pdf
  2. Economic Times, FM provides Covid-19 relief, no fresh insolvency proceeding against MSMEs for 1 year
  3. https://pib.gov.in/PressReleasePage.aspx?PRID=1624661
  4. Section 10-A, Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020  
  5. https://www.ibbi.gov.in/uploads/legalframwork/48bf32150f5d6b30477b74f652964edc.pdf
  6. [2020] ibclaw.in 12 NCLT
  7. https://ibclaw.in/wp-content/uploads/2020/06/Ms-Arrowline-Organic-Products-Pvt-Ltd.-Vs.-Ms-Rockwell-Industries-Ltd.pdf
Written By:
  1. Adv. Vinod Kothari (Partner) &
  2. Adv. Priyanka Shah (Associate) For Apex Law Partners.

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