The Insolvency and Bankruptcy Code (Code) was introduced in 2016 to expedite
the process of recovery of loans. It codifies/ bankruptcy laws of India which
aim at integrating the existing insolvency and bankruptcy laws into a single
On June 5, a new ordinance, The Insolvency and Bankruptcy Code (Amendment)
Ordinance, 2020 (Ordinance), was promulgated. It was notified in light of the
suffering faced by businesses due to the disruption caused by CoViD-19. The
Ordinance seeks to provide relief to "corporate persons which are experiencing
distress on account of (the) unprecedented situation".
The salient feature of the Ordinance is that it has suspended Sections 7, 9 and
10 of the IBC for the specified time period. Sections 7 and 9 pertain to
initiation of the corporate insolvency resolution process (CIRP) by financial
and operational creditors respectively. Section 10 provides for initiation of
CIRP by the corporate debtor himself.
Thus, the Ordinance first and foremost suspends CIRP proceedings by both the
debtor and creditor.
The Ordinance has inserted a new Section 10A into the Code, which states as
10A. Suspension of Initiation of corporate insolvency resolution
process: Notwithstanding anything contained in sections 7, 9 and 10, no
application for initiation of corporate insolvency resolution process of a
corporate debtor shall be filed, for any default arising on or after 25th March,
2020 for a period of six months or such further period, not exceeding one year
from such date, as may be notified in this behalf:
Provided that no application shall ever be filed for initiation of corporate
insolvency resolution process of a corporate debtor for the said default
occurring during the said period.
: For the removal of doubts, it is hereby clarified that the
provisions of this section shall not apply to any default committed under the
said sections before 25th March, 2020.
As such, the Section provides for 3 things. Firstly, it suspends proceedings
under Sections 7, 9 and 10 for defaults arising on or after 25th March, 2020
which is the day on which the nation-wide lockdown was implemented. Further, the
Ordinance provides a time limit for such suspension i.e. 6 months. This
six-month period may be extended to a maximum of one year.
Thus, for the time being, CIRP proceedings have been barred for defaults
occurring in this period, although the government may extend it for up to one
Therefore, the defaults arising between 25th March, 2020 and 24th March, 2021
may be secured under this Ordinance.
Secondly, the Ordinance provides that no CIRP application can ever be filed for
Thirdly, it clarifies that the provisions of this Section do not apply to
defaults that occurred before 25th March.
To summarize, the Ordinance provides for a period and a protection.
The period is 6 months (or 1 year, if extended) and it is protected from
insolvency proceedings forever.
It is further explained that the protection is not available to debts arising
before the specified period i.e. 25th March.
Therefore, Section 10A essentially bars creditors from filing CIRP applications
against debtors if their default occurs in this period.
Additionally, the Ordinance amends Section 66 and adds a third clause to it,
which states as follows:
(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.
Section 66 pertains to fraudulent or wrongful trading. It provides that if,
during the CIRP, it is found that the director or executive of the debtor had
knowledge that the CIRP is impossible to avoid and he could have mitigated the
losses of the creditors but failed to do so, he/she must provide damages to the
It is pertinent to note that an action may be brought against the executive of
the company only after the CIRP has started. As CIRP has already been
blocked for this period, the question of wrongful trading by the executive is
unlikely to arise. In this context, it is uncertain why Clause 3 had to be
The intention of the Ordinance to protect businesses during this economic crisis
is undoubtedly noble. However, it may have gone a bit ahead in its pro-debtor
approach. The Ordinance is tilted towards the interest of the debtors. This may
have adverse effects for creditors.
Further, disabling debtors from initiating corporate insolvency resolution
processes themselves may be counterproductive.
- Tanishka Ranga and
- Aakash Singh