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An Analysis of IBC Ordinance, 2020

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 framework.

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 follows:
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.
Explanation: 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 year.
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 this period.
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 creditor.

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 inserted.

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.


Written By:
  1. Tanishka Ranga and
  2. Aakash Singh

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