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IBC-Amendment Ordinance, 2020

By June 6, 2020 No Comments

A. INTRODUCTION:

In view of the affected businesses, financial markets and the economy caused due to widespread of Covid-19, uncertainty and stress for businesses have been created for reasons beyond their control, the President of India promulgated an Ordinance dated June 05, 2020, to further amend the Insolvency and Bankruptcy Code, 2016 (“Code”).

The Insolvency and Bankruptcy Code (Amendment) Ordinance 2020 (“Ordinance”) inserts section 10A which suspends the filing of applications under Sections 7, 9 and 10 for defaults committed on or after 25th March 2020 for a period of six months, which may be extended to one (1) year with the objective to protect the corporates facing financial stress due to the afore-mentioned situation from being exposed to insolvency proceedings.

B. KEY ELEMENTS OF THE ORDINANCE:

The key elements of the Ordinance are as follows:

1. That no insolvency proceedings shall be filed for any default arising on or after March 25, 2020, for a period of six (6) months which may be extended up to one (1) year from such date as may be notified:

This means that no CIRP proceedings shall be initiated against any corporate persons for any default arising from March 25, 2020, for a period of six (6) months. Further, the Ordinance has provided a provision that the afore-mentioned six (6) months may be extended up to one (1) year, however, it states that afore-mentioned term may start from “such date” as may be notified, which brings a question about the effective date from which the aforementioned period shall be considered for the prohibition of initiating insolvency proceedings in lieu of default arising from March 25, 2020. This has left an ambiguity with regard to the effective date and has become a subject to interpretation.

2. That no Application shall ever be filed for initiation of CIRP for defaults occurring during the period as mentioned above:

This means that no insolvency proceedings shall be initiated against any corporate person in lieu of the default arising out of the afore-mentioned period at any point of time in future. It may be further interpreted that if the default remains to be a continuing one – a creditor will be precluded from filing an application seeking initiation of insolvency proceedings regardless of the corporate person having recovered financially, for the reason that the default occurred after 25th March 2020. The corporate person might continue to enjoy the Ordinance’s protection and would create a room for undue advantage and abuse of the afore-mentioned protection.

3. The afore-mentioned protection shall not cover the defaults arising before March 25, 2020:

This means that any default or part thereof arising before March 25, 2020, does not fall under the ambit of the Ordinance and the creditors are free to initiate insolvency proceedings on such defaults which has arisen before March 25, 2020. Therefore, for example, the total amount due is Rs. 1.00 crores, out of which an amount of Rs. 60.00 Lakhs was due as on March 10, 2020, and the remaining amount of Rs. 40.00 Lakhs was due as on April 05, 2020, the insolvency proceedings cannot be initiated for the reason that the debt amount of Rs. 40.00 Lakhs cannot be considered as default to initiate insolvency proceedings and therefore, the total amount of default fails to meet the new threshold of Rs. 1.00 crores to initiate insolvency proceedings.

4. That no application shall be filed by resolution professionals in respect of default against which the insolvency proceedings are suspended as penned down above:

Section 66 of the Code deals with the power of Adjudicating Authority and right to file an application by resolution professionals if it is found that any business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose. Now, with the above amendment, the right of the resolution professional to file an application under section 66 is suspended during the period mentioned above, which would give room for the wilful defaulters to abuse the protection under the Ordinance.

C. CONCLUSION:

Although the objective of the Ordinance is to protect corporate persons from being dragged before NCLT and face insolvency proceedings, but a blanket suspension of the initiation of insolvency proceedings, filing application by resolution professionals and ambiguity in relation to the commencement date of default may give a possible exposure to abuse of the protection under the Ordinance, especially by wilful defaulters and variance in interpretations.

Authors: Prashant Jain, Co-Founder & Partner; Abhishek Gupta, Associate.

Disclaimer: The content of this article is intended to provide a general guide to the subject matter. For any queries, the authors can be reached at (i) prashant@samistilegal.in (ii) abhishek@samistilegal.in.

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