Covid-19 Update: Suspension on fresh Initiation of Insolvency Proceedings – IBC Ordinance 2020

The Hon’ble Finance Minister Ms. Nirmala Sitaraman, while making an announcement on the COVID-19 stimulus package, announced amongst other things that the Government is in the process of amending the Insolvency and Bankruptcy Code, 2016 (“IB Code”), in order to provide relief to companies defaulting on payment of their dues, in the current pandemic situation.

Subsequently, the Government of India vide it’s notification dated 5th June 2020, promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 (“Ordinance”), thereby suspending the initiation of any fresh insolvency proceeding against any entity committing any default in making payments during this period of lock-down.

Through this ordinance, the Government of India has inserted Section 10A and Section 66 (3) in the IB Code.

Exempted Period for Initiation

Section 10A provides that notwithstanding Sections 7, 9 and 10 of the IB Code 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 (“Exempted Period“), not exceeding 1 year from such date as notified.

The section further casts an embargo on any application ever being filed for initiation of CIRP of a corporate debtor for the a default occurring during the Exempted Period.

It is to be noted that the amendment shall not apply to any default committed under the IB Code prior to 25th March, 2020.

Powers of RP clipped

Following the above provisions for initiation, the powers of a resolution professional to commence action in respect of suspended provisions for a default is also prohibited.

Prospective Application

It is important to note that, the impact of these amendments to the IB Code shall be prospective in nature and therefore all pending cases and proceedings shall continue irrespective of the amount of default.

The same has been clarified by a recent judgement of the National Company Law Tribunal,  Kolkata Bench, in the matter of Foseco India Pvt. Ltd. vs. Om Besco Rail Prodcuts Limited, wherein, it was held that the amendment to Section 4 of the IB Code shall be held to be prospective in nature and not retrospective. Accordingly, the petition was admitted by the Kolkata Bench despite the default amount being below INR 1 crore.

In Sum

The above amendment follows closely relaxations provided by government under Section 4 of the IB Code, wherein the threshold limit was increased from INR 1 Lakh to INR 1 Crore. See our previous article on this point.

Through these slew of amendments, the legislature has tried to uphold the intent and objective of the IB Code i.e. resolution over liquidation, by supporting the corporate entities and by prohibiting any insolvency proceedings against them during such crucial times.

While the move taken by the Government may offer relief to stressed companies, certain provisions in the Ordinance can spring unwarranted consequences and open up the possibility of gross misuse of the leeway by wilful defaulters and fraudulent promoters.

Though the Ordinance aims to protect the stressed corporate entities, it has failed to consider the position of the personal guarantors to the corporate debtors, the rules for which were notified on 15th November 2019. Also, the Government has not taken a holistic approach as no commensurate relief under the Presidency Insolvency Act, 1909 or Provincial Insolvency Act, 1920 has been provided to family run businesses or proprietary concerns or partnership firms during such stressed and unprecedented times. This is specially given that all of the benefits have been offered to “MSMEs” many of whom, given their constitution may be outside the purview of the IB Code.

-Archana Balasubramanian (Partner), Lalit Munshi (Associate)

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