With the intention of bringing uniformity to the scattered bankruptcy laws provided under the Companies Act, 2013, the Sick Industrial Companies (Special Provisions) Act, 1985, Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the Indian Contract Act, 1872, the Code of Civil Procedure, 1908 etc., the Government of India enacted the Insolvency and Bankruptcy Code, 2016 (the “IBC”), which has been amended from time to time, in order to deal more effectively with insolvency and restructuring in India.
The unfortunate outbreak of coronavirus (Covid-19) in December 2019, later declared as a pandemic by the World Health Organization, has started impacting the social and economic life of people and institutions throughout the world.
In view of the spread of the pandemic, the Government of India invoked the provisions of the Epidemic Diseases Act, 1897 in order to effectively deal with the spread and accordingly, declared Covid-19 a ‘notified disaster’ under the provisions of the Disaster Management Act, 2005.
Thus, the Government of India directed all entities, corporations, commercial and private establishments to cease operations until further notice, vide Order dated 24.03.2020 bearing No. 40-3/2020- DM-I(A) and various subsequent Orders. Since then, the Government of India has taken holistic measures such as making changes to various laws and giving relaxations to various sectors with specific attention to Micro Small and Medium Enterprises (MSMEs) since they are the backbone of the economy by employing around 70 per cent of the workforce.
Considering the long-term impact of Covid-19 on the economy, the intent of the Government has been to not only provide short-term reliefs such as providing waivers with respect to fee, taxes, moratorium on bank loans, extension of the limitation period but also providing long-term relaxations such as amending various laws related to Insolvency, EPF etc.
In like manner, advisories have been issued to States/Union Territories by the Government of India directing regulatory authorities to treat the Covid-19 period as Force Majeure for various projects with a view to de-stress developers and ensure completion of projects.
In order to further limit the impact of Covid-19, one such primary relief provided by the Government of India was that of raising the minimum threshold limit for initiating insolvency process against a debtor from Rs. 1 Lac to Rs 1 crore.
The Ministry of Corporate Affairs, in exercise of powers under Section 4 of the IBC, issued a Notification dated 24.03.2020 specifying Rs.1 crore as the minimum amount of default for the purpose of initiation of insolvency process. With numerous companies, mostly MSME’s facing vulnerable situations in terms of performance of obligations owing to the prevailing pandemic situation, this revision of the threshold limit will provide them relief, and deter filing of applications for initiation of insolvency process against such corporate debtors. Similarly, the Union Government notified the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 (IBC Ordinance) on 5 June taking note of the fact that Covid-19 has impacted businesses, financial markets and economies all over the world, thereby creating uncertainty and stress for such businesses due to reasons beyond their control.
By virtue of this IBC Ordinance, the Ministry of Law and Justice, Government of India decided to suspend the operation of Sections 7, 9 and 10 of the IBC in order to prevent corporate entities that are experiencing distress on account of the pandemic from being pushed into insolvency under the IBC.
Sections 7 and 9 of the IBC provide for initiation of corporate insolvency resolution process (“CIRP”) against a corporate debtor by financial creditors and operational creditors respectively. Section 10 provides for a mechanism for voluntary initiation of CIRP by a corporate debtor.
Thus, the IBC Ordinance categorically excludes defaults arising on account of the current unprecedented times by addition of a new section namely Section 10A to the IBC.
Section 10A provides that no application for initiation of CIRP of a corporate debtor shall be filed for any default arising on or after 25 March 2020 for a period of six months, or such further period, not exceeding one year, as may be notified.
However, the Ordinance clarifies that the provisions of Section 10A of the IBC shall not apply to any default committed by the entity before 25 March 2020, the date on which the nationwide lockdown was imposed.
Therefore, no application shall be filed for initiation of CIRP of a corporate debtor for a default occurring after 25 March till a period of six months, or such further period as may be notified.
Furthermore, sub-section (3) has been added to Section 66 of the IBC, by virtue of the IBC Ordinance to bar resolution professionals from filing any applications under sub-section (2) of Section 66 with respect to such defaults against which initiation of CIRP has already been suspended under Section 10A of the IBC as explained above.
A review of the process under the IBC makes it clear that in case an application is filed by a creditor and is once accepted by the National Company Law Tribunal, such corporate debtor proceeds with the CIRP.
The CIRP pre-supposes the engagement of parties who may see potential in the corporate debtor and seek ownership of such companies. Only a failure to receive a proper suitor as per the provisions of the IBC results in the corporate debtor proceeding to liquidation.
It may not be incorrect to say that Covid-19 induced business hardship has affected all businesses and the possibility of finding a good suitor remains remote. Initiating a CIRP against a corporate debtor during the current period of crisis would inevitably push such corporate debtor towards liquidation.
It would also provide a chance to such entities i.e., the corporate debtors which may be able to see the revival path on account of the resumption of demand in the economy once the effect of Covid-19 and the resultant lock-down wears off.
Further, the intent of the Government of India has always been to ensure that the corporate debtor continues as a ‘going concern’. This was the intent behind addition of clause (c) in regulation 33 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.
The Government of India has tried to balance equities at a time when the primary emphasis is to revive the economy, by removing the element of risk of a company being forced into insolvency during these unprecedented and unforeseen circumstances, while trying to secure other necessary reliefs from banks and announcing several financial packages. Such measures are steps in the right direction and will provide much-needed relief and breathing space to all companies, including MSMEs, who are defaulting due to genuine hardships faced during this pandemic, as differentiated from willful defaults.
The writer is an Advocate, Supreme Court of India.