IBC: IMPACT OF COVID-19 AND THE WAY FORWARD
WHETHER COVID-19 HAS DISRUPTED INSOLVENCY AND BAKRUPTCY REGIME IN INDIA?
The Insolvency and Bankruptcy Code (‘IBC’) is being considered as a landmark legislative reform in India . It has passed the test constitutional validity before the Supreme Court, undergone in depth judicial scrutiny, witnessed several legislative amendments and lead to various regulatory initiative of the IBBI during the short span of less than four years. The Finance Minister, in the fifth tranche of India’s economic
package, announced various reforms in the Insolvency and Bankruptcy Code, 2016. These reforms pertain to few legislative structuring, which are enumerated as under:
a) Institution and initiation of fresh insolvency proceedings under section 7, 9 & 10 of the IBC to be suspended for a period of ONE year.
b) Exclusion of COVID-19 related debts from the definition of ‘default’ as defined under Section 3(12) of IBC.
c) Introduction of a special Insolvency framework for Micro, Small and Medium Enterprises (‘MSME’) under Section 240A of IBC.
The Government has been proactive in introducing unprecedented bespoke measures with an objective to minimize the effect of the pandemic on the economy. The above- mentioned few reforms are a step towards combating the effects of the COVID-19, however, it has its own pros and cons. The suspension of fresh applications under the code will not suffice the need of the hour that is to provide an umbrella to the Corporate Debtors, who are bleeding due to liquidity crisis in the economy owing to disruption in demand and supply chains. Instead of suspending fresh institution of insolvency proceedings, legislature should have considered keeping those Corporate Debtors out of the contours of the Code, which have actually been affected by the lockdown. Suspension of fresh applications may become a scapegoat for willful defaulters. Similarly, objective of suspension of section 10 to shield the companies being dragged to the insolvency process is completely misplaced. Section 10 provides an option to the company to apply to the NCLT for initiation of CIRP and seek resolution and restructuring of its debts. It is a beneficial window for any company, whose net-worth has eroded and without resolution, the company cannot revive or survive. In the present crisis, window of voluntary initiation of insolvency would provide breather rather than create any kind of adverse impact upon the economy. However, with suspension of Section 10, the company will have to wait till expiry of the suspension period, which would lead to
lowering down revival and resolution chances of such company. Blanket suspension of section 10 is likely to cause more problems that what it aims to solve under current scenario. Exclusion of COVID-19 related debts from the definition of ‘default’ is indeed a breather for cash strapped businesses, as this is a prudent approach to deal with the problem at hand. It would be interesting to see if the legislature provides for a complete exclusion of COVID-19 related debts from the definition of defaults or it will be left upon the Adjudicating Authority to assess whether the default of debt is due to COVID-19 or not.
The exclusion of debts due to COVID-19 will serve no purpose as the legislature has suspended the fresh initiation of proceedings for period of one year, hence, the intent of such exclusion is unclear and shall be clarified once the fine print is out. MSMEs are the backbone of our country, and the move to introduce separate legislative framework under the code is commendable. Recently, the Ministry of Corporate Affairs
(“MCA”) vide notification dated 24th March 2020 had increased the threshold for filling of applications under the IBC from Rs.1 Lakh to Rs.1 Crores. The move has been rumored to be brought in for safeguarding the MSMEs, but on a different footing it can be said that it will act prejudicial to the interest of MSMEs as in most cases the creditors knocking the doors of the NCLTs are MSMEs themselves. The framework is set to be introduced under Section 240A of the code, which empowers the Central Government to notify any of the provisions of the code to apply to MSMEs. From a different perspective, it is to be seen whether the fine print will enable the MSMEs to initiate fresh proceedings within this period of one year when the existing framework for fresh filling of insolvency would remain suspended. The effect of period of suspension on the prescribed limitation period for initiation of CIRP is yet to be clarified. The issue of limitation has seen lots of ups and downs with diverse judgments by the NCLTs, NCLAT and the Supreme Court as well as insertion of Section 238A vide IBC (Second Amendment) Act, 2018 w.e.f. 06.06.2018. There is ambiguity as to the exclusion of suspension period for the purpose of counting of limitation period prescribed under Section 43 (preferential transactions), Section 46 (undervalued transaction), and Section 50 (extortionate credit transaction). It would be
interesting to see how the NCLTs, NCLAT and Supreme Court would interpret the limitation aspect after lifting of the suspension. The discussed measures have been brought in by the legislature under the Union Government’s initiative in providing a space for ease of doing business. However, the measures, ex-facie seem detrimental to the Insolvency legislation. It would be a challenging task to safeguard the Insolvency and Bankruptcy regime being disrupted by effect of COVID-19 as well by the proposed legislative amendment. We hope that the
suspension of IBC does not result in counter-productive fallouts.
(The above article is written by Authors)
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