The global pandemic and subsequent lockdown has drastically effect the various business sectors. To overcome the situation Indian Govt. has introduced some relief packages in different sectors. The latest one is the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 promulgated on 5th of June, 2020 with immediate effect. The ordinance seeks to amend the Insolvency and Bankruptcy Code, 2016. The main objective of this ordinance is to provide protection to the corporate entities that faced sudden halt in their business operation due to pandemic and consequently defaulted on their repayment obligations.
Impact of ordinance:
The ordinance introduces Section 10-A which suspends the operation of Section 7, 9, 10 of the Code which deals with insolvency application by financial creditor, by operational creditor and by the corporate debtor respectively for a period of 6 months. It is only applicable on the payment defaults that occurred on or after 25th March, 2020. However, Govt. can extend this period upto 1 year via notification.
Prohibition on filing insolvency application during suspension period:
The Ordinance put a ban on filling insolvency application during suspension period i.e. on or after 25th March, 2020 for 6 months and extendable upto 1 year. The extension period seems to give permanent immunity to such defaults from the Code. The Ordinance has also inserted an explanation to suggest that Section 10-A shall not have any application on defaults occurred before 25th March, 2020. Therefore creditors/ corporate are still entitled to file applications to initiate corporate insolvency resolution process for any default which have occurred before 25th March, 2020. This aspect will become
Explanation fails to specify the effect of Section 10-A after the expiry of suspension period. That situation required the judicial interpretation. This aspect may become a subject matter of litigation following the expiry of suspension period.
No distinction between Covid-19 and non-Covid-19 defaults:
The preamble of the Ordinance talks about the impact of Covid-19 on business, financial markets and economy. In opposite to that Section 10-A doesn’t link the defaults with Covid-19 pandemic. This ensures that unnecessary time shall not be spent by the parties proving whether default is related to Covid-19 pandemic before the adjudicating authority.
Ban on voluntary insolvency:
Ordinance also put ban on voluntary insolvency proceedings under Section 10 for default during the suspension period. The preamble of the Code suggests that suspension of insolvency proceedings is to prevent corporate persons experiencing distress, being pushed into insolvency proceedings.
Effect on other remedies under the Code:
The Ordinance doesn’t have impact on other remedies available under the Code such as security enforcement, recovery proceedings before the Debt Recovery Tribunal (DRT) and also contractual restructuring. Similarly the personal insolvency proceedings under the Code would continue to be available as an alternative remedy in respect of personal guarantors.
It may also be possible to proceed against corporate guarantor where the principal debtor’s default occurs during the suspension period.
Protection to directors/ partners of a corporate debtor:
Section 66 of the Code enables the resolution professional to take action against management in respect of fraudulent or wrongful trading. The Section 66(3) has been introduced by this ordinance which seems to protect the director/ partners of a corporate debtor in case of potential loss to the creditors of the corporate debtor during suspension period. Such an exemption may result in directors/partners of corporate debtors engaging into unlawful and illegal measures.
Ordinance provides short term relief to businesses affected by the Covid-19 pandemic. The ordinance appears to encourage creditors to adopt alternative mechanisms such as restructuring, one time settlement and change in ownership etc. The amendment seeks to protect the persons/entities who are genuinely adversely impacted because of Covid-19 from being dragged to bankruptcy proceedings for the reasons that were beyond their control.
Associate at Aggarwals & Associates, S.A.S Nagar, Mohali