RESPONSE OF THE INDIAN INSOLVENCY LAW TO THE COVID-19 PANDEMIC
This article has been authored by Manaswita Nakwaal, a third year student at Symbiosis Law School, Noida.
Calculating in the flare-up of COVID-19, the fret of turning out to be Non-Performing Assets has been at the apex for small and medium-sized enterprises. From the battles in paying remunerations to the employees to looking for postponement of reimbursement of credits and Goods and Services Tax, the equivalent has been reflecting the impacts of the pandemic over the business. The prevailing Covid-19 pandemic situation pushed the Legislature, Executive and Judiciary to revise various laws, requests, notices and circulars.
Major Transformations in the Insolvency Law: An Analysis
Ministry of Corporate Affairs, Govt. of India attempted to aid the business holders vide notification dated 28.03.2020, Notification No. REGD.NO.D.L-33004/99 relieving these entities by increasing the threshold limit for claim from Rupees 1 lakh to Rupees 1 crore which means that an insolvency proceeding against a corporate debtor cannot be triggered unless the default is more than a crore. Ergo, the companies can now focus on stabilizing the business operations rather than fearing the inevitable insolvency.
It is noteworthy that the amendment of Section 4 of Insolvency and Bankruptcy Code 2016 (I&B Code) for increasing the threshold limit has imputation on Sections 7, 9, 10 of the I&B Code which categorically discuss about filing of the applications for initiation of insolvency proceedings against a corporate debtor before the Adjudicating Authority. The end result of which is that all the applications of the financial creditors or operational creditors or even by the corporate debtor can only be entertained if the default amount is equal to or more than rupees 1 crore.
Regulation 40-C “Special provision relating to time-line” has been inserted in the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 so as to exclude the lockdown period from the timeline prescribed under I&B Code vide Notification No. IBBI/2019-20/GN/REG059. Consequently the timeline for completion of the insolvency proceedings by the Adjudicatory Authority (330 days) prescribed under Section 12(3) of I&B Code shall not include the lockdown period for the insolvency resolution process.
Further, so as to achieve a serene financial environment for the companies amid coronavirus, the Government set in motion Section 10A of I&B Code which eventually suspends Sections 7, 9 and 10 of the I&B Code, 2016 (dealing with initiation of Corporate Insolvency Resolution Process) initially for a period of six months, further extendable for six more months at the maximum. It aims to safeguard borrowers from being dragged into insolvency proceedings. Additionally to protect the MSMEs a new framework will be notified under Section 240A of the I&B Code.
On 5 June, 2020, the President of India promulgated the Insolvency and Bankruptcy (Amendment) Ordinance, 2020, stimulating the economic measures announced by the Ministry of Finance with an aim to support Indian businesses impacted due to outbreak of the Covid-19 pandemic. The insertion of section 10A provides that no application for the initiation of CIRF can be filed for any defaults that has arisen on after 25th March, 2020.
Besides Section 10A, the ordinance inserts sub sections (2) & (3) to Section 66 of I&B Code. The principle purpose of Section 66 (2) is to make sure that the director/ partner(s) act diligently on the onset of any financial distress. However, the bar imposed by Section 66(3) is antithetical to the core object or idea of I&B Code, in other words, the maximization of the value of the assets and revival of a corporate debtor that too without any obligation of minimizing the potential loses, the director/ partner may sabotage the interest of Corporate Debtor.
While the transformations introduced are the need of the hour and welcomed, there still are a few more aspects which are needed to be consolidated to deal with the crisis holistically: Priority Financing, being one of them. Amendment made to Section 5(15) of I&B Code provides for the notified debts to form a part of ‘interim finance’ under IBC. Under the resolution plans, the IBC provides for repayment of interim finance amounts as well as for liquidation proceeds. Government also sponsors an alternative investment fund, that is, ‘Special Window for Affordable and Middle-Income Housing Investment Fund I’ so as to provide priority debt financing for stalled housing projects that are in the affordable and middle-income housing sector, as ‘interim finance’ for the purpose of the IBC.
Numerous cases are being considered for rebuilding as per the rules of the Reserve Bank of India dated June 07, 2019 and creditors have consented to inter- creditor arrangements to concur on the rebuilding terms. The rules mull over execution of rebuilding within 180 days. Along these lines, the Indian government may need to consider whether augmentations are required for situations where a rebuilding has been settled upon and is pending execution. The rules likewise require rating of the organization's obligations before rebuilding.
Implications Arising out of the Transformations
Firstly, 3rd Annual Insolvency Law Commission Report, recommended for increasing the threshold amount from Rupees 1 lakh to 50 lakhs, so as to relieve the National Company Law Tribunal from huge number of cases. But the increase of amount to Rupees 1 crore is going to adversely affect the IBC regime. In fact the operational creditors of corporate debtors in most cases are companies themselves. Consequently it is susceptible that they become prospective corporate debtors (if they fail to recover their existing dues to the increased threshold) therefore, it runs counter to the aims and objectives of I&B Code.
Secondly, Notification No. REGD.NO.D.L-33004/99, which was released on 24 March, 2020 does not provide for a retrospective effect, the repercussion being the earlier threshold cases of Rupees 1 lakhs shall continue to apply to cases that are pending. However the fresh applicants who seek commencement of CIRP would necessarily have to meet the revised criterion of default of a minimum of Rupees one crore. The Kolkata Bench of the National Company Law Tribunal has, in its Order dated 20 May 2020 in Foseco India Limited v Om Boseco Rail Products Limited (CP (IB) No 1735/KB/2019), ruled on whether this increase in threshold is prospective or retrospective in effect. The Tribunal has taken a reasonable and straight view that the increase in the threshold limit is prospective in nature, in other words only for applications for CIRP filed after the Notification was released.
Thirdly, suspending the IBC for the operational creditors is unclear. It is inevitable that operational creditors will not insist on shorter payment terms and protection of transactions they have entered into.
Fourthly, Suspension of Section 10 I&B Code disables the corporate debtors to approach the Adjudicating Authority on their own notion to initiate insolvency proceedings against itself and restructure its debts. This suspension indeed forces even the debt ridden companies to continue with their economic activities as the doors to the insolvency proceedings are closed even for the companies that would find it difficult to function, given their economic and financial distress due to the pandemic.
Lastly, the aforementioned ordinance has left a lot of things for the courts to determine and interpret. These exists a vacuum whilst determining whether the default is due to pandemic and that too within the given time frame. Meaning thereby, it requires extra judicial efforts to look into the case matters to identify the validity of cases which can be covered post amendment and which are to be left out.
In order to protect the interest of businesses, the current insolvency regime in India has went through several changes to cope up with the prevailing pandemic distress. But this cannot cast a shadow on the fact that the developments/ transformations have led to several debates owing to the fact that these ordinances and orders have led to some sort of ambiguity with respect to the application of such fresh provisions.
Further it is likewise to be noticed that in the event that the main target of the government was to help the MSMEs, at that point the progressions would have explicitly come to section 240A of the Code. It is additionally to be noticed that there is no clarity upon the duration of operation of these notifications. The government has however expressed this as a temporary measure, though it will be essential to see if it gets overflowed with future or it stays for all time