Unpacking the IBC Code (Amendment)

June 9, 2020 5:00 AM

Stakeholders in the insolvency ecosystem should now redouble efforts to identify an alternate platform for resolution of defaults on account of Covid-19

All stakeholders in the insolvency ecosystem should now redouble efforts to identify an alternate platform for resolution of defaults on account of Covid-19, so that the impact of these defaults can be contained.

By Shardul Shroff

The finance minister on March 24, and thereafter on May 17, had announced that the Government of India intended to suspend the applicability of Section 7, 9 and 10 of the Insolvency and Bankruptcy Code, 2016 (Code). However, the text or language of Section 10A was not in the public domain, and there was uncertainty on how such suspension would affect the initiation of corporate insolvency resolution process (CIRP) under the Code. The uncertainty has now been laid to rest pursuant to the Insolvency and Bankruptcy Code (Amendment Ordinance), 2020 which has come into force at once, and is effective from June 5.

The Ordinance provides for two amendments: the introduction of a Section 10A, suspending initiation of proceedings under the Code, and the introduction of Section 66(3) suspending the application of wrongful trading provisions under the Code when Section 10A is applicable.

The key amendment, of course, relates to the introduction of Section 10A. This section prevents an application from ever being filed for initiation of a CIRP under Sections 7, 9 and 10 of the Code for a default occurring on or after March 25 till September 25 or March 25, 2021, as the case may be. An explanation to the Section also provides that Section 10A of the Code shall not apply to any default committed under the said Section before March 25.
The effect and implications of this amendment are likely to be far-reaching, and it will be critical to understand these, in the context of four questions:

i) Why was Section 10A enacted?
The preamble to the Ordinance is elaborate and inter alia stresses on (a) the uncertainty and stress for business for reasons beyond their control; (b) the nationwide lockdown in force from March 25 to combat the spread of Covid-19, which has caused disruption of normal business operations; (c) the difficulty to find adequate number of resolution applicants to rescue the corporate person who may default in the discharge of their debt obligation; (d) to prevent corporate persons which are experiencing distress on account of the unprecedented situation being pushed into insolvency proceedings under IBC for some time; (e) to exclude default arising on account of unprecedented situation for the purposes of insolvency proceedings under the IBC; as the rationale for promulgating the Ordinance.

From this, it clearly emerges that the purpose of Section 10A is to provide a relief for some time due to the severe distress caused on account of the Covid-19 pandemic and the national lockdown. This association of distress with Covid-19 is based on the objective trigger of date and is intended to ensure that this distress is dealt with through suspension of new filings and a spate of assets do not enter CIRP, in a period where there may not be enough interest from third-party resolution applicants in reworking these assets.

Although unstated, it also appears that the purpose of Section 10A is to ‘flatten the bankruptcy curve’ and ensure that the National Company Law Tribunals that are already combatting infrastructural and capacity constraints do not have to deal with large volumes of applications filed for initiation of CIRP.

ii) What does Section 10A prevent?
The effect of Section 10A is to prevent an application from ever being filed for initiation of a CIRP under Sections 7, 9 and 10 of the Code for a default occurring on or after March 25 till September 25 (which may be extended to March 25, 2021). This would mean that CIRPs, which result in the application of a moratorium and change in control, will not be initiated for defaults occurring in this period. The debtor will remain in possession, and the board of the company would not be suspended. No resolution professional will be appointed.

It is critical to note that applications under the other sections of the Code, including Sections 94 and 95 applicable to guarantors are not prevented from being filed. Further, the institution of normal civil proceedings or special civil proceedings for recovery of debt, including under the Recovery of Debts and Bankruptcy Act, 1993, and the SARFAESI Act, 2002, are not suspended nor affected by this Ordinance.

iii) Does the Ordinance have an impact on applications already filed or on ongoing CIRPs under the Code?
The Explanation to Section 10A provides that the section would not apply to any default committed under the said section before March 25. This means that applications under Section 7, 9 and 10 of the IBC, which are pending admission or filed for defaults, which have occurred prior to March 25 shall continue and may be admitted on merit.

CIRPs in such cases could clearly be ordered or continued. Further, since no other provisions of the Code are suspended, ongoing CIRP proceedings may continue, and resolution under Sections 30 and 31, and even withdrawal under Section 12A, may be permitted in accordance with the law.

iv) Will Section 10A have an impact beyond the period prescribed within it?
The proviso to the section clearly specifies that no application shall ever be filed for initiation of CIRP of a corporate debtor during the period March 25 and September 25. The section does not extinguish the default, nor does it render it ineffective if the default continues beyond the period in Section 10A. It merely suspends the remedy during the period specified. If the default is not cured during the suspension period by payment, then applications under Sections 7, 9 and 10 may be preferred after September 25 or March 25, 2021, as the case may be.

All in all, Section 10A now clarifies that we will see a limited suspension on the initiation of proceedings under the Code, for defaults occurring on or after March 25.

What is awaited now is more clarity on what could be an alternative platform for resolution of such defaults going forward. Would pre-packs for resolution be a new reality? In the absence of such an alternative platform, which has a moratorium similar to what is available under Section 13 and 14 of the Code, we risk a situation where debtors will face piecemeal enforcement through civil suits, or other special actions for recovery which may prove to be value destructive, and to the detriment of stakeholders who benefit from the resolution of insolvency and preservation of the enterprise, as a going concern.

All stakeholders in the insolvency ecosystem should now redouble efforts to identify an alternate platform for resolution of defaults on account of Covid-19, so that the impact of these defaults can be contained.

 

Executive Chairman, Shardul Amarchand Mangaldas & Co. Views are personal

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