IBC (Amendment) Ordinance: Changes and impact

Share

IBC (Amendment) Ordinance: Changes and impact

Introduction

The Central Government notified the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 on 5 June 2020 (Ordinance).

The Ordinance amends the Insolvency and Bankruptcy Code, 2016 (IBC) and has come into force from the date of notification, i.e., 5 June 2020.

The Ordinance was introduced in the backdrop of the novel coronavirus (COVID-19) and is aimed at protecting corporate persons from the financial hardships faced on account of COVID-19.

This article discusses the reasons for introduction of the Ordinance, the changes brought about by it and the impact it is likely to have on different players.

Background

The financial stress caused to companies and disruptions in business due to COVID-19 resulted in a greater number of companies defaulting as per the terms of the IBC.

Additionally, the nationwide lockdown inevitably meant a delay in ongoing insolvency proceedings. As a consequence, discussions surrounding possible relaxations under the IBC have been ongoing since the onset of COVID-19.

To combat the difficulties being faced by companies, one of the first steps undertaken by the Central Government was to raise the threshold for initiation of the corporate insolvency resolution process (CIRP) under the IBC from INR 1,00,000 (rupees one lakh) to INR 1,00,00,000 (rupees one crore). This measure was undertaken pursuant to notification S.O. 1205(E) issued on 24 March 2020.

Further, to address the issue of delays in ongoing insolvency proceedings, amendments were announced to exclude the period of lockdown from the timeline for any activity that could not be completed due to the lockdown, in relation to a CIRP.

However, the Central Government felt that further measures would be required to ensure solvency of companies during the pandemic. On 17 May 2020, the Finance Minister of India announced a proposal to suspend the fresh initiation of insolvency proceedings for a period of up to one year. The Ordinance was subsequently notified on 5 June 2020.

Changes brought about by the Ordinance

Suspension of CIRP

(a) The Ordinance inserts a new section, 10A, in the IBC. This section suspends the initiation of CIRP under sections 7, 9 and 10 of the IBC for any default arising on or after 25 March 2020, for a period of 6 (six) months.

(b) The Ordinance clarifies that such suspension is only applicable for defaults arising on or after 25 March 2020 and not applicable for defaults arising before 25 March 2020.

(c) Further, the Ordinance allows the government to extend the period for suspension of CIRP against corporate debtors, for a further period, up to 1 (one) year.

(d) The Ordinance also provides that no application shall ever be filed for initiation of CIRP of a corporate debtor for any default occurring during the suspension period.

Fraudulent trading or wrongful trading

(a) The Ordinance adds a new sub-section (3) to section 66 of the IBC on fraudulent or wrongful trading.

(b) The new sub-section states that “no application can be filed by a resolution professional in respect of default against which initiation of CIRP is suspended under section 10A of the IBC”.

Impact of the Ordinance

Relief to Limited Liability Partnerships (LLPs)/companies

The Ordinance is likely to be a huge relief to LLPs/companies incurring losses on account of the disruption to businesses due to COVID-19.

With the introduction of the Ordinance, LLPs/companies may continue business without the fear of insolvency proceedings being filed against them.

Relief to directors/partners

The relief to LLPs/companies, implies a corresponding relief to the directors or partners of the LLPs/companies as they are no longer under the constant threat of insolvency proceedings against the company/LLP.

Section 66(1) and (2) of the IBC permit a resolution professional to file an application against directors and the partners for suspected wrongful/fraudulent trading. The newly inserted section 66(3), specifically prohibits action by the resolution professional on account of fraudulent or wrongful trading against a director/partner during the suspension period. It appears that the intention behind the insertion of sub-section (3) was to alleviate fears of directors/partners from repercussions on account of any unsuccessful trading activities during COVID-19.

In essence, it appears to be a move to encourage the continuation of business.

Recovery under IBC no longer an option for creditors

The time-bound insolvency procedure under the IBC was an attractive option for both operational and financial creditors, seeking recovery of their debts.

The Ordinance closes this avenue of recovery for creditors during the suspension period.

However, creditors may consider recovery under other statutes. For instance, a bank may consider initiation of proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

On the other hand, a supplier may consider filing a recovery suit under the Code of Civil Procedure, 1908.

Conclusion

The Ordinance is a welcome move for defaulting companies/LLPs. However, it should be kept in mind that the Ordinance does not prevent creditors from utilising other avenues for recovery of debts (as described above).

Further, interpretation of section 10A inserted by the Ordinance may become the subject of litigation. The language of the Ordinance appears to permanently prohibit creditors from initiating CIRP for defaults by corporate debtors during the suspension period. The result may be that creditors may never recover debts incurred by a company during COVID-19, even at a later stage where companies are able to repay. If this interpretation were taken, it might also pave the way for abuse of the Ordinance.

We may look to the courts or the legislature to resolve interpretation questions as described above.