IBC ORDINANCE 2020 – A brief analysis
An ordinance further to amend the IBCode2016 has been promulgated by the president of India on June 5th, 2020 to extend protection to the corporate entities experiencing distress on account of the unprecedented situation, for being pushed into the insolvency proceedings from the prevailing provisions of the IBCode2016. The purpose of the amendment appears not only to extend the protection to the corporate debtor being pushed for insolvency experiencing distress due to the outbreak but also to protect the object and scope of the Code as this ordinance takes into account the practical difficulty in finding the resolution applicants to rescue such corporate debtors.
The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 (No. 9 of 2020) has inserted Section 10A which selectively suspends the invoking provisions i.e. Section 7, 9 and 10 of the Code which will potentially tranquilize the corporate debtors battered by the outbreak. Section 10A, along with the proviso and explanation reads as under:-
“10A. Notwithstanding anything contained in Sections 7, 9 and 10, no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25th March, 2020 for a period of six months or such further period, not exceeding one year from such date, as may be notified in this behalf:
Provided that no application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the said default occurring during the said period.
Explanation.- For the removal of doubts, it is hereby clarified that the provisions of this section shall not apply to any default committed under the said sections before 25th March, 2020.”
Some of the reasonable interpretations of the amendment w.r.t. Section 10A of the Code are as follows:-
- No application shall “ever” be filed for the initiation of Corporate Insolvency Resolution Process (CIRP) of a corporate debtor for the default occuring during the period of suspension under sections 7, 9 and 10 of IBC.
- Applications already filed under IBC for initiation of insolvency proceedings and ongoing insolvency proceedings will continue to be dealt with in accordance with the Code.
- Defaults not related to COVID-19, however, will continue to be dealt with under the Code. One can initiate insolvency proceeding in respect of default that has arisen prior to March 25th, 2020 or that arises after COVID-19 period.
- Defaults arising during COVID-19 period shall not be the basis for initiation of insolvency proceeding at any time. This will prevent companies from being pushed into insolvency for their inability to meet repayment obligations due to business disruptions on account of COVID.
The Ordinance has also extended some relief to the corporate entities under Section 66 of the IBCode2016. It acknowledges the difficulties that the corporate debtors might face due to the COVID-19 outbreak and to procure the resolution applicants in order to rescue them from the insolvency.
Section 66 of the Code suggests that “If during the corporate insolvency resolution process or a liquidation process, it is found that any business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose, the adjudicating authority (NCLT) may on the application of the resolution professional pass an order that any persons who were knowingly parties to the carrying on of the business in such manner shall be liable to make such contributions to the assets of the corporate debtor as it may deem fit.” In the ordinance, a sub-section has been inserted in Section 66 which reads as follows:-
“66(3). Notwithstanding anything contained in this Section, no application shall be filed by a resolution professional under sub-section (2) in respect of such default against which initiation of corporate insolvency resolution process is suspended as per Section 10-A.”
This provision implies that the applications filed by the Resolution Professional under Section 66(2) which deals with “Fraudulent trading or wrongful trading” i.e. the transactions which are committed to defraud the creditors of the corporate debtors, has been restricted. However, some of the people is having a view that the insertion of sub-clause 3 in Section 66 of the Code appears to run contrary to the spirit of Section 66 itself, while some others are of the view that they foresee very less possibility of embezzlement during this disruption period, particularly when the companies does not even have the money to operate the business.
The proposition of this ordinance is to provide relief to the corporate debtor from the stress arising out of the outbreak. However, the draft rather created more confusions rather than solving them as it leaves more questions than answers among the stakeholders.
The language of the newly inserted Section 10A suggests that no applications u/s. 7, 9 and 10 shall “ever” be filed for the initiation of CIRP of the corporate debtor for any default arising on or after 25th March 2020 for a period of atleast six months. However, the model of “filing ever” in the amendment will create interpretational issues when we consider a situation where the default originates during the six months period as notified herein and continues beyond such period. Will CIRP of the corporate debtor be initiated in such cases?
Further the insertion of sub-section (3) in Section 66 of the IBCode2016 gives incongruity to the object of the provision as this insertion of the sub-clause provides undue protection to the directors/management of the Corporate debtor from being held liable even in future for any transactions that fall under Section 66 of the Code. This implies that the corporate debtor can engage in the fraudulent or wrongful transactions even before invoking the CIRP proceedings against itself and yet enjoying the protection afforded to the corporate debtor under Section 10A of the Code.