Insolvency and Bankruptcy (Amendment) Ordinance 2020- An Ambiguous Draft

Aditi Singh

The Insolvency and Bankruptcy (Amendment) Ordinance 2020 (hereinafter referred to as “Ordinance”), introduced section 10A and clause (3) to section 66 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “The Code”). The amendment has been awaited since the beginning of nationwide lock-down. In order to understand the impact of Ordinance, it’s important to understand the background behind its promulgation i.e. the preamble which says that the Ordinance has been passed to protect the corporate persons who have been experiencing temporary non-availability of possible resolution applicants and distress because of lock-down in the nation. Since, the parliament is not in session, the president under article 123(1) of constitution has assented to the (Amendment) Ordinance on June 5, 2020.[i]

 The Ordinance inserts section 10A and clause (3) to section 66, in order to provide relief to the corporate debtors on account of unprecedented situation. It is also pertinent to note that the threshold limit for initiation of CIRP has been recently increased from Rupees one lakh to Rupees one crore.[ii] The Hon’ble NCLT of Kolkata has recently held in M/s. Foseco India Limited v M/s. Om Boseco Rail Products Limited,[iii] that the notification does not expressly states the modification in the threshold limit is retrospective in nature therefore the modification in threshold limit shall be considered as prospective in nature.

• Amendment to section 10 of the Code

Section 10A which has been inserted after section 10 of the Code, aims to suspend corporate insolvency resolution process (hereinafter referred to as “CIRP”) i.e. section 7, 9 and 10 which states as under:

“Notwithstanding anything contained in section 7, 9, and 10, no application for initiation of corporate insolvency and resolution process of a corporate debtor shall be filed, for any default arising on or after 25^th 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 and resolution process of 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 25^th March, 2020.”

 As per the Code, CIRP can be initiated by the financial creditor, operational creditor and by corporate applicant itself as provided under Section 7, 9 and 10 respectively. As per newly inserted section 10A, no CIRP can be initiated under the Code for defaults which have occurred after the announcement of nationwide lockdown i.e. March 25, 2020 for a period of six months (hereinafter referred to as “The Said Period”), which cannot be extended more than a year. It further goes on to say that no application shall ever be filed for the default which has occurred in the Said Period.

Though the suspension of CIRP seems to be well intentioned considering the unprecedented situation the world is facing however, the wording of section 10A remain unclear and ambiguous. It gives rise to further confusion and questions. The major implications of section 10A and the confusion associated with its ambiguous wording are stated herein below:

• Section 10A clarifies clearly that it only inhibits initiation of CIRP for default occurring during the Said Period amidst nationwide lock-down. It does not bar initiation of CIRP against corporate debtor for the default that has occurred before March 25, 2020 in the Said Period. The creditors can still invoke provisions under the Code for default that has occurred before March 25, 2020 in the Said Period.
• In order to suspend initiation of CIRP, section 10 takes away locus standi of corporate applicant to initiate CIRP against corporate debtor. It takes away the opportunity from the corporate debtor to go through insolvency procedure in case it sees no future for the corporate, burdening them further to continue for at least six months amidst lockdown.
• Section 10A, on one hand aims to restrict initiation of CIRP procedure during the Said Period and on the other hand, the proviso to section 10A states that “no application shall ever be filed for initiation of corporate insolvency and resolution” crating further ambiguity that whether creditors will be restricted from initiating CIRP for the default occurred in the Said Period after the suspension of the Said Period. If the default occurring in the Said Period shall never be considered under the Code then this simply gives an excellent opportunity to corporate to exploit the provision to get away from the default occurred in the Said Period even if it hasn’t been a result of pandemic causing lock-down.

Since, the definition of ‘default’ in the Code remains untouched, the ambiguity associated with the wording of section 10A and its proviso will provide an opportunity to corporate debtor to use this leeway to get away from the default occurred in the Said Period.

• Six months suspension of CIRP under Ordinance runs parallel to six months moratorium period permitted by the Reserve Bank of India, providing relief to borrowers amidst lockdown,[iv] however it only cover financial creditors. So, the Ordinance only deprives certain financial creditors and operational creditors which include MSMEs from initiating CIRP under the Code. In such circumstances, the only feasible option remains with operational creditor is to file civil suit for recovery of debt or to go back to section 230 of the Companies Act, 2013 in order to compromise or make arrangements with the creditors as per the provision.
• Amendment to Section 66 of the Code

The ordinance inserts clause (3) to section 66 of the Code which states as under:

“(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 for Section 10 A.”

Section 66 of the Code deals with fraudulent trading or wrongful trading. Abovementioned, clause (3) suspends clause (2) of the code inhibiting resolution professional under the Code from filing wrongful trading application against directors of company in respect of default suspended under section 10A. The intention of the parliament behind suspension of clause (2) of section 66 remains unclear as it only provides an opportunity to directors of corporate debtor to use it as a leeway to get away from fraudulent trading or wrongful trading in the Said Period.

• Conclusion

The Ordinance is well intentioned and a positive step towards protecting corporate in the stage of pandemic, however as stated hereinabove the ambiguities associated with the drafting of section 10A gives rise to more questions than answers. As of now, the only things it succeeds in clarifying is suspension of CIPR against default occurring in Said Period for six months, what will happen to default after suspension of Said Period or to default occurred before Said Period, still remains entirely unclear. The picture will be clearer after the Supreme Court examines the validity of Ordinance.

[i] https://ibbi.gov.in//uploads/legalframwork/741059f0d8777f311ec76332ced1e9cf.pdf.

[ii] https://ibbi.gov.in//uploads/legalframwork/48bf32150f5d6b30477b74f652964edc.pdf..

[iii] M/s. Foseco India Limited v M/s. Om Boseco Rail Products Limited, CP (IB) No. 1735 of 2019 (unreported).

[iv] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11902&Mode=0.

This article is authored by Aditi Singh. Aditi is a final year student at Symbiosis Law School, Pune.