Image source:

This article is written by Vishwajeet Singh Shekhawat, pursuing Certificate Course in Advanced Civil Litigation from LawSikho.


The Covid-19 pandemic and the resultant restrictions and nationwide lockdown made an adverse impact on the businesses in the country. It affected the demand for the product and services of the companies which was a result of the disruption in supply chain and credit-related issues. The same also affected the financial markets and systems of the country as a whole and a resultant increase in corporate and personal insolvency (a state of financial distress in which a person or business is unable to pay their debts). As a consequence of the same, certain short-term insolvency measures were put in place by the government. 

Firstly, the Finance Minister increased the threshold for activation of insolvency proceedings from One Lakh to One Crore. Later, the government suspended Sections 7, 9, and 10 of the Insolvency & Bankruptcy Code, 2016 which provides for the initiation of insolvency proceedings, through the enactment of the Insolvency and Bankruptcy Code (IBC) (Amendment) Ordinance, 2020. The same Ordinance was later introduced and passed in Parliament as the IBC (Second Amendment) Act, 2020.

Download Now

The IBC, 2016 is an umbrella legislation that applies to companies, partnerships, and individuals, and provides for insolvency resolution in a time-bound manner. The code allows a corporate debtor as well as the creditors to initiate an insolvency resolution process. In this process, it aims to maximize the value of assets of such persons, promote entrepreneurship, availability of credit, and balance the interests of all the stakeholders. This article will discuss the object and provisions of the Amendment Act as well as analyse and highlight the key issues.

Highlights of the Amendment Act

The Second Amendment Act, 2020 inserted the following provisions to the IBC, 2016:

  • Section 10-A was inserted which suspended the initiation of the corporate insolvency resolution process for a default made by the corporate debtor on or after 25th March 2020. The period of such suspension is six months, or as notified, not exceeding one year from such date. 
  • The proviso to the Section 10-A bars, forever, the filing of such an application for a default occurring during the said period. 

The provisions of section 10-A are not applicable to any default made before 20th March 2020. The prospective nature of the amendment was also later upheld by the NCLT Chennai Bench in the matter of Arrowline Organic Products Pvt Ltd v. Rockwell Industries Ltd as well as by NCLT Kolkata Bench in the matter of Foseco India Limited v. Om Boseco Rail Products Limited.  

  • The Act amended Section 66 of the IBC and added clause (3), which barred filing of an application by a resolution professional in respect of default suspended as per Section 10-A as stated hereinbefore.
  • By virtue of Section 66 Clause (3) added by the Amendment Act, the liability for wrongful trading on the director or a partner for defaults in the period from 25th March 2020 up to six months was prohibited. The liability occurred where despite knowing that the insolvency proceedings cannot be avoided, the person did not exercise due diligence in minimizing the potential loss to the creditors. 
  • It repealed the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020. 

Analysing the Amendment 

The IBC, 2016 provides a mechanism to initiate the insolvency resolution process on an application by the corporate debtor or the creditors. The amendment act bars such insolvency proceedings to be initiated for defaults arising for a period of six months arising on and after 25th March 2020 by the corporate debtor himself or by the creditors. 

Firstly, the amendment provided for a complete suspension of the insolvency process for a period of 6 months, which was a step to safeguard companies whose insolvency could have been temporary and were performing well before the pandemic. Although whether the complete suspension was necessary given that it even bars the opportunity available to an already distressed company is not clear. Such an opportunity could have helped such companies to iron out their financial problems. Another aspect of insolvency is debt restructuring which doesn’t involve selling off a company and the same should have been allowed instead of a complete suspension of the process. Further, how is it possible to determine that the default is attributable to the pandemic since a company could have been in financial distress before the pandemic?

Secondly, the amendment barred even corporate debtors themselves to initiate insolvency proceedings. If the initiation of proceedings by the corporate debtors would have been permitted, the same would have allowed him to assess the financials and take the necessary steps in order to maximize the benefits for the company as well the creditors. However, there are alternative remedies available to a corporate debtor as per the nature of the case, under the provision of the Companies Act

  1. The company by special resolution may resolve that the company be wound up by the tribunal under Section 271 of the Companies Act, 2013.
  2. Debt restructuring can be undertaken by forming a scheme of arrangement with creditors as per Section 230 to Section 232 of the Companies Act, 2013.
  3. The company can under Section 59 of IBC wound up its operation, given it has not defaulted or there is the non-existence of any default by the company. 

Thirdly, the amendment act prohibited the initiation of insolvency proceedings for the default made during the said period, forever. It states that no insolvency proceedings can ever be initiated against such a defaulter. This brings us to the question as to what will be the position of the creditors with regards to such default since they will be unable to hold the company liable even after the company is financially sound and in a position to repay the same. The situation of financial distress would be temporary and there is a possibility that the company would be in a position to repay the debt to the creditors. A complete bar on the ability of the creditor to recover the debt is difficult to comprehend.

However, the financial creditor can pursue the following remedies:

  1. Rearrangement or restructuring schemes as a one-time settlement.
  2. A scheme of arrangement as per Section 230 of the Companies Act, 2013.
  3.  Inter-creditor agreement in accordance with the RBI’s circular dated June 7, 2019, on ‘Prudential Framework for Resolution of Stressed Assets.’
  4. The creditor can file an application under the SARFAESI Act, 2002 against the debtor.
  5. He can initiate proceedings against the personal guarantors of the corporate debtor.
  6. Operational creditors can recover the debt by filing recovery suits or by way of an arbitration proceeding.

Lastly, under IBC, an insolvency proceeding can be initiated against the personal guarantor of the corporate debtor. The issue is that the Amendment Act does not talk about the liability of such a personal guarantor who has provided a guarantee for the debt of such corporate debtor, although who himself cannot be made liable as per the amended provision for the default. The Amendment Act does not answer or elaborate upon the liability of such guarantors.      


The Insolvency and Bankruptcy Code (Second Amendment) Act, 2020 with the help of other steps and measures adopted by the government has tried to provide relief to the companies in view of the unprecedented impact on the financial health of the system of the country due to the pandemic. The amendment has been enacted with the aim to save viable businesses and companies, in the process help save the employment of the workers. But the same amendment has also raised questions as to the complete suspension of the provisions being a viable solution to the issue. Another question has been as to whether all defaults on or after 25th March 2020 can be attributed to having taken place because of the pandemic? What about the companies which were in financial distress before the pandemic? The same is open to interpretation and may give rise to disputes. Also, what will happen to the creditor’s right to enforce the default made by the corporate debtors since the amendment completely suspends the right to initiate proceedings against such default? Although the provisions of other enactments will be available and come to the rescue of the creditors, will it be circumventing the provisions of the amendment and affect the intent and purpose of the Act? 

The Amendment Act has been enacted keeping in view the steps taken by various countries to address the insolvency measures. Such measures have taken into account the challenges which may be faced as a consequence of the pandemic by the companies which may destruct their value because of insolvency and other economic factors such as supply problems. However, it will be interesting to see how the government will respond to these challenges once the complete suspension period for initiating insolvency proceedings lapses. This much is assured that there will be a need for multiple measures with regards to the insolvency issue in addition to other steps that need to be taken by the government to address the financial issues of the companies. 


Students of LawSikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.


Please enter your comment!
Please enter your name here