This article is written by Yash Sharma, from Vivekananda Institute of Professional Studies, Indraprastha University, New Delhi. This article is an analysis of the Ordinance promulgated by the President to suspend some provisions of the Insolvency and Bankruptcy Code to save companies from financial instability due to the global pandemic crisis.
Table of Contents
Introduction
In India when everyone was struggling through COVID led crisis, the corporate also suffered from the crisis. Corporate was suffering because the production units became inactive and financial transactions stopped. During these times of turmoil, when many companies were facing problems with their liability to discharge the debt. Taking cognizance of this problem an ordinance was promulgated by the President of India on 5th June 2020, namely ‘Insolvency and Bankruptcy Code Amendment Ordinance, 2020’. The ordinance suspended some provisions of the Insolvency and Bankruptcy Code, 2016. Before that on 24th March 20120, the Ministry of Finance laid down various relief measures which were getting affected by market uncertainties and consequent defaults. In this article, a detailed amalgamation of facts related to the suspension of the provisions of IBC code is discussed. An attempt to form an analysis of the Ordinance is made. Further, this article deals with the causes and effects of the suspension on the companies. Criticism of this act of the Government is also presented in this article.
About the Ordinance
Amended provision of the Code provides a time-limitation for the process of resolving insolvency in companies and among individuals. Insolvency is that state of inability to pay one’s outstanding debt. The Ordinance amends the provisions to exempt some companies from the provisions of the IBC Code. This changes the conditions for the initiation of the corporate insolvency resolution process. If a company is declared insolvent, it goes into liquidation. In liquidation, the stocks are converted into cash credits and are distributed among creditors to satisfy their debts. This means the company dies and stops performing any work as a company.
In the current COVID led crisis, the Government recognised the vulnerability of many companies who may face insolvency resolution processes. To protect those companies, this ordinance was promulgated. The Ordinance suspends the proceedings of insolvency resolution under Section 7, 9 and 10 of the Insolvency and Bankruptcy Code, 2016. The suspension would be enforced for 6 months and based on results and requirements it may further be extended for 6 more months. On 24th March 2020, Finance Minister of India Nirmala Sitaraman announced that the threshold limit of minimum debt for initiation of corporate insolvency resolution process will be increased from Rs 1 lakh to Rs 1 crore. She also made it clear that on 30th March the situation will be reviewed and if as per the condition if felt necessary certain provisions of IBC code would be suspended.
The amendment ordinance suspends proceedings under Section 7, 9 and 10. Due to the suspension of these provisions, no new proceedings could be initiated under these Sections. A new Section 10(A) was inserted to enforce the suspension. Section 7 of the Insolvency and Bankruptcy Code enables a financial creditor to initiate a corporate insolvency resolution process against a financial debtor. Section 9 provides for application for initiation of insolvency process by a functional creditor. Section 10 provides for the process of initiation of insolvency process by a corporate applicant.
Suspension of these provisions of the Code means that for the period of 6 months from 25th March 2020 lenders will not be able to initiate proceedings against borrowers for insolvency. Similarly, Debtors can not legally declare themselves insolvent or bankrupt for the same period. After the amendment of these provisions, the resolution professionals can not initiate insolvency against promoters or related parties of the corporate defaulter for this period.
Grounds for suspension
As already told this amendment was brought in light of COVID-19 pandemic led crisis. Same is mentioned in the Ordinance that this suspension is enforced by the Government of India to protect companies from damages due to this pandemic. It is recognised in the Ordinance that pandemic has impacted business, financial markets and economies all over the world including India. This turn of events has created uncertainty and stress for business beyond their control. Another direct cause for this related to the global pandemic is, in response to the emergent situations created by the circumstances, the nationwide lockdown was enforced. The lockdown resulted in complete suspension and disruption of normal business operations.
This decision also came as a result of increasing pressure on companies endangered to get liquidated. This threat is majorly posed on small and medium enterprises. Majority of the finances of a company originate from sponsors and no new buyer or sponsor would like to invest in a company against whom a successful insolvency resolution process has been done. Also, if the corporate insolvency resolution process is successfully completed against a company it would inevitably get liquidated.
Primarily, this is brought in as an initial measure enforced for only 6 months starting from 25th March 2020. The Government has already made it clear that if required, the provisions under Section 10(A) of the Code will be extended for a further 6 months.
Another reason for the promulgation of this ordinance was to provide stability to companies facing pandemic related problems. Suspension of provisions providing for the initiation of the insolvency process would help them avail benefits under Atma Nirbhar Bharat Package aid. This will give them time to restructure arrangements with creditors and capital providers. Also, this was done to relieve some pressure from the resolution applicants. It is also accepted by the Government that it is hard to find resolution applicants to carry out the process for a distressed or defaulted business.
Impacts
Due to the pandemic, all the companies including the biggest of giants are facing turmoil. For a way out they were looking for debt restructuring policies. They are vulnerable to insolvency proceedings and have major concerns due to them. Through the suspended provisions still, a lot of companies will be looking for debt restructuring after the situation gets normalized.
Similarly, organizations who invested a large number of funds in others, especially the operational creditors, and do not have any other source of financial stability will also be hit hard. Either way, the creditor organizations will be facing liquidation. With earlier provisions in place, the creditors could have recovered some debts and made it through this crisis. The provisions could have helped them in a time-bound and efficient manner.
Financial Creditors such as the banks and financial institutions, for them the Reserve Bank of India has already given a moratorium of 6 months on loans. Suspension of Section 7 has both benefits and losses. Now the companies have to balance the accounts and are facing a lot of stress. The suspension of resolution process applications will run parallel to the 6-month Reserve Bank of India moratorium on the loans for 6-months. This moratorium could be extended to the borrowers by the banks and financial institutions for more than even 6 months. Because the pressure from banks and creditors have been completely removed there leaves no scope for default in this period. But the RBI moratorium which does not apply to other creditors who deal in bonds and debenture holders can no longer invoke resolution for insolvency under the Insolvency and Bankruptcy Code.
A positive impact of this could be that companies now will have time to reconsider management strategy to do better financially. They can try to do better in terms of debit and credit with better maintenance of balance sheets and avoiding unpayable debt.
Fraudulent trading
When a resolution for the insolvency process is passed, in the investigation it is often found that the company was being carried out with an intention to defraud its creditors. In that case, the National Companies Law Tribunal can issue an order in favour of the creditor, by making people involved in such company contribute towards the asset of the company or getting the creditor his credit back. The resolution professional can also apply at NCLT and get decree ordained to make other partners contribute to the company assets. After promulgation of this code, no such proceedings could be initiated. Companies themselves as well can not claim for bankruptcy or insolvency anymore. This loophole is the biggest flaw in this whole step of the Government.
The suspension order has stated that the cases or application made before 25th March will not be enforced. Suspensions ordered won’t be executed for defaults committed prior to the date of promulgation of the ordinance. This way the resolution professionals will be barred from initiating fraudulent trading resolution processes against the directors and managers of companies against where the IBC processes are suspended.
Critique
The need for this suspension was clear but a blanket suspension has also raised much scepticism. It is only logical to accept that companies who had to discharge the debt have some relief now. But, this suspension will hamper creditors who have no way of recovering their finances and cannot sustain themselves without recovery. This step will also affect companies operating from abroad as they do not have a proper mechanism to recover their debts anymore. This may lead to a loss in such investment even in future.
It was suggested that instead of following a complete suspension of the Insolvency resolving process Australian Model could have been followed. Like Australia instead of increasing the threshold of debt amount, temporary reliefs could have been provided. As per statistics, more than 50% of National Company Law Tribunal cases are of below 1 crore. Since via notification by the Ministry of Corporate Affairs, the threshold was already increased to 1 crore via its notification on 24th March 2020, a substitute mechanism should have been formed to combat exceptional cases. This questions the handling of cases due to this blanket suspension.
Another critique of this step of the Government is that instead of enforcing a blanket suspension amendment in Section 8 in IBC could have sufficed. Section 8 provides for a time period of 10 days in which the debtor has to give an answer to demand notice with the reason for the delay in payment. The time period given under the provision could have been amended to increase from 10 days to 3 months or more rather than enforcing a blanket suspension. Any delay in initiating insolvency resolution process can hamper the stock value of that company and its more critical in this crisis situation.
Conclusion
In these times of global crisis, it is an indisputable fact that companies are unable to pay off their debt because of no production or financial stability. The suspension of Section 7, 9 and 10 of Insolvency and Bankruptcy Code was necessary. This step was taken to protect companies unable to pay off their debt and are under threat to get the insolvency resolution process started against them. Successful completion of this process would mean the declaration of that company insolvent and would result in the liquidation of that company. This could not be allowed to happen and to protect those companies from getting liquidated this step was taken.
There were some negative impacts of this step. To resolve those there are some suggestions that could be taken into account. This whole blanket suspension is criticised. Globally, it is essential to bring about a better damage control mechanism. The possible mechanism that could be used in place of complete suspension is an amendment in the procedural aspects. Further, relief could be provided to help companies in maintaining financial stability. This could bring a long desire for balance between creditors and debtors.
References
- https://economictimes.indiatimes.com/news/economy/policy/covid-19-govt-amends-insolvency-law-suspends-initiation-of-fresh-proceedings-for-six-months/articleshow/76221981.cms
- https://www.prsindia.org/billtrack/insolvency-and-bankruptcy-code-amendment-ordinance-2020
- https://ibclaw.in/section-8-insolvency-resolution-by-operational-creditor-chapter-ii-corporate-insolvency-resolution-processcirp-part-ii-insolvency-resolution-and-liquidation-for-corporate-persons-the-insolvency-and/#:~:text=Section%208%3A%20Insolvency%20resolution%20by%20operational%20creditor%3A&text=(1)%20An%20operational%20creditor%20may,manner%20as%20may%20be%20prescribed.
- https://www.thehindubusinessline.com/money-and-banking/why-the-ibc-ordinance-to-suspend-insolvency-pleas-for-six-months-spells-trouble/article31768005.ece#
- https://www.mondaq.com/india/insolvencybankruptcy/932174/suspension-of-the-insolvency-bankruptcy-code-provisions–boon-or-bane
- https://economictimes.indiatimes.com/news/economy/policy/covid-19-govt-amends-insolvency-law-suspends-initiation-of-fresh-proceedings-for-six-months/articleshow/76221981.cms
- https://www.livelaw.in/law-firms/articles/the-insolvency-and-bankruptcy-code-amendment-ordinance-2020-and-remedies-available-to-creditors-158323#:~:text=The%20Insolvency%20and%20Bankruptcy%20Code%20(Amendment)%20Ordinance%2C%202020%20(‘,on%20account%20of%20the%20unprecedented
- https://www.bloombergquint.com/law-and-policy/ibc-ordinance-issued-to-suspend-insolvency-and-bankruptcy-code-for-six-months
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