COVID-19 and the UK’s Insolvency Response: Strengthening India’s Insolvency Regime

Must Read

India’s International ‘Retrospective Taxation’ Regime Vis-a-Vis PCA Rulings in Vodafone and Cairn in 2020

The imposition of retrospective taxation of foreign companies doing business in India has been at the helm of controversy...

What is the Real Estate (Regulation and Development) Act, 2016?

The Real Estate (Regulation and Development) Act, 2016 (“RERA”) is an Act of the Parliament. It seeks to protect...

Should the Exorbitant Amounts Charged for RT-PCR Tests be Refunded?

Introduction A plea has been filed in the Honourable Supreme Court of India seeking a refund of exorbitant amounts charged...

Should CCTV’s be Installed in the Police Station?

Introduction In a recent judgment, the bench led by Justice Nariman issued directions to both the state and Union Territory...

A Legal Analysis of the West Bengal Political Crisis on IPS Deputation

The Ministry of Home Affairs (MHA) has recently summoned three IPS officers of West Bengal (WB). The decision was...

Explained: Postal Ballot for NRIs

At the end of November 2020, Election Commission sent a proposal to the law ministry to amend the Representation...

Follow us

The unprecedented times of COVID-19 pandemic have not only generated consequences from a social perspective but have also put a halt to economic growth. Companies across the world are facing disruptions in the supply of inputs, deficit demand, and restriction of credit provisions. For this reason, the nations are strengthening their insolvency regimes to mitigate the current harm to an extent.

The United Kingdom did not remain alien to this volatile environment of COVID-19. A Survey shows that due to COVID-19, 79 percent of the businesses have a decreased turnover, and 20 percent have suspended trading in the UK. Hence, for reinstating the economy, the government laid down the Corporate Insolvency and Governance Act (Act). It provides for two-prong measures: permanent and temporary measures.

While the UK brings the Act to prevent insolvencies, India has promulgated the Insolvency and Bankruptcy (Amendment) Ordinance, 2020, (Ordinance). The Ordinance seeks to put to rest the speculations that were raised by suspending the initiation of corporate insolvency under the Insolvency and Bankruptcy Code, 2016 (IBC). However, the Ordinance has certain shortcomings. Hence, this post aims to categorically unfold the UK insolvency regime and establish a framework that India should adopt.

Permanent Changes

Free-standing moratorium

The Act promulgates a free-standing moratorium. As per this, the financially distressed companies can seek a moratorium. Hence, a creditor without prior leave of the court cannot take legal action against the company.[i] The free-standing moratorium is built on the facets of the existing administration moratorium in the Insolvency Act 1986.[ii] But unlike the administration moratorium, now, there would be a monitor, a licensed insolvency practitioner, to keep an eye over the framework adopted by the company. From a procedural perspective, an eligible company as per Schedule ZA1 of the Act may obtain a moratorium by filing relevant documents the director’s statement and a statement from the appointed monitor that the company is or will be soon insolvent with the court.[iii] After filing of the documents, the initial period has been capped at 20 days, subject to extensions to a year.

In the author’s view, the measure leaves a grey area regarding the initiation after the period elapses if the default continues. Illustration: X defaults for €10,000 in January 2020. Subsequently, due to COVID-19, X seeks a moratorium. Now, once the period ends, there is no clarity on whether a creditor can initiate an insolvency procedure for that debt. Nevertheless, the moratorium is significant because it does not provide absolute autonomy to debtors:

  1. Monitor Appointment: In case, there is non-compliance with the procedure by the company or commission of an offence, the monitor can bring an end to the moratorium.
  2. Harming creditor’s interest: If the creditor’s interests are unfairly harmed by the company, the court may exercise its discretion.

On the other hand, Section 10A of the Ordinance provides that no corporate insolvency proceedings can be initiated for any default arising after 25 March 2020. It puts a blanket ban on debts accruing for up to one year. However, there are several shortcomings with the Indian measure. One, while the Ordinance has been promulgated to aid businesses, there is no parallel to have a permanent and complete prohibition on the debts accruing during the pandemic. Instead, the UK measure should be considered, which provides that the debts accrued during the moratorium have to be paid. Two, the Ordinance carves an absolute autonomy to the debtors. On the contrary, the UK measure provides certain exceptions of the monitor and harm to the creditor’s interest. Lack of such measures circumscribes India’s capability to mitigate the dramatic consequences of COVID-19.

Restructuring plan

Similar to the existing scheme of arrangement procedure in Part 26 of the UK Companies Act, 2006, the Act provides for a restructuring plan. The issue resurrected now is that although the arrangement helps in restructuring, it lacks the mechanism to implement the plan on all the creditors. Broadly, the restructuring plan involves one, a compromise or an arrangement proposed between the company and the creditors; and two, the compromise should ‘eliminate, reduce or prevent, or mitigate the effect of financial difficulties’ which affects the ability of a company to carry on a business.

From a procedural perspective, the plan requires the approval of a majority of a minimum of 75 percent creditors from each class. It confers the courts with the ability to ‘cram-down-across-classes’. With such a power, courts can approve the plan even if a few classes did not vote in favour of the plan. Irrespective of the need for scrutiny, the measure is significant because of its association with the moratorium, unlike the prior scheme of arrangement.[iv]

India relies on the debt restructuring mechanisms that were modeled way before the IBC enactment. Broadly, there are following schemes of an arrangement available: One, the arrangement under Section 230, Companies Act, 2013, read with Companies (Compromises, Arrangement, and Amalgamations) Rules, 2016. This scheme outlines the increment in the company’s profitability by rearranging its debt obligations. Two, the scheme for Micro, Small and Medium Enterprises (MSME), which provides for the one-time restructuring of MSME’s debts ‘without a downgrade in the asset classification’. Although this is an appreciated move, such limited measures would not suffice the companies to bear the crisis. Moreover, the non-binding nature of the debt restructuring would bring uncertainty in acceptance of the plan. Hence, India should adopt the UK mechanism, which makes the rearrangement binding. This can also be done by adopting the pre-packaged plan half-devised in 2019.

Prohibition of supplier termination clauses in contracts

To reinstate the growth of companies in the dilapidated economy, the Act further proposes a provision that aims to protect a company’s chain of supply. This measure provides for the extension of prohibition of supplier termination clauses in contracts to all goods and services. Interestingly, the measure is not purely one-sided. Instead, it aims to strike a balance between the supplier’s interest and the companies. This is for the reason that the Act provides certain exceptions to the supplier under Schedule 12 and 13 of the Act. For instance, on the ground of ‘hardship’ to the supplier, or by reaching an agreement with the distressed company, a supplier can terminate the contract. Furthermore, the Act seeks to keep small suppliers outside of the purview of the prohibition. Considering the legislative intent, this is arguably a significant facet as it would not leave the small suppliers in distress.

India has not yet suspended the supplier termination clauses in contracts. During these unprecedented times, the revival of a company becomes more difficult. This is grounded on the fact that the IBC under Section 14(2) provides that even during an insolvency process, the debtor has the exception to the moratorium for ‘essential goods and services’. During these testing times, such an exception dilapidates the corporate revival. On the contrary, the UK Act extends the suspension to all goods and services. Hence, to ensure an effective revival, it is imperative to adopt the UK measure.

Temporary Changes

Winding up petitions and statutory demands

Research demonstrates that nearly a fifth of small and medium-sized companies in the UK will have no liquidity in the crisis. Symptomatically, they are on the verge of insolvency. Therefore, the Act prohibits the initiation of corporate insolvency resolution. Not only this, but it also prohibits the filing of a winding-up petition on or after 27 April 2020 based on failure to comply with statutory demand until 30 June 2020. The prohibition is subject to the exception of a creditor having reasonable grounds such as if COVID-19 has not had a ‘financial effect’[v] on the debtor and that the debtor would have been unable to pay the debt in any case.

On the other hand, India imposes a blanket ban on the initiation of insolvency procedures. Due to this, a winding-up petition cannot be brought against the debtor company for up to one year and perpetuity for COVID-19 debts. Such a decision goes against the interest of creditors. Not only this, but the debtors may also get an opportunity to reinstate their revival by prejudicing the interests of creditors. On the contrary, the UK Act provides an exception of reasonable grounds to the creditor. Hence, taking a cue from the UK, the period to bring a winding-up petition should also be restricted for a certain period.

Wrongful trading

Both India and the UK have tentatively removed the director’s liability arising from wrongful trading. This is an appreciated move in the short term to ensure cash flow. However, there may be an influx of actions for wrongful trading after the period elapses. At that juncture, the sole liability would lie on the directors to prove that every action of theirs was towards minimizing the losses of creditors. Moreover, the amendment contravenes the principles envisioned behind this measure as this reform was made to prevent wrongful conduct of the companies.[vi] Hence, the legislative intent behind it is uncertain.


The author submits that the bleak economic growth during COVID-19 in the UK can be resolved through the adopted insolvency measures. Taking into consideration the speculation in the Indian Ordinance, the author submits that India should adopt the measures provided by the UK Act. The measures will undoubtedly aid in mitigating the upheaval caused due to the COVID-19 crisis. The Czech Republic and Australia have also brought the measures adopted by the UK. Hence, there is no ambiguity in its universal acceptance to stabilize the deterioration of the economy during the crisis.


[i] A prior leave can be taken in case the director or the Secretary of State presents a winding-up petition. See Corporate Insolvency and Governance Act 2020, schedule 1-8.

[ii] See Insolvency Act 1986, schedule B1.

[iii] For the list of the relevant documents, see Corporate Insolvency and Governance Act 2020, s A6.

[iv] Unlike previous scheme arrangement, the new plan provides for a moratorium to keep company assets consolidated during the restructuring negotiations.  See Corporate Insolvency and Governance Act 2020, 901H.

[v] Corporate Insolvency and Governance Act 2020, schedule 10. The term ‘financial effect’ is left open-ended here. Hence, it has to be decided on a case-to-case basis.

[vi] Andrew Keay and Michael Murray, ‘Making Company Directors Liable: A Comparative Analysis of Wrongful Trading in the United Kingdom and Insolvent Trading in Australia’ (2005) 14 Intl. Insolvency Rev. 27. is now on Telegram. Follow us for regular legal updates and judgments from the court. Follow us on Google News, InstagramLinkedInFacebook & Twitter. You can also subscribe to our Weekly Email Updates. You can also contribute stories like this and help us spread awareness for a better society. Submit Your Post Now.


Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Latest News

SC: Under-21 Convicts Can Be Given Less Than Minimum Sentence, Resorts To Probation of Offenders Act

The Supreme Court resorted to the Probation of Offenders Act to sidestep the mandate under Section 397 of the Indian Penal Code that mentions a sentence of not less than 7 years to those convicted of armed robbery, to give a chance to two young convicts to reform their lives.

Environment Protection Act Passed at the Instance of Foreign Powers: NHAI in Karnataka HC

The National Highways Authority of India (NHAI) claimed in a submission that the Environment Protection Act 1986 was passed not only for the protection of the environment by the parliament but also at the instance of foreign powers. This statement was made while referring to a UN conference and got the NHAI into great trouble in the Karnataka High Court.

Delhi High Court To Implement a Hybrid System Through Virtual and Physical Hearing

On Friday the Delhi High Court said that they have initiated steps to implement a mode wherein hearing can be done by virtual as well as physical mode. The Delhi High Court is aiming to implement the Hybrid mode. It stated that when the particular bench is conducting a virtual hearing the lawyer may opt for this mode after giving prior intimation about the same.

Mercy Plea of Rajiv Gandhi Assassination Case To Be Decided in Four Weeks, TN Governor To Supreme Court

Tamil Nadu Governor Banwarilal Purohit on Thursday told the Supreme Court that a decision on the mercy petition of one of the convicts serving a life sentence for the assassination of former Prime Minister Rajiv Gandhi, AG Perarivalan will be taken within four weeks. The petition has been pending with the Governor since December 30, 2015.

Bombay High Court Questions FIR Over Journalist Alleged of Communist Comment on WhatsApp

An FIR lodged against the editor of Marathi newspaper, Rajkumar Chhajed has been questioned by the Bombay High Court. The Maharashtra Police has accused Chhajed of creating a rift between the two communities based on a WhatsApp message.

Allahabad High Court Expresses Dissatisfaction on Counsels Seeking Unnecessary Adjournments

The petition had been filed by Smt. Radha prayed to issue directions to Judicial Magistrate-I in Faizabad. The petition sought a speedy decision in...

[Delhi Riots] When the IT Ministry Calls Us, We Will Go Says Harish Salve To Delhi High Court

The Vice President and Managing Director of Facebook, Ajit Mohan told the Supreme Court that when the representatives of the company are called by the Information Technology Ministry they will come and record their statements.

Allahabad High Court Seeks Response on Compensation of Cutting Trees From National Highways Authority of India (Nhai) 

The Order had come in the form of a Public Interest Litigation (PIL) filed by a bunch of law students in Uttar Pradesh. The...

Doctrine of Proportionality Must Adhere to Reasonableness Principal Test: Madras High Court

Young Men's Christian Association built a commercial complex and leased it without having due permission. The District Collector & Tahsildar issued a show-cause notice...

Delhi High Court Refuses To Stay Release of ‘The White Tiger’ on the OTT Platform Netflix

A plea requesting a stay on the release of the film ‘The White Tiger’ by the American producer, John Hart Jr. alleging copyright violation was rejected by the Delhi High Court on Thursday.

More Articles Like This

- Advertisement -