Explained: Insolvency and Bankruptcy Code (Amendment) Act, 2020

The COVID-19 pandemic has brought various widespread impacts on every sector of the country, whether it is the corporates or it is the MSMEs. The Indian Government to cope with this situation has time and again introduced a wide range of schemes and initiatives to protect those who are the worst affected by this pandemic. Among the various schemes and initiatives that were introduced, one of the main initiatives is the ‘Atmanirbhar Bharat Yojana’.

Introduction

The announcement was this initiative was made by the Finance Ministry on 17th May 2020, and as a part of the 5th tranche of this scheme, several major policy reforms were to be taken in the Insolvency and Bankruptcy Code (hereinafter referred to as ‘IBC’) 2016 which bewildered the stakeholders about the new reforms and thus they were eagerly waiting for the Government to clear the air about this.

Finally, on 5th June 2020, the Government cleared the air and promulgated an ordinance (IBC (Amendment) Ordinance, 2020)) and thus the new rules have been enforced immediately.

Why was this Amendment Needed?

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As per the Central Government and the Preamble of the Ordinance, the main reason for which it has been introduced is to prevent the corporates from being forced into bankruptcy due to the unprecedented situations which have arisen due to the Covid-19 pandemic. Other reasons stated by the Government for the amendment are as follows:

  1. The Covid-19 pandemic had brought many major businesses to a standstill. The financial market and the economy are not able to carry out daily business activities and this has brought a major financial crisis in the corporate world. Thus, to tackle this problem, the Government of India put forth this amendment.
  2. The Government of India imposed a nationwide lockdown from 25th March 2020 which led to the shutting down of many businesses which affected their financial standing.
  3. Due to the Covid-19 pandemic, many corporates suffered losses and thus had to declare themselves insolvent. The new amendment provided for the suspension of Section 7, 9, and 10 of the IBC, 2016 so that the corporates are not pushed to declare themselves as insolvent.
  4. The pandemic has also rendered difficulty in finding an adequate number of resolution applicants when a corporate firm defaults the discharge of a debt application.
  5. The pandemic has also called for the exclusion of defaults arising due to the extraordinary situation. In other words, the defaults which arose during the nationwide lockdown on account of its impact on the ‘normal business operations’ are to be excluded for insolvency proceedings under the Code.

What Amendments have been made in the IBC, 2016?

Since the promulgation of IBC in the year 2016, the code has undergone 5 amendments, the latest one being the IBC amendment bill 2020. The latest ordinance has introduced Section 10-A and Section 66 (3) to this code to protect the distressed corporates from insolvency due to this covid-19 pandemic.

Section 10A

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In the new ordinance 2020, Section 10A has been added to IBC 2016. Section 10 of the code provided the locus standi to initiate corporate insolvency resolution process (CIRP) in case of default but the new section 10A suspends section 7, 9 and 10 of the code and states that the corporate defaults which arise on or after 25th March 2020, an application for CIRP cannot be filed by any corporate debtor for 6 months and not exceeding 1 year from the mentioned date.

The section also provides that no application for initiation of CIRP can be filed by any corporate debtor in case of default during the period on or after 25th March 2020 and default arising before this period shall not come under the purview of this section.

Section 66(3)

Section 66 of IBC deals with fraudulent trading or wrongful trading by a corporate debtor and requires the resolution professional to file an application during the CIRP of the corporate debtor, thereby making the director or partner liable for the contribution of assets to the corporate debtor.

Subsection (3) has been added as an amendment to Section 66 which bars the resolution professional from filing an application under Section 66 (2) and applies to those corporate debtors whose CIRP has been suspended for the prescribed period as per Section 10A.

Critical Analysis

While analyzing and interpreting the new amendment bill 2020, the following points came into light:

  1. Section 10A, introduced in the IBC Amendment Bill 2020, raises an ambiguity regarding the date which shall be considered from which 6 months shall be counted. This provision is, thus, left upon the adjudicating authority to determine the same which serves as a burden on the Courts. The Court’s action in this ambiguous period might also be a point of conflict since it may vary from case to case.
  2. The amendment also creates a dilemma for the corporates in case of the date of commencement of the 6-month period which can either be 25th March 2020 or the date of default. Different adjudicating authorities might interpret it differently and thus conflicts may arise. Thus, a uniform application and interpretation will be required which is only available if the case is before the higher judiciary.
  3. Subsection (3) which has been added in Section 66 of IBC 2016 is contrary to the principles of justice since it prohibits the resolution professional to file an application to the adjudicating authority in case the corporate debtor commits fraud and thus empowers them to keep committing such activities during the said period and making them not to be held accountable.
  4. The Finance Minister, in her press conference relating to MSMEs, said that the IBC amendment bill 2020 doesn’t focus on MSMEs since no changes have been made in the definition of default under section 3 (12) of IBC and thus considering that the default occurred during the pandemic will be a grey area.

Conclusion

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The Amendment 2020 made to IBC 2016 provides the corporate debtors with permanent immunity from the defaults arising during the said pandemic and is considered a welcome step but it has created several ambiguities and has raised certain issues that need to be answered further. The lenders and creditors have to look for other possibilities to restructure their debts since no insolvency proceedings can be filed under the amendment 2020 and thus, I believe that the amendment 2020 to the IBC should have been drafted keeping in mind all the sectors of the economy rather than focusing more on the corporate debtors which might lead the creditors and lenders with irreversible repercussions and thus will be put additional pressure on the Indian judiciary.


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