The current pandemic has brought with itself a whole slew of problems. The novel coronavirus (SARS-CoV-2) onslaught has resulted in the entire world economies coming to a standstill. This is an unprecedented scenario. The situation pertinent to India is no different and consequently, the Indian economy is standing no fairer than others. The forecasted growth rate of India is gaining momentum in the downhill direction. The growth rate predicted by the United Nations has been slashed down to a mere 1.2 percentile  in the ongoing year crisis. The International Monetary Fund (“IMF”)has slightly better figures as it increased the subpar rate to around 1.9 percentile , still it is indeed a very woeful situation. IBC
Without being overly optimistic and sugar-coating things, we find ourselves in the position to say that things are not looking too good at the moment. We are in the midst of a collapse not seen since the Great Depression of 1929 , with the main contributing factor being the pandemic. The Centre responded with a multitude of tranches of reforms under the purview of Aatma Nirbhar Bharat  (“Self-Reliant India”) IBC
The fifth and final tranche  provided for the further elementariness via amending the Insolvency and Bankruptcy Code (“IBC”). Concurrently, the details of the aforesaid tranche were illustrated via a presentation  uploaded by the Ministry of Finance. IBC
It should be noted, that the tranches of the relaxations predate the aforesaid ordinance. The spark was ignited via the RBI notification (RBI/2019-20/186)  wherein it provided certain measures for easing the backs for debtors. Recently. The revised notification (RBI/2019-20/244)  has extended the provision of the moratorium for another 3 months i.e. till August 31, 2020. IBC
The de-escalations of the future insolvency resolutions were done on 24th March by increasing the threshold of default to INR 1 Crore from the pre-existing INR 1 Lakh. There were also other considerations which have been later solidified in the IBC ordinance. That was followed by the NCLAT taking a suo moto cognizance  of the situation via which the corporate resolution period was determined to exclude the lockdown period. We, however, are going to restrict our scope to the amendments that have been brought about in the IBC via the promulgated ordinance  on 5th June 2020.
IBC (Amendment) Ordinance, 2020
Primarily, the ordinance is focusing on two aspects vis a vis the “default aspect” via the insertion of Section – 10A and “wrongful trading” via the insertion of Section – 66(3) respectively.
Ingredients of Section – 10A
- No application for initiation of the corporate insolvency resolution process (“CIRP”)
- Under section 7,9 or 10
- For any default occurring on or after 25th March 2020
- For a period of 6 months i.e. 25th September 2020
- Or such further period, not exceeding 1 yr., as may be notified.
- No application shall ‘ever’ be filed for default during the said “period”.
There are certain points to be considered here. There can be no filing under Section – 7, hence no Financial Creditor can proceed against the corporate debtor. There can be no filing under Section – 9, hence no Operational Creditor can process against the corporate debtor. Finally, there can be no application under Section – 10 also, which consequently implies that no self-filing can be initiated. Further, the abatement is not available for defaults that occur before 25th March 2020.
The Emergence of Uncertainties of IBC
The aforesaid section 10A has unearthed certain loopholes. The first deals with the presence of the term “ever” under its proviso. The proviso says that no application shall ever be filed in case the default has occurred with the period. The section provides for a safety blanket for six months, in exchange however the proviso to the same gives the element of perpetuity. The combined interpretation thus makes the section fall under the garb of uncertainty.
Secondly, the section is silent with respect to the scenario in case of the continuance of the default post the safety period. If the continuing default continues to have the protection of the ordinance, this provides the debtors a loophole to incentivize their defaults. Thus, if the debtor is of the opinion that sometime in the near future, he is going to find himself in the default zone, he will try his level best to default now, as he would have the shield of the aforesaid ordinance. This will become a safe harbour for the said debtors. This cannot be deemed to be the intent of the law.
Thirdly, the logical reasoning for curbing the voluntary insolvency proceedings is not at all clear and is highly ambiguous. Section – 10 of IBC provides for the initiation of the CIRP via the corporate applicant. What would be the justification for restricting a company which was finding itself unable to stay afloat to continue to try to tread under the weight of its debt obligations? Nobody is clear on the said reasoning and it is proving to be nigh incomprehensible to interpret the same.
Relaxations with respect to Wrongful Trading
The second aspect is pertinent to wrongful trading. Accordingly, the ordinance has provided an exemption provision to the Resolution Professional from filing an application under section 66 for defaults safeguarded under Section – 10A. Let us discuss the ingredients of the inserted provision.
Ingredients of Section – 66 (3)
- Provides relaxation from wrongful trading provisions.
- The section should only be read in the context of Section – 66 (2)
- Section – 66(1) covers fraudulent trading – Therefore, no relief for the same is provided.
- Consequential to the abatement of insolvency filings.
The inclusion of the aforesaid provision bears a strong resemblance with the suspension of the wrongful trading regime that was dealt with by the United Kingdom under its Corporate Insolvency and Governance Act, 2020 . Therein also the relevant period is provided for a period of 6 months. Thus, the UK proviso attempts –
- To give greater confidence to directors to continue trading during the disrupted period.
- Without the risk of personal liability if the company falls into insolvency.
The insertion of the non-obstante clause imparts a shield of protection to the corporate debtor. This protection however should not be interpreted as providing a free buffet to the board of directors to continue the regular business and keep on incurring debts which would provide no incentives for recovery of the company.
However, at the same time, I believe that the intention of the legislation was to only impact the relaxations only for the purpose of wrongful trading and not fraudulent trading. The provisions of 66 (1) deal with fraudulent trading, hence, if I a debtor continues to trade fraudulent as a measure of defrauding its creditors, there can be no granting of protection. There should be no remedy for protection to fraud, there can be protection for wrongful trading during the stressed situations. As a fraudulent trade cannot be justified or excused.
Other Possible Recourses
The closure of the relief doors of the insolvency for the current period cannot be deemed as the end of the line. Certain other routes can tread up by the creditors and the debtors for seeking relief. A few of them have been discussed below.
- Actions under SARFAESI by secured creditors
- The said recourse is only possible when there is an existence of a default.
- However, in light of the RBI moratorium, in the instances where the said moratorium is availed, the question of default no longer arises.
- Hence, the effectiveness of said relief is substantially reduced.
2. Civil Actions
- Commercial suits, money suits (This is generally processed by the operational creditors)
3. Recourse to Schemes of Arrangements
- By the corporate debtors and the creditors (As provided for under Section 230 – 232 of the Companies Act, 2013)
4. Other informational settlements between the creditors and the debtors
Certain Unresolved Queries:
Even post the clarifications the implanted ordinance still finds itself in murky waters. There are certain ambiguities that need to be resolved as soon as possible for clearing the air. A few unresolved issues are as follows.
- Date of the Demand Notice
Firstly, what is the significance of the demand date with regard to the ordinance? If the date of demand notice was prior to the safeguarded period and post the waiting period of 10 days, the debtor commits a default, and doesn’t respond to the said notice can the creditor proceed for CIRP? In my personal opinion, the answer to the aforesaid has to be in negative as demand notice in itself will not suffice as evidence of default.
2. Corporate and Personal Guarantors
Corporate Guarantors can be saved under the said scheme. A creditor won’t be able to seek the recourse of insolvency against him if on the invocation of guarantee the guarantor is unable to pay. However, there is no relaxation for personal guarantors and subsequent guarantees.
3. Occurrences of Default in Tranches
The next query deals with the occurrence of default in tranches. What will happen in the instances wherein a part of default occurs prior to the default period, and the rest happens amidst the protected period? Will the recourse of insolvency proceedings be available to the creditors?
4. Implications upon Limitation Act.
The Suo-moto order  of the Hon’ble Supreme Court provides for an exclusion of the lockdown period for the purpose of determining the limitation. It does not extend till the disruption period.
- Would the disruption period be excluded for determining limitations?
If the answer is yes, then it is prejudicial to the creditors as they would not be able to exercise their rights under the IBC, yet suffer the wear and tear of the limitation period.
- Possible Solutions
- Extension of the SC’s order to include the disruption period.
- Further clarification to provide for the aforesaid exclusion.
It is incumbent on the government to provide the solutions to the aforesaid questions as soon as possible. This will go a long way in easing the minds of the business owners and would further reduce issues and complexity down the line.
The inclusion of the ordinance is a breath of fresh air for the Indian business market. The cataclysmic pandemic has entirely shaken the economy. While the ordinance has the capacity to be misused by a certain stratum of the debtors, such a risk has to be taken for the greater good of the country as a whole. Whether the aforementioned steps be enough to enable the country to stand on its legs is unclear, however, it would not be too wrong to say that steps are indeed being taken in the right direction.
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Ankit Tewari | Amity Law School Delhi, IP University