Govt Relaxation to Ease Global IBC Regimes in Times of Pandemic

    About the Article

    COVID-19 which erupted from the Wuhan region of China hastily turned into a global health emergency with threatening outcomes in Italy, America and some European countries. The disease which at the first instance seems to be normal has left long-running economies in peril of serious setback. The essay starts by assessment of the menacing effects of this pandemic on various economies including India. IBC

    On 19th March 2020, Indian Prime Minister rightly pointed out in his address to the nation that if the pandemic is mismanaged it has the potential to push the country 21 years back. Governments across the globe have been struggling to alleviate its menacing impact by providing some relaxation in their laws and policies. Following the concept of “extraordinary situation requires extraordinary reforms”, India introduced a series of relaxations in its one of the crown jewels of reforms IBC (Insolvency and Bankruptcy Code, 2016) from time to time. These amendments are an amalgamation of humanitarian as well as economic approach. The author provides an insight into the various aspects of the most effective resolution framework of the country and its evolution. The fresh amendments to this regime are indicative of the clear intention of the centre to give primacy to the corporate debtor over the resolution of their stressed assets. However, these new promulgations have backed both the support and criticism from various elite members of the society. The author attempts to make an analysis of these amendments one by one by providing their perspective effects upon the persons concerned. 

    COVID-19 AND ITS ADVERSE ECONOMIC EFFECTS

    Over the past few months, our minds and life have all been affected in some way or the other by the ongoing pandemic while many of us have accepted it as a part of our lives. The very recently became familiar name ‘corona’ has brought major economies of the world on their knees. It has halted the wheels of the rapidly growing economies of the world bringing them under complete standstill. Economic hardships and uncertainty have now resembled at each and every aspect of an individual’s life pushing many of them into depression.  At this stage, one cannot agree more with the saying “If you have life, you have the world”. In the view to cripple the speed of its transmission, various countries observed complete lockdown. India also observed complete nationwide lockdown in three phases but soon gave the idea of a complete shutdown of the economy and allowed some relaxations. It has become a double burden on the Indian economy which was already undergoing severe economic setbacks with low GDP, a high number of loan defaulters, low work participation rates, sinking employment rates etc. 

    According to the IMF, the global economy is expected to shrink by 3 per cent this year, which is the worst decline since the Great Depression of 1930. The UN conference on trade and commerce stated that the pandemic will cost the world up to two trillion dollars[2]. There has been a big shift in the stock market and the efforts of the government don’t seem sufficient. Science has proved deficient in providing a plausible cure to this problem. Businesses are facing disrupted supply and production chains and are preparing to downsize their operations. Even one of the strongest pillars of a state i.e. judiciary has not been left untouched and is in a standstill with only important cases being heard. 

    IBC & CORPORATE INSOLVENCY RESOLUTION PROCESS (CIRP)

    Insolvency and bankruptcy are often confused together however there lies a thin line of difference between these. Insolvency is the preface of Bankruptcy which comes into picture when an insolvent individual, firm or entity is declared to be insolvent by a court following which a resolution order is issued. Provisions regarding the resolution Insolvency and Bankruptcy were earlier governed by Sick Industrial Companies Act, 1985 (SICA), Financial Institutions Act 1993 and the Companies Act 2013 which were inadequate and inefficient. India has a massive concentration of a dynamic set of entrepreneurs who were crippled by the expensive and lethargic insolvency processes dealt under earlier statutes.  The country was facing grave challenges of sunken credits and low debt recovery rate which stood at 20% of the value of debt. These statues gave the right of secured credits to banks neglecting other lenders like individuals and lending firms. According to the World Bank, 2016 report on insolvency, CIRP in India took 4.3 years which was substantially high as compared to U.K. (1 year) and U.S.A. (1.5 years). SICA provided a revival mechanism through formulating a protective wall for sick companies entering into BIFR. This mechanism inhibited the creditors to make credit demand and made NPAs (non-performing assets) more non-performing. 

    “The insolvency law provides a new life to stressed companies to save them from premature deaths.” IBBI Chairman- M. S. Sahoo[3]

    In 2016 Insolvency and Bankruptcy Code came into existence to curb all these ailments in the pre-existing regimes and envisage a market mechanism to put back the defaulting debtor into a profitable operation. The code vests in a Resolution Professional the power to continue business and assist in retrieval of value lost. Unlike the companies Act where the official liquidator was a government official, the code provides that the RP shall be a competent personnel who comes from a large consultancy thus having greater knowledge and experience. The code intends at ameliorating the existing bottlenecks by providing resolution in a time-bound manner and balancing the interest of all the stakeholders.  IBC has shifted the regime of ‘debtors in possession’ to ‘creditors in control’ furnishing creditors an upper-hand throughout the CIRP.

     The CIRP under the code can be triggered by any of the Financial Creditor (FC), Operational Creditor (OC) or the corporation itself. Financial Creditors are entities which have extended any kind of credit facility to the Corporate Debtor (CD) while Operational Creditors are those people or entities which have provided some sort of goods and services to the defaulting CD. FCs are given wider powers under the code as compared to OCs who are excluded from Committee of Operational Creditors (COC) which is constituted to work on a resolution plan. In some cases where the inclusion of OCs is allowed, they are barred from voting. The Banking Law Reform Committee has backed this difference by opining that OCs are generally not bothered about company’s revival and are keen on liquidation. Also, they lack the competence to decide on the matters of insolvency.[4] 

    According to Section hundred of IBC, the application made by any of the said persons can be rejected or admitted by the NCLT (National Company Law Tribunal) within 14 days from the filing date, however, Supreme Court has held that this is the only directory and not mandatory and many times it exceeds three months or more[5]. If admission is allowed, the constitution of COC as stipulated under section 21 has to take place within 30 days of such admission. Consequently, a resolution plan is devised with the aid of the interim resolution professional in a time-bound manner and submitted to the NCLT for its sanction. The endorsement of the resolution plan makes it binding on all the stakeholders while its repudiation results in the liquidation of the CD.[6]

    Once the CIRP begins, the control is withdrawn from the management and transferred to the Resolution Professional. Period of moratorium also known as EMI holiday is imposed under section 14 of the code which acts as a protective shield for the CD. The efficacy of moratorium period has been iterated in several judgments of the Adjudicating Authorities as in Shree Bhawani Paper Mills v/s Bombay Stock Exchange[7] where NCLT laid down that, “moratorium period prevents institution of suits or continuation of any pending suit against corporate debtor including execution of any judgment, decree or order.”

    OBJECTIVES 

    Indian capitalism, unlike real capitalism, sees a company’s bankruptcy as a shame. However, it is normal for a business to fail despite its best efforts and cautiousness. Preceding statutes facilitated entry of the distressed entities but failed to provide a stable exit mechanism. IBC emerged to be one of the most efficaciously and swiftly implemented statues. Its preamble reads as, “to consolidate and amend laws relating to reorganization and insolvency of corporate personnel, partnership firms and individuals………………….[8]”

    NCLAT in Binani Industries v/s Bank of Baroda and Anr held that “the first objective is resolution. The second is the maximization of value of assets of CD. Third is promotion of entrepreneur, availability of credit and balancing the interest[9]”

    1.Resolution, not Recovery 

    The idea behind the code is retrieval of the sick company and preservation of the value of its property by appointment of a competent resolution professional. The code makes every possible effort to keep the business as a going concern until it is drawn up. It promotes resolution over liquidation of CD for the recovery process. Section 14 of the code envisages the moratorium process and mandates continuation of essential services to facilitate the operation of CD as a going concern. It restrains direct action for liquidation and renders for compromise or arrangement post liquidation order. Section 12 (A) stipulates the withdrawal of application even after its admission. Adjudicating authorities in their various pronouncements have mandated the liquidators towards making an effort to keep the CD as a going concern. 

    In Swiss Ribbons Pvt. Ltd. v/s UOI & Others, the Supreme Court held, “It’s interesting to note that the preamble doesn’t in any manner refer to liquidation which is available as a last resort.[10]”

    In Reid and Taylor, “Last but not the least, we request the creditors and RP to somehow see that company is sold as a going concern and the interest of employees is protected.[11]” 

    In Sekaran v/s Amit Gupta and Others, “Liquidator is required to keep the CD as a going concern and take mandatory steps to undertake restructuring scheme.[12]”

    2. Strict Timelines

    There were no rigid timelines for insolvency proceedings prior to the IBC coming into existence. There were superfluous delays which led to the devaluation of the assets and deteriorated the recovery rate. Section 12 of IBC intends to curtail this feebleness by mandating that the resolution process must be completed within 180 days from date of admission is extendable only once on the satisfaction of Adjudicating authority but such prolongation shall not exceed a period of 90 days. In JK Jute Mills Company v/s Surendra Trading Company, NCLAT held that “time is the essence under the code which requires NCLT and all stakeholders to perform within time.[13]”

    In Arcelor Mittal India Pvt. Ltd. v/s Satish Kumar Gupta, Supreme Court held that “the entire time period within which CIRP ought to take place is mandatory and cannot be extended.[14]”

    AMENDMENTS OWING TO COVID-19 

    The menacing COVID situation has left the businesses counting the costs. Businesses both big and small stand disrupted. The terrible effects tend to straddle all forms of industries i.e. tourism, healthcare, MSME and even the tech sector which lends easy work from home policies. With the prevailing circumstances there comes the utmost probability of businesses getting affected and courts getting overburdened with IBC cases. The massive explosion of IBC proceedings will have drastic effects upon the economy suppressing further depressing employment Law of a viable and non-viable CD having a direct impact on the daily bread of stakeholders. However, the Indian government has come up with relaxations in the IBC to avoid possible ramifications. These relaxations are primarily motivated with the objectives of preventing over-burdening of courts and envisaging the objective of IBC.[15] 

    1. MCA Notification No. S.O. 1205 (E) dated 24/03/2020

    With the purpose to inhibit the use of tools in the hands of creditors to cause impediments in the economy, the finance ministry announced an extension of the threshold of default amount from 1 lakhs to 1 crore exercising its powers furnished under Section 4 of IBC. Nonetheless, this has its own implementation drawbacks as it reacts differently to a different set of stakeholders. Workmen and employees bear the most severe consequences as it is unlikely for them to reach the threshold of 1 crore and hence they can’t claim remuneration. The impact on Financial Creditors was lower as compared to Operational creditors because of wider powers granted to FCs under section 7 of the code.

     Under the code, FCs are allowed to file the application jointly with other creditors or file the application against the CD for any debt which is due to any of the financial creditors. For instance, if three creditors A, B and C have lent their money to XYZ Ltd. then creditor ‘A’ can file an application against the company for the recovery of the debt owed to him or to any of B or C or all the three creditors could jointly file the application for the recovery of aggregate debt. However such powers are not available to OCs under section 7 though it becomes interesting to note that 49 per cent of all the cases have been filed by OCs as per latest reports[16]. The amendment became a heavy burden on OCs making it difficult for them to touch the threshold. This move was to restrain triggering of insolvency suits against MSMEs as clearly mentioned by the country’s finance minister; however, these amended rules are applicable to all the businesses. 

    2. Extension Of Stringent Timelines of IBC

    wide notification on 29.03.2020 CIRP regulation was modified and regulation 40 C was inserted to exclude the period of lockdown for the purpose of calculation of timelines under the code however the relaxation is subject to overall time-limit provided in the code. The rationale behind this was that in such tough times when everyone is working from home, it becomes difficult for the RP to adhere to the strict timelines. For example Regulation 16 (1) which provides for the publication to be made within 3 days from the commencement of the insolvency process shall now exclude the period of lockdown while making such calculation.[17]

    In a suo-moto order of the Supreme Court which was notified on 23/03/2020 relaxation was provided to the limitation period in all the proceedings under general or special law with retrospective effect from 15/03/2020. Also, NCLT exercising its powers under rule 11 of NCLAT rules, 2016 in a suo-moto order passed on 30/03/2020 excluded the period of lockdown for the purpose of counting resolution period under Section 12 of IBC in all cases where IBC has been initiated or pending.[18] 

    3. Suspension of Governing Sections 7,9 and 10 

    The major move came on 5 June 2020 when an ordinance was promulgated to insert section 10(A) which suspended three commanding sections (7, 9 and 10). These three sections were heart and soul of the code and their suspension has rendered the statute useless. However, the amendment is not happily worded and involves the risk of misinterpretation such as wrong placement of the terms like ‘as may be notified’. Section 10A primarily defines the default period and not ‘non-filing period’ which is not easily comprehensible by a layman. The section bars the filing of applications for defaults committed starting from 25th March 2020 and till the end of the next six months or further as may be notified by the government. 

    PRIVATE DEFENCE- PROTECTION AGAINST BODY OR PROPERTY

    This move has been adopted to shield companies from stringent regulations and prevent their rock-bottom valuations. There exists a high certainty of business-facing market crunch owing to bad market conditions and non-availability of capital funds. The lucrative and healthy businesses who were in a position to overtake the defaulted CD prior to COVID-19 situation have limited their scale of operation. So even if the proceedings are initiated, it is tentative that they arrive at a plausible resolution plan resulting in liquidation. Financial Creditors were already realizing mediocre values opposed to their admitted claims such as in CIRP of Ambey Iron Private Ltd. the admitted value was 218.55 crore but realization value was only 11.3 crore. [19]So the realization values are predicted to plummet further placing creditors in loss. The amendment intends to accommodate reasonable time to CD to redeem their losses so that creditors have better realization value. These amendments are debtors-centric and have completely severed the ‘creditors in control’ regime. 

    This promulgation involves drafting fallacies as well as slackness on the part of the government. Firstly, the government has ignored the fact that the moratorium period is only available after the CIPR proceedings have emanated. The moratorium is very essential to keep the company as a going concern and cannot be exercised without CIRP. However, the government simply accepts the fact that suspension of the code will deter any kind of claims of loss of assets without contemplating that these proceedings can still be initiated under other laws. The creditors can file a summary suit under Order 37 of CPC 1908 or a commercial suit under commercial courts act 2015. Creditors can also cling back to the old provisions for recovery under the Companies Act 2013 and June 7 circular of RBI’s Framework. These provisions have their own shortcomings as they are marked by expensive and sluggish processes. Unlike IBC, these provisions neither bind all the stakeholders nor furnish a fresh start to the CD through whitewashing all past liabilities.[20]

    The government grossly neglects to reckon the fact that the pandemic has disrupted the supply and production chains making it unviable for the CD to pay remunerations to its employees let alone to be engaged as a going concern. As such suspension of section 10 which provides locus standi to the CD to restructure its debt and retrieve itself further deteriorates the situation. The rationale behind the provision was that if the CD fails to discharge its obligations it can approach adjudicating authority instead of getting into prosecutions and trials. Overall the revival will be delayed which will lead to devaluation of the assets of the business. The resulting devaluation of the assets is a complete rupture of the statute’s ideology of maximization of value of the assets.  The entire objective of the code seems to fail to afford neither revival nor recovery. The move is short-sighted as it protects NCLT from over-burdening only for a short span of time as the overburdening of the courts is ought to take place in the future Where it is highly probable that post lockdown the courts will be in flux with the plethora of insolvency cases, the authorities are silent and unprepared on a viable mechanism of dealing future cases. 

    CONCLUSION of IBC

    • The road taken by the Indian authorities has been adopted by various other nations as well. The U.S.A, U.K., Australia and many other countries have provided somewhat same relaxations to ease their businesses and present situations. But these countries differ from each other in social, cultural and political backgrounds hence they all will experience different implications. 
    • The relaxation in stringent timelines of exclusion of the lockdown period for the purpose of calculation in insolvency cases which are pending or have been initiated is a welcomed move as it lessens the burden on the shoulders of the Resolution Professional. 
    • The relaxation provided in the threshold also held well till the further suspension of governing sections. The relaxation had to stress effects only upon the Operational Creditors while leaving some gaps for the Financial Creditors and the business itself under section 7 and 10 respectively. 
    • The suspension of the code is not a much-appreciated move as the authorities have lacked to focus on major key areas. The lack of diligence on the part of the authorities in terms of drafting and formulating the amendments has fetched lots of criticism. The objective behind the amendment would have been better met if the period of the moratorium was provided in general without being confined to a particular provision. 
    • Creditors opting recovery under any other provision will only add to their woes. Despite concerns with IBC, it was the most effective regime which had the potential to put back the business into a profitable operation. For the time being it would be better if the controversial section 29 (A) which prevents the backdoor entry of the CD is suspended temporarily to enable the CD in seeking revival. The management of an entity is its best judge of financial stability, hence filings under section 10 should be allowed for its own rehabilitation. 

    Endnotes

    1.Legal

    2.Report of The Insolvency Law Committee, Ministry of Corporate Affairs, (February,2020), http://www.mca.gov.in/Ministry/pdf/ICLReport_05032020.pdf

    3.IBC Provides Lifelines for Distressed Companies, The Economic Times, (March,6,2020,05.19PM), https://economictimes.indiatimes.com/news/economy/policy/ibc-provides-lifeline-for-distressed-companies-sahoo/articleshow/74513366.cms 

    4.Ashish Parwani and Gitika Makhija, IBC Amendments and its Impact in The Wake Of Covid, Mondaq, ( June 08, 2020), https://www.mondaq.com/india/operational-impacts-and-strategy/949132/ibc-amendments-and-its-impact-in-the-wake-of-covid-19-

    5.Reetika Wadhwa and Nishtha Das, Insolvency In Times Of Covid, Mondaq, (June 09, 2020), https://www.mondaq.com/india/insolvencybankruptcy/949778/insolvency-in-times-of-covid-19

    6.Khurana and Khurana, Unfolding the Loopholes in Recent Amendments, Mondaq, (May 28, 2020), https://www.mondaq.com/india/operational-impacts-and-strategy/942062/covid-19-and-ibc-unfolding-the-loopholes-in-the-recent-amendments?signup=true

    7.Shree Bhawani Paper Mills v Bombay Stock Exchange, CA NO. 100 (2018). 

    8.Insolvency and Bankruptcy Code, Preamble, (2016).

    9.Binani Industries v Bank of Baroda and Anr, Company Appeal No. 82, (2018).

    10.Swiss Ribbons Pvt. Ltd. v UOI & Others, Writ Petition Nos. 99,100, 115,459, (2018).

    11.Reid and Taylor, Final Order No. 600, Casemine, ( May 22, 2007), https://www.casemine.com/judgement/in/5ba0bd3560d03e57b21b7560

    12.Sekaran v Amit Gupta and Others, IBC Laws, (Jan 29, 2019), ibclaw.in 02 NCLAT

    13.JK Jute Mills Company v Surendra Trading Company, 138 CLA 258 (NCLAT), (2017).

    14.Arcelor Mittal India Pvt. Ltd. v Satish Kumar Gupta, 2 SCC 1, (2019).

    15.Rohit Lalwani, Pandemic Legal Intelligence, Mondaq, (May 11 2020), https://www.mondaq.com/india/insolvencybankruptcy/932154/pandemic-legal-intelligence–insolvency-laws39-perspective.

    16.Vimlendu Agarwal, IBC 2016- Suspension of 7,9 and 10- Implications and Way Forward, TaxGuru, (May 10, 2020), https://taxguru.in/corporate-law/ibc-2016-suspension-section-7-9-10-implications.html.

    17.Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, Insolvency And Bankruptcy Board Of India notification, (March 29, 2020), https://www.ibbi.gov.in/uploads/whatsnew/be2e7697e91a349bc55033b58d249cef.pdf

    18.Suo Moto – Company Appeal (AT) (Insolvency) No. 01 of 2020, IBC Laws, (March 30, 2020), https://ibclaw.in/the-period-of-lockdown-covid19-shall-be-excluded-for-the-purpose-of-counting-of-the-period-for-resolution-process-under-section-12-of-the-ibc-in-all-cases-where-cirp-has-been-initiated-pending-befo/.

    19.Oriental Bank of Commerce v Ambey Iron Private Ltd., Casement, (June3, 2019),https://www.casemine.com/judgement/in/5def07654a9326694b815372.

    20.Sriram Venkatavaradan and Ramya Subramaniam, Does IBC Provisions suspension provide intended succour, The New Indian Express, (May 11, 2020, 4 AM), https://www.newindianexpress.com/opinions/2020/may/11/does-ibc-provisions-suspension-provide-intended-succour-2141717.html.

    BY- Shailja Mishra | ICFAI University Hyderabad

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