Insolvency and Bankruptcy Code (Amendment Ordinance), 2020
iasparliament
June 11, 2020
What is the issue?
The Insolvency and Bankruptcy Code (Amendment Ordinance), 2020 has come into force and is effective from June 5, 2020. Click here to know more on suspension of IBC.
The ordinance inserting Section 10A in the Insolvency and Bankruptcy Code (IBC), 2016 has opened itself up to a legal challenge.
What is the government's rationale?
The COVID-19-led lockdown has caused much disruption to businesses.
This may lead to default on debts pushing such companies into insolvency.
Therefore, it was felt that suspending Sections 7, 9 and 10 of the IBC would be the right course of action.
What are the key amendments?
The Ordinance provides for two amendments:
the introduction of a Section 10A, suspending initiation of proceedings under the Code
the introduction of Section 66(3) suspending the application of wrongful trading provisions under the Code when Section 10A is applicable
The IBC provides for initiation of corporate insolvency resolution process (CIRP) of a corporate debtor.
Section 10A provides that no such application for CIRP initiation under Sections 7, 9 and 10 of the IBC could be filed, for any default arising on or after 25th March 2020.
This will be applicable for a period of 6 months or such further period, not exceeding one year from this period, as may be notified.
The suspension period is thus from March 25 to September 25, 2020 unless extended for another 6 months, in which case it would be till March 25, 2021.
Section 10A shall not apply to any default committed under the said Sections before March 25.
What is the concern now?
In clear terms, Section 10A prevents an application from being filed for initiation of a CIRP occurring during the suspension period.
But the proviso (attached condition) to the section states that no application for CIRP shall ever be filed against a corporate debtor for any default occurring during the suspension period.
While the main Section 10A suspends such applications for a limited period, the proviso enlarges the scope.
The proviso provides complete amnesty under the IBC for 'any default occurring during such period'.
The role of a proviso in a statute is to restrict the application of the main provision under exceptional circumstances.
However, the proviso here expands the substantive provision in the main section.
Further, if the main provision is unclear, a proviso may be given to explain its true meaning.
In this case, the main provision appears clear, and the proviso is disputable.
The proviso therefore does not appear to be legally tenable.
Creditors can still approach courts, and banks/Financial Institutions can still approach Debt Recovery Tribunals.
So the protection given by this proviso seems illusory.
Also, Section 10A suspends provisions of Section 10 of the IBC that enables voluntary insolvency resolution.
This is difficult to understand because such voluntary insolvency resolution should have been made easier for companies now facing distress.
Also, the ordinance appears to consider every default occurring during the suspension period to be a consequence of the COVID-19 pandemic.
There could be cases where defaults were imminent due to other reasons as well.
Now all these will also enjoy the protection offered.
What could have been done?
The ordinance should have protected only such defaults which occur as a direct consequence of the pandemic or the lockdown.
It should have left this determination to the National Company Law Tribunal.
Also, a company defaulting on its payment obligations on March 24 (a day before the lockdown started) would not be provided any relief.
But a company defaulting on or immediately after March 25 due to similar reasons will get relief.
In the absence of definition of a COVID-19 default, the suspension of IBC becomes arbitrary.
