IBC Ordinance 2020: Calibrated Approach & Contradiction

On 05.06.2020, the President of India promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 (“the Ordinance”)[1]. The Ordinance has been brought in to suspend the insolvency proceedings under the Insolvency and Bankruptcy Code, 2016[2] (“the Code”) for a period of 6 months. The Ordinance has inserted a new section under the code i.e. Section 10-A[3]. Section 10-A states that no application can be filed under Sections 7, 9 and  10 for a default committed on or after 25.03.2020 for a period of six months. It also provides that the same can be extended for another period of six months as and when notified at a later date.

The Ordinance was part of the Atamnirbhar package which was announced[4] by the Finance Minister on 17.05.2020 to provide relief to the companies who are on the verge of insolvency[5]. The Finance Minister had announced that the fresh insolvency filings period will be suspended for a period of one year. However, the Ordinance has only suspended the fresh insolvency filings for a period of six months. It may extend for another period of six months or for further period not extending beyond a period of one year from a date as and when notified by the Government.

There are various reasons which have been cited by the Government for the promulgation of the Ordinance which are as follows;

  • COVID-19 pandemic has impacted business, financial markets across the world including India and created uncertainty and stress for business beyond their control.
  • The nationwide lockdown since 25.04.2020 has added disruption to the normal business operations.
  • It is difficult to find adequate number of resolution applicants to rescue the corporate person
  • It is expedient to exclude the defaults arising on account of unprecedented situation.

The Ordinance has effectively provided a breather, at least for now, to the companies who may commit default on their debt obligation on or after 25.03.2020 till 25.09.2020. Interestingly since Section 9 is also suspended, many big retailers and small retailers who have committed default in the payment of rents and also defaulted in the payment obligations during  COVID-19 period of six months from 25.3.2020 are equally protected. It means that the fast track mechanism to recover the debts of financial creditors and operational creditors under the IBC, during the period of six months from 25.3.2020 has been given a decent burial.

With the new Ordinance in place, the suspension can also be extended for another period of six months i.e. till 25.03.2021. It is also clarified under the newly inserted Section 10-A that it will not apply to any default which occurred before 25.03.2020. Therefore, corporate insolvency resolution process (CIRP) can be initiated for any account which was declared a non-performing account (NPA) or a default committed before 25.03.2020.

Prima facie, there is an apparent conflict in the Ordinance. Section 10-A states that the proceedings cannot be filed for the default that occurred on or after 25.03.2020, for a period of six months. Ordinarily it could have meant that the insolvency proceedings for these defaults can be filed after the period of six months. However, the proviso to the section states that no application shall ever be filed for the default committed during this period of six months. This proviso is in the form an amnesty clause. It provides that the insolvency proceedings cannot ever be initiated against the company for the default that occurred during this period.

On one hand, the Ordinance is suspending the filing of the proceedings under Sections 7,   9 and 10 for a period of six months whereas on the other hand, it is stating that the same will remain suspended in perpetuity. If the intention of the Ordinance is to suspend the insolvency proceedings temporarily, then there is no requirement for providing the perpetual suspension in the proviso. It appears that there is no possible harmonious interpretation of the section and the proviso attached to it. A tweet[6] by the Insolvency and Bankruptcy Board of India, regulator under the Code also stated that the default during COVID-19 shall not be the basis for initiation of Insolvency at any time. This intention runs counter to what is stated in the main section.  The Supreme Court in  J.K. Industries Ltd. v. Chief Inspector of Factories and Boilers[7],  held that;

35. Indeed, in some cases, a proviso, may be an exception to the main provision though it cannot be inconsistent with what is expressed in the main provision and if it is so, it would be ultra vires of the main provision and struck down. As a general rule in construing an enactment containing a proviso, it is proper to construe the provisions together without making either of them redundant or otiose. Even where the enacting part is clear, it is desirable to make an effort to give meaning to the proviso with a view to justify its necessity.”

(emphasis supplied)

The apparent conflict between the main section and the proviso is required to be resolved immediately to avoid any further confusion.

However, there can be a possible reason for providing the perpetual suspension. The Finance Minister also announced that  COVID-19 induced defaults will be kept outside the purview of the Code. The proviso to Section 10-A may be inserted for that purpose but the same nowhere refers to any COVID-19 induced default. Also, there is no definition provided under the Ordinance for any COVID-19 induced default. On the contrary, since the proviso has used the term “said default”, it is referring to the same defaults which are mentioned under Section 10-A. Therefore, the perpetual suspension of the default cannot be justified by any stretch of imagination.

It is also pertinent to mention that the Ordinance has also suspended fresh insolvency under Section 10 of the Code. Section 10 allowed for voluntary insolvency proceedings i.e. if a company is unable to meet its debt obligation then it can on its own file for insolvency. It is beyond any comprehension as to why force an insolvent company to continue its business. It will only lead to the reduction in the value of the company. The same will act as an impediment for the resolution of the same as a going concern.

The Ordinance has also amended Section 66 of the Code which provides right to the Resolution Professional (RP) to file an application for against any business of corporate debtor which is being carried with the intent to defraud the creditors. A new sub-section is being added to exempt the RP from filing any application under Section 66 for the defaults for which CIRP is being suspended under Section 10-A. This particular amendment was necessary as lot of changes in the loan structure of the corporate debtor will be done in order to mitigate the disruption caused by the pandemic which may change the priority of creditors under Section 53 of the Code.

The Ordinance has provided a much-needed relief to the companies. It has provided at least a period of six months to the companies to get back on their feet and continue fulfilling their repayment of debt obligations. The Ordinance has also taken into consideration the  interest of the financial institutions by not providing a blanket suspension of any proceedings to recover a debt, which was floated earlier. It needs to be seen how well the debtors would take this opportunity to streamline their businesses. Otherwise it will go the same way as the defaults committed in MUDRA loans. This small dose of help by the Government should not be misused by the defaulters. However, the apparent conflict between the main section and the proviso needs to be resolved on an immediate basis.

*Delhi based Advocate

** Student, National University of Study and Research in Law

[1] The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 [No. 9 of 2020]

[2] Insolvency and Bankruptcy Code, 2016 

[3] Section 10-A, Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020   

[4] Economic Times, FM provides Covid-19 relief, no fresh insolvency proceeding against MSMEs for 1 year

[5] Press Information Bureau, Finance Minister announces Government Reforms and Enablers across Seven Sectors under AatmaNirbhar Bharat Abhiyaan, 17.05.2020. Available at: https://pib.gov.in/PressReleasePage.aspx?PRID=1624661

[6] https://twitter.com/IBBIlive/status/1268932122519060480

[7] (1996) 6 SCC 665  

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