The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020: Half Baked?

THIS ARTICLE WAS WRITTEN BY NAINA AGARWAL, A STUDENT OF RAJIV GANDHI NATIONAL UNIVERSITY OF LAW, PATIALA.

Article 123[1] of the Indian Constitution empowers the President of India certain law making powers, i.e. to promulgate ordinance when either house of the parliament is not in the session. The idea behind this provision is to bestow executive with the power to issue ordinances in emergency situations which commands necessary actions like the unprecedented health and economic crisis during this COVID pandemic. By virtue of the powers bestowed under this Article, the President has promulgated the Insolvency and Bankruptcy Code Ordinance, 2020[2] on 5^th June 2020 to suspend the operation of Sections 7, 9 and 10 of the Insolvency and Bankruptcy Code, 2016 with regards to the defaults arising on or after 25^th March 2020 for a time frame of six months, which can be extended upto one year from the notified date. The Ordinance also seeks to insert new clauses, i.e. Section 10A and 66(3) to the Insolvency and Bankruptcy Code, 2016.

Rationale behind the move

The Ordinance was a part of the Atmanirbhar Package that was announced by the Finance Minister in order to provide relief to the companies at the verge of insolvency.[3] The ministry announced that no insolvency filings can be done for one year. But it is worth noting that only the fresh filings have been suspended for six months. There are various reasons from government’s end in order to make such a move during this pandemic.

It is evident that COVID has affected the financial markets and businesses not only in India but across globe too, which has further resulted in stress and uncertainty beyond their control. The imposed nationwide lockdown for a longer time has aggravated the situation, with low demand which adds fuel to fire. During such times, it is difficult to trace sufficient number of resolutions applicants to save persons in corporate sector. Hence, it is expedient and beneficial to exclude such defaults during these unprecedented times.

Issues in the Ordinance: Unfinished Challenges

Insertion of Section 10A: A Fallacy?

Section 10A of IBC, 2016 elucidates,

“10A. Notwithstanding anything contained in Sections 7, 9 and 10, no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed for any default arising on or after 25th March, 2020 for a period of six months or such further period, not exceeding one year from such date, as may be notified in this behalf.

Provided that no application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the said default occurring during the said period.

Explanation: For removal of doubts, it is hereby clarified that the provisions of this section shall not apply to any default committed under the sections before 25th March, 2020.”

There lies an ambiguity in the expression “no application shall eve be filed” as stated in proviso to the Section. It cannot be interpreted in the sense that relaxation of clause is available even after the prescribed time ends. If such interpretation is given impetus, it would run counter. An endless protection to corporate debtor would raise his pedestal and incentivize him to increase defaults in the prescribed periods and benefit from enduring abatement. But this might not be the intent and idea of law behind this provision. Hence, this calls for a clarity on the interpretation of the proviso.[4] Under Sections 7, 9, 10 of the Code, Ordinance on one hand, is suspending filing of proceedings, whereas, on the other hand, it states that it will remain suspended eternally. If the intention of Ordinance is loud and clear, i.e. to suspend the proceedings for certain period of time, then what shall be the use of proviso which calls for perpetual suspension? This indicates the poor harmonious construction of the provisions. Also, the tweet of Insolvency and Bankruptcy Board of India runs counter to the argument when they emphasized that default during pandemic cannot be a basis for initiating insolvency at any time.[5] The Honorable Supreme Court in J.K. Industries Ltd. v. Chief Inspector of Factories and Boilers emphasized 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”.[6]

Therefore, the conundrum between the section and proviso must be resolved to provide a clear picture rather than contradicting notions.  

Channelize abysmal for Corporate Debtors

The provision prima facie infers that no applications can be sought to initiate insolvency resolution of a corporate debtor can be filed in circumstance where the default has arisen on or after 25^th March 2020 for a minimum of 6 months. In situation wherein the corporate insolvency resolution begins after 25^th March 2020, the same can be extended upto a maximum of 12 months (up till 24^th March 2021) in case of a default. Nevertheless, the exact time frame i.e. window of reprieve to be given to the corporate debtor has not been notified until yet, which must seek to be lucid and clear.

Silent on framework for Micro Small and Medium Enterprises

The Ordinance is silent on any special insolvency resolution for Micro Small and Medium Enterprises covered under Section 240 of the Insolvency and Bankruptcy Code 2016. The Micro Small and Medium Enterprises are also considered as a pipeline in the Atmanirbhar reforms as announced by finance ministry. Therefore, with the formulation of provisions for such enterprises in the ordinance would ease the doing of business in this sector.

Paradox of minimum threshold in default

There persists a debate regarding the nature of the notification dated 24^th March 2020 which raised the minimum threshold limit in case of default from Rs 1 Lakh to 1 Crore.[7] It is unclear whether the notification is prospective or retrospective in nature. National Company Law Tribunal of Kolkata and Chennai Benches in their orders on M/S Foseco India Ltd. v. M/S Om Boseco Rail Products Ltd.[8] and M/S Arrowline Organic Products Pvt. Ltd. v. M/S Rockwell Industries Ltd[9] respectively have provided their opinion on the same. After taking into consideration the text of the notification and provisions, it opined that the law does not bestow any power on the delegate to issue impugned notification with a retrospective effect. They explicitly held that the notification is ‘prospective’ in nature, unless held as retrospective. Hence, they allowed the pending suits before the adjudicating bodies to attain a reasonable and logical conclusion.

Amendment in Section 66 of IBC, 2016

Section 66 of IBC, 2016 provides for the right of the Resolution Professional to file an application against corporate debtor’s business being carried out with the intention to defraud the creditors. The Ordinance amends the Act and inserts Clause (3) in Section 66. The new clause states,

“Notwithstanding anything contained in this section, no application shall be filed by a resolution professional under sub-section (2) in respect of such default against which initiation of corporate insolvency resolution process is suspended for Section 10A.”

The provision in reality relaxes wrongful trade provisions. It bars the resolution professionals from filing any wrongful trade application against directors of the company wherein the process of IBC is suspended. This raises a matter of concern. However, this was essential since a lot of changes will be done in the loan structure of the corporate debtor in order to alleviate disruption to be caused by this pandemic which definitely will change the priority of creditors under Section 53 of IBC, 2016.[10]

Creditors at disadvantage?

The moratorium provided by the Apex Bank for six months adds to the security of corporate debtors from financial creditors. This Ordinance is likely to have negative impact on the operational creditors. The Ordinance leaves the operational creditors who had issued demand notice before the amendment in a confusion state. The Preamble[11] of IBC aims to maximize the value of the assets of the corporate debtor. Insolvency and Bankruptcy Board of India’s quarterly newsletter (Oct.-Dec. 2019)[12] clearly spells how sum realized by creditors through insolvency process is way less than the admitted claims. For instance, in CIRP of Ambey Iron Pvt. Ltd.[13] the total claims admitted by the financial creditors was 218.55 crore and liquidation money amounted to 5.63 crore whereas the actual amount realized was just 11.3 crore. This sheds light on the fact that despite the huge amount of value claimed, the amount realized was small due to unfavorable financial conditions. Hence, this again proves to be disadvantageous for creditors. Also, liquidation in general is considered as a last resort to keep the company going. In Y Shivaram Prasad v. S Dhanapal & Ors.[14], NCLAT stated that, “efforts must be made to keep the company as a going concern”. Therefore, the continuation of Section 7, 9, 10 would promote liquidation instead of reorganization of corporate debtor which ultimately contravenes the objective of the Code.

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Alternatives during uncertainty

With this, not all the doors for a creditor is closed. The financial creditor can go for restructuring or rearrangement schemes such as One-Time Settlement (OTS) or under Section 230 of the Companies Act, 2013[15]. They also have the option to pursue for inter-creditor agreement as noted in Reserve Bank of India’s circular dated 7^th June 2019 which talks about ‘Prudential Framework for Resolution of Stressed Assets’.[16] They are also allowed to file application against the debtor under DRT as specified in SARFAESI Act of 2002. The Optional Creditors, on the other hand, may recover debts under Order XXXVII of the Code of Civil Procedure, 1908 or file recovery suit under of civil nature under Commercial Courts Act, 2015 or seek remedies under MSME Act 2006 and sought arbitration under Arbitration and Conciliation Act, 1996, though subjected to the clause in agreement. Also, the debtors whose rights cease with the Ordinance are free to avail remedies like voluntary liquidation under IBC and wind up under Companies Act, 2013 read with the corresponding rules.

[1] Indian Const. art. 123, http://legislative.gov.in/sites/default/files/coi-4March2016.pdf.

[2] The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020, Insolvency and Bankruptcy Board of India, https://ibbi.gov.in//uploads/legalframwork/741059f0d8777f311ec76332ced1e9cf.pdf.

[3] Finance minister announces government reforms and enablers across seven sectors under Atmanirbhar Bharat Abhiyaan, Press Information Bureau, https://pib.gov.in/PressReleasePage.aspx?PRID=1624661.

[4] IBC Amendment Ordinance, 2020: No fresh insolvency for default after lockdown declaration, New Indian Express, https://www.newindianexpress.com/business/2020/jun/08/ibc-amendment-ordinance-2020-no-fresh-insolvency-for-default-after-lockdown-declaration-2153907.html#:~:text=By%20virtue%20of%20the%20said,arising%20on%20or%20after%2025.03.

[5] Tweet by Insolvency and Bankruptcy Board of India, https://twitter.com/IBBIlive/status/1268932122519060480.

[6] J.K. Industries Ltd. v. Chief Inspector of Factories and Boilers, (1996) 6 SCC 665.

[7] Govt raises default threshold to Rs 1 cr for invoking insolvency proceedings against firms, The Economic Times, https://economictimes.indiatimes.com/news/economy/policy/govt-raises-default-threshold-to-rs-1-cr-for-invoking-insolvency-proceedings-against-firms/articleshow/74796076.cms.

[8] M/S Foseco India Ltd. v. M/S Om Boseco Rail Products Ltd., IBC Laws, https://ibclaw.in/case-name/foseco-india-limited-vs-om-boseco-rail-products-limited/.

[9] M/S Arrowline Organic Products Pvt. Ltd. v. M/S Rockwell Industries Ltd, IBC Laws, https://ibclaw.in/wp-content/uploads/2020/06/Ms-Arrowline-Organic-Products-Pvt-Ltd.-Vs.-Ms-Rockwell-Industries-Ltd.pdf.

[10] P Nagesh, Akshay Sharma, IBC Ordinance 2020: Calibrated approach and contradiction, SCCOnline, https://www.scconline.com/blog/post/2020/06/20/ibc-ordinance-2020-calibrated-approach-contradiction/.

[11] Insolvency and Bankruptcy Code, 2016, Acts of Parliament, No. 31 of 2016, http://www.mca.gov.in/Ministry/pdf/TheInsolvencyandBankruptcyofIndia.pdf

[12] The quarterly newsletter of the Insolvency and Bankruptcy Board of India, October- December 2019, Vol. 13,  Insolvency and Bankruptcy Board of India, https://ibbi.gov.in/uploads/publication/62a9cc46d6a96690e4c8a3c9ee3ab862.pdf

[13] Oriental Bank of Commerce v. Ambey Iron Pvt. Ltd., NCLT (Mumbai Bench), MA 82 of 2019 in CP No. 1704/I&BC/MB/MAH/2017, https://resolutionbazaar.com/attachments/ambey-iron-private-limited-pdf.1324/.

[14] Y. Shivaram Prasad v. S. Dhanapal & Ors., Company Appeal (Insolvency) No. 224 of 2018, (NCLAT, Delhi), https://nclat.nic.in/Useradmin/upload/212469115c8a433965360.pdf

[15] Section 230, Companies Act, 2013; Power to compromise or make arrangements with creditors and members.

[16] Prudential framework for resolution of stressed assets, Reserve Bank of India, https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11580&Mode=0.