Part-III:
Covid-19 & Modi 2.0’s Relaxing the Rigours of the Insolvency and Bankruptcy
Code
Modi
1.0’s Landmark Enactment of IBC, 2016:
One of the most laudable and bold achievements of the
Modi 1.0 dispensation was to enact and enforce the Insolvency and Bankruptcy
Code, 2016 (“IBC”) w.e.f. December
1, 2016. IBC consolidated and amended the laws relating to reorganization and
insolvency resolution of companies, partnership firms and individuals in a time
bound manner for maximization of value of assets of such persons with an
objective “to promote entrepreneurship,
availability of credit and balance the interests of all stakeholders”. It was touted that IBC was structured on the
lines of the Bankruptcy Act of the United States.
Scheme
of IBC:
Part II of the IBC relates to insolvency resolution
and liquidation for corporate persons, while Part III thereof does the same for
individuals and partnership firms and Part IV thereof envisages the regulation
of insolvency professionals, agencies and information utilities. Against a corporate person who is in default,
a financial creditor is entitled to initiate Corporate Insolvency Resolution
Process (“CIRP”) by filing making an
application under section 7 of the IBC with the National Company Law Tribunal (“NCLT”).
An operational creditor can also file similar application under section 8.
A corporate person can voluntarily file
an application for initiating CIRP against itself under section 10. The CIRP has to be completed within a period
of 180 days from the date of admission of the application to initiate such
process, which period can be extended by the NCLT up to 90 days, upon an application
made by a resolution professional, in terms of section 12 of the IBC. After admission of the application under section
7 or 9 or 10, the NCLT shall pass an order declaring moratorium and to cause
public announcement of the initiation of CIRP and call for the submission of
claims and the appointment of an Interim Resolution Professional (“IRP”).
In terms of section 14, the moratorium prohibits- (a) the initiation or
continuation of suits or proceedings against the corporate debtor including
execution of any judgement, decree or order in any court of law, tribunal,
arbitration panel or other authority; (b) transferring, encumbering, alienating
or disposing of by the corporate debtor of any of its assets; (c) any action to
foreclose, recover or enforce any security interest created by the corporate
debtor in respect of its property including under the SARFAESI Act, 2002; (d)
the recovery of any property by an owner.
The IRP is entitled to manage the affairs of the corporate debtor under
section 17 and to carry out the duties enjoined on his under section 18 of the
IBC. Per section 21, the IRP is required
to collate all claims received against the corporate debtor and determine its
financial position and thereupon constitute a Committee of Creditors (“CoC”).
There is also provision to appoint a Resolution Professional (“RP”) who can be the same IRP or any
other person as approved by the CoC. The
RP shall conduct the entire CIRP and manage the operations of the corporate debtor
during the said period in terms of section 23 and discharge the duties cast on
him under section 25 of the IBC. The RP
prepares an Information Memorandum (“IM”)
for formulating a resolution plan in terms of section 29 and a resolution
applicant may submit a resolution plan on the basis of the IM prepared by the
RP, which will be presented before the CoC for its approval in terms of section
30 of the IBC. Once the resolution plan
approved by the CoC is filed before the NCLT, it shall approve the resolution
plan under section 31 which becomes binding on the corporate debtor, its
employees, members, creditors, guarantors and other stakeholders involved in
the resolution plan. In case no
resolution plan is received by the NCLT within the stipulated timeframe or if
it rejects the resolution plan for being non-compliant with the provisions of
IBC, then, the NCLT shall pass an order under section 33 to liquidate the
corporate debtor by issuing a public announcement in which case a liquidator
shall also be appointed to exercise the powers vested on him under section 35 of
the IBC. The liquidator consolidates and
verifies the claims against the corporate debtor so as to admit or reject the
claims and determine the valuation of claims.
In terms of section 53 of the IBC, the proceeds from the sale of the
liquidation assets of the corporate debtor shall be distributed in the order of
priority mentioned thereunder and upon completely liquidating the assets of the
corporate debtor, it shall be dissolved by making an application under section
54 before the NCLT. Voluntary
liquidation by a corporate person is also envisaged under section 59. Appeals against the orders of the NCLT shall lie
with the National Company Law Appellate Tribunal (“NCLAT”) under section 61 and any one aggrieved by the orders of NCLAT
may file an appeal before the Supreme Court on a question of law arising out of
such order in terms of section 62 of IBC.
IBC has ousted the jurisdiction
of civil courts in terms of section 231 and the provisions of the IBC shall
override other laws in terms of section 238 of the IBC. IBC also amended the provisions of the Indian
Partnership Act,1932; the Central Excise Act, 1944; the Income Tax Act, 1961; the
Customs Act, 1962; the Recovery of Debts due to the Banks and Financial
Institutions Act, 1993; the Finance Act, 1994, the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002, the Sick Industrial Companies (Special Provisions) Repeal Act, 2003, the
Payment and Settlement Systems Act, 2007, the Limited Liability Partnership
Act, 2008 and the Companies Act, 2013 so as to either delete or modify their
provisions in relation to the matters envisaged under the IBC.
Track
Record of the IBC:
While upholding the constitutional validity of the IBC
in Swiss Ribbons Pvt. Ltd. and ors vs.
Union of India (2019)4 SCC 17, the Supreme Court hailed this piece of
legislation introduced by the Modi 1.0 as it had practically helped in the
timebound resolution of CIRP and the resultant repayment of financial debts infused
capital into economy as banks and financial institutions were able to apply the
money that had been paid back to them to further on-lend to other entrepreneurs
for their businesses.
However, with the outbreak of the Covid-19 global
pandemic, the banking industry in our country apprehended that there would not
be adequate resolution applicants in the country and when the corporate debtor is put through
a CIRP or liquidation process, the chances of the financial creditors receiving
even a fair value of money through either of the processes would get seriously jeopardized
and therefore appealed to the Government of India to suspend the operations of
section 7, 9 and 10 of the IBC for a period of two years.
Covid-19
& Relaxing the Rigours of IBC:
In the wake of the lockdown announced by the Ministry
of Home Affairs, there was a flurry of activities unleashed by the Modi 2.0 to
ensure that the MSME sector and the rest of the corporate sector is afforded the
much needed relief, support and rehabilitation in the face of loss of revenues,
stagnation of finished goods and deterioration of the work in progress, en masse exodus of migrant labour
deserting their workplaces, all emanating from the closure of factories,
workplaces and offices and the clampdown on the entire supply chain and
logistics and all modes of transportation.
The Modi 2.0 Government readily came forward to extend force majeure condition to the outbreak
of Covid-19 so as to ensure that contractors do not end up in default in
relation to all supply contracts with the Government(1). For its part, the
Reserve Bank of India (“RBI”) had
declared and extended moratorium on term loans and working capital facilities
effectively for a period of 6 months(2). In order to effectively protect the majority
of the corporate entities falling under the MSME sector from being hauled up
for defaults before the NCLT, the Modi 2.0 enhanced the pecuniary applicability
of defaults under the IBC from a minimum of Rs.1.00 lakhs to Rs.1.00 crores(3).
This was aimed at preventing the filing of CIRP applications against
MSMEs for alleged defaults of any amount less than One Crores Rupees.
The Supreme Court acting suo motu W.P.(C) No.3/2020 had declared on 23.03.2020 that limitation
period for all filing matters before any court, tribunal or appellate
authorities shall stand extended till the period of lockdown subsists. For the purposes of IBC, the entire period of
lockdown was directed to be excluded for any activity that could not be
completed due to such lockdown in relation to a CIRP, notwithstanding the
timelines prescribed under the Regulations(4).
Akin to the effect granted to the CIRP,
in relation to the liquidation process also the entire period of lockdown in
the wake of Covid-19 was directed not to be computed for the purposes of
completion of tasks that could not be completed due to such lockdown in
relation to any liquidation process under the IBC. The NCLAT directed that for all cases in
which CIRP has been initiated and/or is pending before any bench of the NCLT or
in appeal before NCLAT, the entire
period of lockdown, including their extended periods would stand excluded for
the purpose of determining the outer-limit of 330 days within which a CIRP is
required to be completed as per section 12 of the IBC and that all its earlier interim
orders/stay orders passed by it under IBC will continue until further orders(5).
The NCLT vide its notification dated March 15, 2020 directed that
all its benches will only take up matters which require urgent hearing and all
other matters will be adjourned and on March 22, 2020, it directed the closing
of all benches of NCLT for judicial work until April 14, 2020 which was further
extended up to May 3, 2020 in view of Covid-19. The above had the effect of
enlarging the period of limitation for filing and also overcame the period statutorily
prescribed for CIRP and liquidation processes which was further fortified by
denying the fresh filing or the adjudication of applications before the NCLT
and NCLAT during the lockdown periods which had the cumulative relief of
providing the much needed reprieve to the corporate persons against any default
applications from being filed against them during the global pandemic.
In addition the moratorium on term loans and working
capital facilities earlier unveiled by it, the RBI permitted the extension of
timeline for resolution of large accounts default by adding additional 90 days
to the earlier available 210 days in relation to the Prudential Framework of
Resolution of Stressed Assets dated June 7, 2019 such that the banks, lending
institutions and NBFC do not immediately initiate the mechanism under the IBC(6) and subsequently modified it to the
effect that the lending institutions my exclude the entire moratorium/deferment
period from March 1, 2020 to August 31, 2020 from the calculation of 30-day
Review Period or 180-day Resolution Period in relation to the said Prudential
Framework, if the Review /Resolution Period had not expired as on March 1, 2020(7).
The effect of the same was to afford a longer period to such
borrowers of large ticket debts from being pursued in terms of the IBC.
Ordinance
to Amend IBC:
The Modi 2.0 Government signaled its intention to
suspend the operation of sections 7, 9 and 10 of the IBC (which enables the
filing of application for CIRP) for a period of 6 months to prevent companies
being pushed into CIRP in the event the lockdown were to be extended beyond
April 30, 2020(8). Recognising that the Covid-19 pandemic has
impacted business, financial markets and economy all over the world, including
India, and created uncertainty and stress for business for reasons beyond their
control and as the lockdown in force since March 24, 2020 has led to disruption
of normal business operations and in such a backdrop it is becoming difficult
to find resolution applicants to rescue the corporate persons who end up in
default in discharge of their debt obligations, in view of the unprecedented
situation, considering it expedient to suspend the operation sections 7, 9 and
10 of the IBC, an Ordinance was passed on June 5, 2020(9). This Ordinance
introduced a new Section 10A, as a non
obstante provision to IBC, inter alia,
to the effect that no application for initiation of CIRP under sections 7, 9 or
10 of the IBC shall be filed for any default arising on or after March 25, 2020
for a period of 6 months or such further period, not exceeding one year from
such date as to be notified in that behalf.
The proviso to the said section clarifies that for any defaults arising
during this period no applications for initiation of CIRP shall ever be filed,
which is intended to dispel the tendency to file such application even after
the suspension period may be over.
However, the explanation appended to this section clarifies that nothing
contained in the said section will apply to defaults which have been committed
in relation to sections 7, 9 or 10 prior to March 25, 2020.
Through the said Ordinance, a new subsection (3) was
inserted to section 66 of IBC to provide that notwithstanding anything to the
contrary contained in the said section, no application shall be filed by
resolution professional in respect of such default against which initiation of
CIRP has been suspended in terms of section 10A of the IBC. Thus, the effect of the Ordinance appears to
not only prohibit the filing of any application for initiation of CIRP in
relation to defaults under section 7, 9 or 10 of IBC, but, also to disentitle
the filing of any resolution application in respect of such defaults which have
been suspended in terms of section 10A.
It would be evident that the Modi 1.0 had unveiled a laudable
piece of legislation aimed at timebound resolution of insolvency and bankruptcy
in our country and when it was faced with the onslaught of the Covid-19
pandemic, the Modi 2.0 did not fight shy to relax the rigours of the provisions
of the IBC by suspending the right to initiate CIRP, regulators like RBI, NCLT
and the NCLAT acted in tandem to further provide relief to the corporate sector
by extending the limitation period and to enlarge the time period for
completion of the CIRP and the liquidation processes and the Ordinance also
laid to rest the lack of the legislative sanction by suspending the right to
initiate CIRP during the Covid-19 period.
End
Notes:
1.
Office Memorandum No.F.18/4/2020-PPD dated February 19, 2020 of the Ministry of
Finance, Government of India.
2.
For more details on this subject, see my earlier post dated June 6, 2020 in
this blog.
3.
Notification No.S.O.1205(E) dated 24.03.2020 of the Ministry of Corporate
Affairs, Government of India.
4.
Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for
Corporate Persons) (Third Amendment) Regulations, 2020 notified on March 29,
2020.
(5)
Order dated March 30, 2020 passed by NCLAT in Suo Motu – Company Appeal (AT)(Insolvency) No.01/2020.
(6)
RBI Governor’s Statement,
April 17, 2020 and RBI reference No.2019-RBI/2019-20/220
DOR.No.BP.BC.63/21.04.048/2019-20 dated April 17, 2020.
(7) RBI Press Release No.2019-2020/2392 dated May 22,
2020.
(8) Press Release dated March 24, 2020 of the
Government of India.
(9) The Insolvency and Bankruptcy Code (Amendment)
Ordinance, 2020, No.9 of 2020 notified on June 6, 2020.
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