Context: The President of India promulgated an ordinance suspending the Insolvency and Bankruptcy Code (IBC) for a period of at least six months from 25 March, 2020 to protect businesses from being dragged to bankruptcy courts.
- Hours after India went into lockdown, the Finance Minister announced a slew of measures to alleviate the economic crisis.
- This included proposed changes to the Insolvency and Bankruptcy Code (IBC), 2016, a law enacted to bring about smooth and quick resolutions for companies facing insolvency and bankruptcy with a view to primarily avoiding liquidation.
- The coronavirus pandemic has caused uncertainty and stress for businesses for reasons beyond their control.
- Thus it was expedient to exclude defaults arising on account of the current unprecedented situation from IBC proceedings.
- Finally, on June 5, the government promulgated an ordinance which inserted Section 10A in the IBC.
About the Ordinance:
- The IBC (Amendment) Ordinance says that no business can be taken to bankruptcy tribunals for defaults during the period of the IBC’s suspension.
- It introduces Section 10 A under the Insolvency and Bankruptcy Code, with the objective of suspending Section 7, Section 9 and Section 10 of the Code, 2016 dealing with initiation of Corporate Insolvency Resolution Process (CIRP).
- Section 7 allows a financial creditor to file for initiating the corporate insolvency resolution process against a corporate debtor.
- Section 9 provides for application of insolvency by an operational creditor, while Section 10 is for initiation of insolvency proceedings by a corporate applicant.
- This suspension denotes a bar on the ability of a financial creditor, operational creditor and a corporate applicant seeking initiation of CIRP.
- The IBC suspension is applicable for a period of six months or such further period, not exceeding one year from such date.
- The suspension will not apply to any corporate default committed before 25 March,2020.
- No opportunity to Restructure Companies - As per experts, while pausing fresh bankruptcy proceedings could give a breather to many companies, it could also deprive lenders the opportunity to restructure certain companies which may be beyond redemption.
- Ambiguity regarding Proviso of Section 10 A - It states no application for insolvency resolution 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 to provide complete amnesty under the IBC for any default occurring during such period.
- Further the proviso does not appear to be legally tenable.
- As creditors can still approach courts, and as banks/FIs can still approach Debt Recovery Tribunals.
- Voluntary Resolution - Section 10A also suspends provisions of Section 10 of the IBC which enables voluntary insolvency resolution.
- This is difficult to understand as such voluntary insolvency resolution should have been made easier for companies facing distress.
- Nature of default - The ordinance appears to consider every default occurring during the suspension period to be a consequence of the pandemic.
- There could be cases where defaults were imminent due to other reasons, but which will now still enjoy this protection.
- The ordinance should have protected only such defaults which may occur as a direct consequence of the pandemic or the lockdown and should have left this determination to the National Company Law Tribunal.
- MSME Challenge - Earlier, the government increased the minimum default amount to trigger corporate insolvency resolution from Rs.1 lakh to Rs. 1 crore.
- This was purportedly done to protect MSMEs from insolvency petitions.
- However, this also operates against such MSMEs because they will now be forced to approach civil courts to recover undisputed debts below Rs. 1 crore.
- The suspension of these provisions would now impact even claims above Rs.1 crore for at least six months to a year.
The ordinance has opened itself up to a legal challenge on grounds of arbitrariness and untenability of the proviso due to the flaw in its drafting.
- An important clarification on ambiguous provisions needs to be given as blanket suspension of Insolvency and Bankruptcy Code would be a regressive move.
Insolvency and Bankruptcy Code:
- The Insolvency and Bankruptcy Code, 2016 (Code) sets out a time-bound insolvency resolution process for defaulting corporate debtors.
- It introduces a creditor-in-possession model whereby a committee of creditors (CoC) is constituted to take decisions regarding the operations of the corporate debtor, including evaluating prospective resolution plans for resolving the corporate debtor's account.
Salient Features of IBC
- It applies to both individuals and companies.
- Earlier it provided for a 180-270 days period to resolve insolvency but now the deadline of 330 days has been set for completion of the corporate insolvency resolution process (CIRP), including litigation and other judicial processes.
- It provides immunity to the debtors from claims of resolution by creditors during this period of resolution.
- It provides for a common platform of debtors and creditors of all classes to resolve insolvency.
Bodies under the code:
- The Insolvency and Bankruptcy Board of India (IBBI) – An apex body for promoting transparency & governance in the administration of the IBC.
- It will be involved in setting up the infrastructure and accrediting IPs (Insolvency Professionals (IPs) & IUs (Information Utilities).
- It has 10 members from the Ministry of Finance, Law, and RBI.
- Insolvency professionals: It will be a cadre of licensed professionals.
- They will be tasked with the administration of the resolution process and management of debtor’s assets,
- Also will act as a source of information to creditors in order to help them in decision making.
- Information Utilities: The utility would specialise in procuring, maintaining and providing/supplying financial information to businesses, financial institutions, adjudicating authority, insolvency professionals and other relevant stakeholders.
- In 2017, National e-Governance Services Ltd (NeSL) became India’s first information utility (IU).
- Insolvency Professional Agencies: It registers insolvency professionals.
- The agencies conduct examinations to certify insolvency professionals and enforce a code of conduct for their performance.
- Adjudicating Authorities:
- National Company Law Tribunal (NCLT) – The adjudicating authority (AA), has jurisdiction over companies, other limited liability entities.
- Debt Recovery Tribunal (DRT) has jurisdiction over individuals and partnership firms other than Limited Liability Partnerships.
- The responsibilities of the authorities include:
- approval to initiate the resolution process
- appoint the insolvency professional,
- approve the final decision of creditors
Source: Economic times
- If the debtor goes into liquidation, an insolvency professional administers the liquidation process.
- Following the order of precedence, in which Proceeds from the sale of the debtor’s assets are distributed:
- Insolvency resolution costs, including the remuneration to the insolvency professional,
- Secured creditors, whose loans are backed by collateral, dues to workers, other employees,
- Unsecured creditors,
- Dues to government,
- Priority shareholders and
- Equity shareholders.
Ordinance making power of President:
- An ordinance is an authoritative order or decree or an ephemeral (existing for a short duration of time) law that is promulgated by the President of India on the recommendation of the Union Cabinet.
- Article 123 of the Indian Constitution empowers the President to promulgate an ordinance when the Parliament is in recess.
- It is a very important legislative power of the President of India.
- An ordinance can only be promulgated when:
1. Both the Houses of the Parliament are not in session or even when one of the houses is not in session or is prorogued. This is because the bill needs to pass through both the houses before it can be presented for Presidential assent.
2. He is satisfied that the circumstances that exist call for an immediate action in form of an ordinance.
- Ordinance is co-extensive with Parliamentary Legislative Powers i.e ordinance can be promulgated only on subjects on which Parliament can make a law.
- Ordinances must be approved by Parliament within six weeks of reassembling or they shall cease to operate.
- They will also cease to operate in case resolutions disapproving the Ordinance are passed by both the Houses.