Insolvency and Bankruptcy Amendment Ordinance June 2020

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Scope of the Ordinance

Applies only to defaults occurring between the period commencing from 25 March 2020 till expiry of 6 months, which may be extended up-to 1 year.

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Blanket Ban for defaults during Exemption Period

Ø  The Ordinance imposes a blanket ban on use of the ‘trigger provisions’, for defaults occurring during the period between 25 March 2020 till the expiry of 6 months, which may be extended up-to 1 year.

Ø  However, there is no blanket ban on filing of applications during this period or after that, for any default occurring before 25 March 2020.

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Non-Linkage to CoVID-19: While the preamble of the Ordinance refers to the impact of the COVID-19 pandemic on businesses, financial markets and the economy, the language appearing in Section 10A does not link defaults to the COVID-19 pandemic. This ensures that unnecessary time shall not be spent by parties proving whether the default is linked to COVID-19, before the adjudicating authority.

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Ban of Voluntary Insolvency: In addition to involuntary insolvency proceedings under Section 7 and 9, the Ordinance has also imposed a ban on initiation of voluntary insolvency process under Section 10, for default during the Exemption Period, which doesn’t seem to be aligned with the intent of the Ordinance. The preamble of the Ordinance suggests that ‘it is considered expedient to suspend Section 7, 9 and 10 to prevent corporate persons experiencing distress, being pushed into insolvency proceedings’. In our view, a prohibition on voluntary insolvency proceedings of a corporate debtor in distress, may result in further deterioration of its assets, implying lesser chances of revival of the corporate debtor and pushing it into liquidation.

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Blanket Ban and Intentional Defaults: Another issue for consideration is, whether exempting the defaults during the Exemption Period may lead to intentional defaults by corporate debtors towards the financial and operational creditors (including employee and workmen), since the recourse to IBC by such creditors for default during the Exemption Period has been permanently taken away.

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Section 66(3): Excusing the Fraud: Considering Section 66 deals with ‘Fraudulent trading or Wrongful trading’, the proposed Section 66(3) seems to be ambiguous. From the current language it seems that it proposes to excuse lack of due diligence by the director or partner of a corporate debtor resulting in a potential loss to creditors of the corporate debtor during the Exemption Period. Such an exemption may result in directors/partners of corporate debtors engaging into unlawful and illegal measures such as misappropriation and siphoning off funds without facing consequences under Section 66 of IBC and may adversely impact the realisable value for its creditors.

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Adjudication of disputes relating to date of default: The date of default is critical as far as the applicability of Section 10A is concerned and may be a disputed question of fact, between the creditor and the corporate debtor requiring adjudication by the adjudicating authority. However, considering that creditors are precluded from filing applications under Section 7 and 9 before the adjudicating authority, it would be interesting to see how disputes relating to date of default are decided.

a.

The flow of financial resource to the commercial sector in India has increased exponentially as a result of financial debts being repaid.

b.

These figures (figures considered by the SC) show that the experiment conducted in enacting the Code is proving to be largely successful.

c.

The defaulter’s paradise is lost. In its place, the economy’s rightful position has been regained.