Insolvency and Bankruptcy Code

The Insolvency and Bankruptcy Code, 2016

PART II
Insolvency Resolution and Liquidation for Corporate Persons

CHAPTER II
Corporate Insolvency Resolution Process (CIRP)

Section 10A of IBC – A ‘Lakshman Rekha’ for Filing CIRP

 

On 5th June 2020, an Ordinance titled “Insolvency And Bankruptcy Code (Amendment) Ordinance 2020” came to be promulgated by insertion of Section 10A which has practically suspended the applicability of Section 7, 9, and 10 of the Insolvency & Bankruptcy, 2016 (“the Code”) for initiation of fresh bankruptcy proceedings against persons impacted because of COVID-19, for at least six months, up to a maximum of one year.

 

Reason for the introduction of Section 10A-

The Ordinance was promulgated taking into consideration the extraordinary situation prevalent all over the world, including India impacting business, financial markets, and economy which had created uncertainty and stress for business for reasons beyond the control of corporate persons, hence the suspension of the IBC proceedings by virtue of section 10A of I & B Code 2016.

In view of the above, it has suspended insolvency proceedings under the Code for up to a period of 1 year.

 

Section 10 A to be read as-

“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 the corporate insolvency resolution process of a corporate debtor for the said default occurring during the said period.

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

 

POINTS OF CONSIDERATION:  

  1. Section 10A provides that “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 this period, as may be notified in this behalf”.

This means that these provisions shall remain suspended from March 25, 2020, to September 25, 2020, unless extended for another six months, which would extend the suspension up till March 25, 2021.

However, the proviso to the section states that 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 a period. The role of a proviso in a statute is to restrict the application of the main provision under exceptional circumstances.

  1. Six months suspension of CIRP under Ordinance runs parallel to six months moratorium period permitted by the Reserve Bank of India, providing relief to borrowers amidst lockdown, however, it only covers financial creditors.

So, the Ordinance only deprives certain financial creditors and operational creditors which include MSMEs from initiating CIRP under the Code. In such circumstances, the only feasible option remains with an operational creditor is to file a civil suit for recovery of debt or to go back to section 230 of the Companies Act, 2013 in order to compromise or make arrangements with the creditors as per the provision.

 

Conclusion:

The Ordinance is well-intentioned and a positive step towards protecting corporate in the stage of the pandemic, however as stated hereinabove the ambiguities associated with the drafting of section 10A give rise to more questions than answers. As of now, the only things it succeeds in clarifying is the suspension of CIPR against default occurring in Said Period for six months, what will happen to default after the suspension of Said Period or to default occurred before Said Period, still remains entirely unclear. The picture will be clearer after the Supreme Court examines the validity of the Ordinance.

 

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