Analysis of Insolvency and Bankruptcy Amendment Ordinance 2020

The Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “The Code”) was amended on June 5, 2020, through promulgation by the President of India. The widespread of the pandemic COVID-19 has created inconsistencies in the operational and financial mechanisms in the business sector worldwide. The amendment ordinance and changes were introduced to the Code to prevent businesses from going into financial distress. One of the Code’s primary features is to revive the corporate debtors from the financial defaults and the amendment ordinance intends to do just that. This article will make an analysis of the amendment ordinance, 2020 and the impact of the same. The ordinance primarily deals with two fresh amendments to the Code;

Insertion of Section 10A – deals with suspension of insolvency proceedings for six months.
Insertion of Section 66(3) – deals with filing of an application by the Resolution Professional in case of fraudulent trading and wrongful trading.

Other than the abovementioned, this article will also discuss the possible scenarios when a creditor can apply for insolvency against the corporate debtor and otherwise.

Section 10A

Section 10A essentially suspends the Code for fresh insolvency applications before the Adjudicating Authority for six months. The period of suspension of proceedings is from March 25, 2020, until September 24, 2020, at present. The ordinance also clearly mentions that the suspension can be extended for six months more but the total period of extension cannot exceed one year. The ordinance prohibits initiation Corporate Insolvency Resolution Process (CIRP) against a corporate debtor, for repayment of default occurring during the suspension period, in the future. This proviso of the ordinance is ambiguous and opens a scope for debate. Proviso of the Section 10A declares the words “no application shall ever be filed”. This provision, if sustained for the period beyond the suspension of the Code, incentivises the debtor. The corporate debtor could take undue advantage of non-payment of debts and try to bring the default under the umbrella of the suspension period. The Code does not provide a proper explanation of the consequences of such a situation. If such a situation does arise, it will go against the moral and ethical code of the law.

Explanation

Further, the ordinance also gives an explanation to Section 10A wherein it clarifies that the applications instituted before March 25, 2020. The explanation states that the Code will not stay suspended for the insolvency applications admitted before the adjudicating authority prior to March 25, 2020. This fundamentally means that the insolvency regime will apply as it is to application admitted before the said date, and the proceedings will carry on in accordance with the Code. However, the explanation also puts forward another question pertaining to its implementation. Whether the Regulation published by the government in March 2020, stating that insolvency proceedings hampered due to COVID-19 would not contribute to lapse in timeline, sustain? The answer to this question is, yes. The timeline of CIRP will remain unprejudiced due to non-performance of CIRP activities during the period of lockdown.

Section 66(3)

Section 66(3) is the direct continuation of Section 66(2) of the Code. The said section describes the consequences of actions where fraudulent trading or wrongful trading has occurred. The provision lays down the following elements;

If the resolution professional finds that the debtor carried out fraudulent and wrongful trading practices, to defraud creditors, it can apply to the adjudicating authority.
The adjudicating authority, on receiving the application, can pass an order that makes all the involved parties liable towards asset contribution of the corporate debtor.
Section 66(1) imposes liability on all the parties voluntarily involved in fraudulent activities defrauding creditors.
Section 66(2) states that, if the resolution professional files such an application, then the adjudicating authority can pass an order. The order will declare the contribution of the asset against the director of the corporate debtor if;
The director performed fraudulent activities knowing that CIRP can be initiated against the corporate debtor; and
The director was negligent in performing due diligence to minimise loss for the creditors.

The amendment ordinance, 2020 has inserted Section 66(3) to the Code puts a condition on the resolution profession. The provision states that the resolution professional cannot file an application under Section 66(2) during such period of suspension of the Code. It is imperative to note that the said amendment talks about actions against fraudulent trading. This is specifically with reference to Section 66(2). It is not referring to Section 66 (1) of the Code.

Status of making an application for insolvency

The amendment ordinance imposes an injunction on the functionality of the Code for a maximum period of one year. This period is starting from March 25, 2020. The suspension of the Code is with reference to the insolvency applications that the creditors and the corporate debtor can file before the adjudicating authority. The concerned provisions are; Sections 7,9 and 10. This gives birth to the following situations and their impact on future in0073olvency applications;

Applications filed before March 25, 2020

The process of CIRP will remain unaffected for such applications. The stages of CIRP will continue to execute as per the procedure established by the Code. The only hiccup that the stakeholders will face is in the timeline. The period of lockdown will not be counted towards the timeline of the process. This means that the maximum timeline for completion of the process of 330 days will be extended inevitably.

Application filed after March 25, 2020

The adjudicating authority will not accept such applications for analysis. The Code is clear about its intention to not admit applications filed after the said date. Thus, the default in payments by the corporate debtor will not attract an application for insolvency and such default will be exempted.

Applications filed after completion of the suspension period

The adjudicating authority will accept such applications for analysis of claims. As per the law in force, the applications filed after the suspension period has ended will be treated according to the original intent of the law. The timeline and stages of corporate insolvency would continue to apply as per the Code.

Applications filed after completion of suspension period for continuing default

The ordinance is silent about such applications. This situation is about the default that originated during the suspension period, but is continuing even after the suspension is over. This is one grey area of the ordinance. This needs clarification from the concerning authorities to prevent from attracting multiple lawsuits. It is understandable as to why the government deemed this step towards the insolvency regime necessary. However, such drastic measures can attract multiple loopholes in the system, like in case of an operational creditor. The operational creditor is unfortunate even in the ordinary course of implementation of the Code. The only benefit it retains is the right to file an insolvency application. Other than this, the operational creditor is not a priority creditor in the code. The changes in, and suspension of the Code can turn out to be even more threatening to the operational creditors including MSMEs.