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Section 10 A – Suspending IBC proceedings until further notice

Section 10 A – Suspending IBC proceedings until further notice

Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “The Code”) was implemented over four years back. Since then, it has also been amended three times. The Code has been a subject of debate for years which is addressed by the concerned authority from time to time. However, in the recent couple of months, the implementation of the Code has been a matter for discussion in the Union Cabinet.

Changes to Insolvency & Bankruptcy due to COVID notified in March 2020

The implementation of the Code has observed certain changes due to COVID-19 since March 2020. Summary of these changes are as follows;

  • The minimum threshold of default amount is now INR 1 Cr.
  • National Company Law Tribunal (NCLT) shut down for the duration of the lockdown. It deemed insolvency cases to be classified as non-urgent matters.
  • Regulation 40C was notified which exempted any delay in Corporate Insolvency Resolution Process (CIRP) due to COVID-19.
  • Regulation 47A was notified which exempted any delay in the Liquidation process due to COVID-19.

The Code has been under constant dispute for the non-implementation of these changes ever since their announcement. However, seeing the prevailing circumstances of the nation at the time, these changes seemed necessary. The idea behind introducing these changes to the Code was to ensure compliance of its provisions.

For instance, the Code makes the timeline of CIRP very precise. The entire process has to be concluded within 330 days of the commencement date of insolvency. If not done, there are repercussions. Now, due to COVID-19 and the subsequent lockdown, certain activities were inevitably restricted like meetings of the Committee of Creditors. Thus, to prevent violation of the Code, the government introduced these changes. The Finance Minister stated that the Code can foresee changes if the situation of the country remains unchanged after April 30, 2020.

Fifth Tranche of Economy Relief Package announced by Finance Minister in May 2020

The Finance Minister (FM) of India, Ms. Nirmala Sitharaman, introduced tranche packages under Atmanirbhar Bharat Package across the country. These tranches lay down policies that curb the damage done to various financial and economic sectors due to the lockdown. She introduced the package in five phases. The last and fifth tranche described changes to the Insolvency and Bankruptcy Code. The two changes incorporated were as follows;

  1. No fresh insolvency case – Under this, the FM announced that the adjudicating authority will not admit fresh insolvency cases for 1 year. The aim of this provision was to safeguard corporate debtors who did not make payments because of COVID-19.
  2. Minimum threshold of default – Under this. The FM reiterated that the minimum threshold for defaulted payment would increase to INR 1 Cr. She further informed that, MSME’s will be insulated by this provision.

These were the two changes introduced and a proper notification was subject to publish at a later date. The FM, in the Atmanirbhar Bharat Package conference, announced that, the Code will suspend for 1 year and will not authorize fresh cases. She also stated that the default in payment by the corporate debtor, due to COVID-19, would be permanently exempted.

Insertion of Section 10A to the Code

On June 5, 2020, the Ministry of Law and Justice passed The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020, adding a new clause to the Code. This clause will have an overriding effect on provisions allowing creditors to apply for insolvency. Section 7,9,10 and 10A are as follows;

  • Section 7 of the Code empowers the financial creditors of the corporate debtor to file an insolvency application before the adjudicating authority. On admission of the application, the CIRP process commences.
  • Section 9 of the Code empowers the operational creditors of the corporate debtor to file an insolvency application before the adjudicating authority. Before making an application, the operational creditor has to send a demand notice to the corporate debtor u/s 8. If the corporate debtor does not respond in the designated time, then the operational creditor applies u/s 9. On admission of the application, the CIRP process commences.
  • Section 10 of the Code allows the corporate debtor to move an application of insolvency before the adjudicating authority. The corporate debtor has the right to do so in case it starts defaulting in payments.
  • The Code is yet to have Section 10A introduced to it. It will essentially state that insolvency cases filed on or after March 25, 2020, will not be admitted before the adjudicating authority. The Union cabinet has suspended the code for six months. The suspension can remain in force up to one year.

Reason behind introducing the clause

The amendment ordinance amends the Code in two places. Section 10A suspends institution of insolvency proceedings and Section 66 suspends filing of liquidation proceedings.

The aim behind introducing this clause is to provide relief to the corporate debtors. COVID-19 is a situation that is not in control of the corporate debtor. The lockdown has inevitable affected businesses and they are going in losses and defaulting in payments. So, to safeguard the corporate debtors, the government has taken this initiative affirmatively.

The Union Cabinet, on June 3, 2020, made clear that even though, fresh applications will not be instituted, ongoing proceedings will continue. So, the applications instituted and admitted prior to March 25, 2020, would still be considered admitted. However, these proceedings would still fall under the umbrella of changed introduced by the government in March 2020.

It must be noted that, although the introduction of these initiatives is to prevent violation of the Code, there are certain loopholes in their implementation. The subject is a part of an ongoing debate since March 2020 and the Code is yet to have this provision formally inserted. Stakeholders like the Operational Creditors stand to lose the most in such a situation. They are already slightly underprivileged in the insolvency proceeding anyway, but now, they will face greater problems.