Introduction
The Government of India (GoI) imposed an absolute lockdown due to the pandemic on March 24, 2020, which was extended multiple times. Graded re-opening commenced only at the end of May 2020 however, certain sectors are yet to be fully functional. This lockdown wreaked havoc over the economic vein of the country and the GoI, in order to mitigate the impact, enforced certain pertinent measures. With an intent to reduce the impact on businesses, the GoI not only increased the threshold of initiating corporate insolvency resolution proceedings from INR One Lakh to INR One Crore and it also suspended initiation of insolvency proceedings pursuant to Sections 7, 9 and 10 the Insolvency & Bankruptcy Code, 2016 (IBC). The GoI mandated the incorporation of Section 10A in the IBC on June 5, 2020 by way of an ordinance1 (Ordinance), which reads as follows:
“Section 10A: 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 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.".
What does the Ordinance entail?
Section 10A of the IBC suspends Sections 7, 9 and 10 of the IBC. Section 7 of the IBC deals with initiation of insolvency proceedings against the corporate debtor by a financial creditor, whereas Section 9 of the IBC deals with initiation of insolvency proceedings against the corporate debtor by an operational creditor and further, Section 10 of the IBC deals with initiation of insolvency proceedings by the corporate debtor against itself.
The proviso to the Section 10A of the IBC prescribes that no insolvency proceedings can ever be instituted against any entity whatsoever for the default caused/committed in the period between March 25, 2020 till September 2020. The GoI was apprehensive that an unprecedented number of insolvency proceedings against struggling businesses would be instituted in case such a provision was not incorporated in the IBC.
ANALYSIS OF SECTION 10A OF THE IBC
The above Section retrospectively provided a bail out to the business sector and allayed the apprehensions of insolvency proceedings in an unprecedent period wherein the economy collapsed, and the world came to a standstill. It is noteworthy that the Rajya Sabha on September 19, 2020 passed the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2020 (Bill), which ensures that fresh insolvency proceedings will not be initiated against a company starting March 25, 2020. The period was for six months pursuant to the Ordinance and the amendment empowered the GoI to extend this suspension for a maximum period of one year. Expectedly, the operation of Section 10A of IBC was extended for three months, upon the expiry of statutory period of six months in September 2020, till December 2020 and for further three months in December 2020, till March 2021, thereby enforcing the suspension of Sections 7, 9 and 10 of IBC for one whole year.2
The intent of the GoI was to safeguard the interests of the distressed businesses and protect them from the ghost of insolvency at a time when the businesses across all the spectrums succumbed to the Covid-19 pandemic.
Section 10A of the IBC, however, is ambiguous and while it endeavors to lend a helping hand to the businesses devasted by the pandemic, it also protects the businesses that have defaulted deliberately, thereby obfuscating the process and affecting the interests of the creditors at large.
Ambiguities & Shortcomings of section 10A of the IBC:
The Ordinance appears to consider every default occurring during the suspension period to be a consequence of the Covid-19 pandemic. There could be cases where defaults were imminent due to other reasons, but which will now still enjoy the arbitrary protection of Section 10A of the IBC. The provision should have protected only such defaults which may occur as a direct consequence of the pandemic or the concomitant lockdown and should have left this determination solely to the National Company Law Tribunal.
A company defaulting on its payment obligations on March 24, 2020 (a day before the lockdown started) would not be provided any relief under the IBC as compared to a company defaulting on or immediately after March 25, 2020 due to similar reasons. This makes the suspension, in the absence of definition of a COVID-19 default, prima facie arbitrary.
Furthermore, the GoI also needs to clarify that whether the default amount accumulated during the suspended period be included in the debt amount of default application, which will be filed at the end of suspended period.
The point of conflict is not the suspension of the insolvency proceedings for one year but the proviso that bars the initiation of insolvency proceedings against a corporate debtor for financial defaults occurred/caused between March 2020 till March 2021. This leaves a void answer to the proceedings after expiry of the said period, that will the default continue and allow the corporate debtor to get away with the ordinance's protection forever?
Section 10 A of the IBC fails to answer whether Section 10A will cover the continuing defaults, the ones which commenced during the suspended period but continues after March 2021? or What will be the course of action if part of the default occurred before March 25, 2020 and the other part of it occurred on or after March 25, 2020?
Suspension of Corporate Insolvency Resolution Process (CIRP) by a Corporate Applicant under Section 10 of IBC.
According to Section 10 of the IBC, the corporate debtor has the option and power to voluntarily file for insolvency proceedings. The suspension of the provision defeats the purpose of the IBC by depriving the corporate debtor of the right to initiate voluntary insolvency proceedings. Thus, it gives no other option to the distressed businesses, especially the ones who wish to avail the benefit of the IBC. Moreover, this is antithetical to the observation made by the Hon'ble Supreme Court of India in Swiss Ribbons Pvt. Ltd. v. Union of India3 wherein it was held that “The primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation”.
Recently, the Hon'ble Apex Court, in Ramesh Kymal v. M/s Siemens Gamesa Renewable Power Pvt. Ltd.- Civil Appeal 4050 of 20204, has clarified that section 10A of IBC bars initiation of CIRP against the debts accrued between March 25, 2020 to the date of enactment of the Ordinance i.e., June 5, 2020, even if an application under sections 7, 9 or 10 of IBC was already filed during the period of March 25, 2020 to June 5, 2020.
Voluntary liquidation under Section 10 of the IBC was a boon for struggling businesses as they could not just initiate the process while they were solvent but could also pay off all the creditors and ensure a proper restructuring of the business. Unfortunately, owing to the suspension of Section 10 of IBC, such businesses have no other option but to wait for the conclusion of the statutory period. However, it is unclear whether an entity can initiate insolvency proceedings against itself after the expiry of the statutory period in March 2021, for the default occurred between the statutory period of March 2020 till March 2021.
Legal challenge
The validity of Section 10A of the IBC was challenged before the Delhi High Court, seeking declaration that the suspension of Section 10 of The Insolvency and Bankruptcy Code, (Amendment) Ordinance, 2020 as ultra vires Articles 14 and19(1)(g) of the Constitution of India. However, as the ordinance was transposed into an Act with effect from September 23, 2020, the Public Interest Litigation was deemed to be infructuous and hence withdrawn by the Petitioner. (Rajeev Suri v. Union of India - W.P.(C) 4622/2020).5
Another challenge to the legal validity of Section 10A of the IBC has been made before the Delhi High Court on the ground that it discriminates against persons and personal guarantors, as while the provision suspends the enforcement of sections 7, 9 and 10 of the IBC against corporate debtors, it excludes persons and personal guarantors from its ambit. (Getamber Anand v. Union of India – W.P. (C) 8868/2020)6
Alternate remedies
With suspension of IBC, the creditors would have to return to the archaic remedies such as Section 19 of Recovery of Debts due to Bank and Financial Institution Act,1993; Section 13 and Section 14 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002. In addition, creditors can look upon remedies under the Commercial Courts Act, 2015 & Code of Civil Procedure for recovery of dues.
Conclusion
The suspension of Sections 7, 9 and 10 of IBC may have provided relief to the distressed businesses who were adversely impacted due to COVID-19 pandemic, but the brunt of the amendment is being faced by operational creditors or financial creditors especially who are home buyers. Further, for continuing defaults beyond the exempt period, it may prove difficult to establish aggregate default of INR 1 crore. To proceed under IBC, such creditors would either have to file application jointly (in case of financial creditors meeting requirements under Section 7(1) or wait till aggregate debt becomes INR 1 crore or CIRP is initiated as a result of some other creditor's application.
In the alternate, they would be required to approach other forums, and the multiplicity of proceedings in various forums may lead to confusion and chaos.
It seems to be the time for GoI to lift the suspension and make requisite amendments to the IBC prior to the conclusion of the suspended/statutory period in March 2021 to preserve the robustness of the IBC. While Section 10A of IBC has given a lifeline to the business sector, it has had its share of collateral damage.
Footnotes
1 https://www.ibbi.gov.in/uploads/legalframwork/741059f0d8777f311ec76332ced1e9cf.pdf
2 http://www.mca.gov.in/Ministry/pdf/Notification_04012021.pdf
3 Swiss Ribbons Pvt. Ltd. v. Union of India, 2019 SCC Online SC 73.
4 https://main.sci.gov.in/supremecourt/2020/27296/27296_2020_36_1501_26013_Judgement_09-Feb-2021.pdf
5 http://delhihighcourt.nic.in/dhcqrydisp_o.asp?pn=207162&yr=2020
6 http://delhihighcourt.nic.in/dhcqrydisp_o.asp?pn=9960&yr=2021
Mr. Gurmukh Choudhri, Associate TMT Law Practice
Gurmukh is a counsel at TMT Law Practice. Primarily a dispute resolution lawyer, Gurmukh's core areas of practice includes intellectual property laws, arbitration laws, insolvency laws, civil and criminal laws. Gurmukh regularly advises clients on media and broadcasting rights and telecommunications laws.
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