Insolvency and Bankruptcy Code Amendment Act 2020

Highlights of Insolvency and Bankruptcy Code Amendment Act 2020

1.New section 10A is inserted into the Act namely no application for initiation of corporate insolvency resolution process(CIRP) of a corporate debtor shall be filed, for any default arising on or after 25th March, 2020 for a period of 6 months or such further period, not exceeding 1 year from such date.

2. No application shall ever be filed for initiation of corporate insolvency resolution process(CIRP) of a corporate debtor for the said default occurring during the said period mentioned above.

3. This section shall not apply to any default committed under the said sections before 25th March, 2020.

4. No application shall be filed by a resolution professional(RP) in respect of such default against which initiation of corporate insolvency resolution process(CIRP) is suspended as per section 10A.(Section mentioned above)

Also Read: The Taxation And Other Laws (Relaxation And Amendment Of Certain Provisions) Bill, 2020(RACP Bill,2020)

Notes

1.The amendments made shall be deemed to take effect from 5th June,2020.

2.Insolvency and Bankruptcy Code Amendment Act 2020 is passed in the Rajya Sabha on 19th September,2020 and in Lok Sabha on 21st September,2020. Once it receive the president’s assent, the amendments proposed will be made effective.

3.This Bill replaces the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 . Therefore please refer to legislative brief on the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 given below.

Read original text here: PRS India

Legislative Brief of Insolvency and Bankruptcy Code Amendment Act 2020

Highlights of the Ordinance

  • The Insolvency and Bankruptcy Code allows a corporate debtor as well as its creditors to initiate an insolvency resolution process.  The Ordinance prohibits the initiation of insolvency proceedings for defaults arising during the 6 months from March 25, 2020 (extendable up to 1 year).  
     
  • A director or a partner may be held liable if despite knowing that insolvency proceedings cannot be avoided, he did not exercise due diligence in minimising the potential loss to the creditors.  The Ordinance removes this provision for defaults in the above period.

Key Issues and Analysis

  • The suspension of the insolvency resolution process raises several issues.  First, it prohibits resolution even in cases where that may be the best way to preserve the value of assets.  Second, it removes the option of a debtor to avail of the insolvency process for restructuring.  Third, it is unclear why insolvency proceedings against specified defaults have been prohibited forever.
  • It may be questioned whether a personal guarantor to a corporate debtor should undergo insolvency proceedings for defaults for which insolvency proceedings are not allowed against the debtor.

Also Read: How to file GSTR 9C online step by step

PART A: HIGHLIGHTS OF THE ORDINANCE

Context

The Insolvency and Bankruptcy Code, 2016 provides a time-bound process to resolve insolvency among companies and individuals. Insolvency is a situation where an individual or company is unable to repay their outstanding debt. In light of the COVID-19 crisis, the World Bank identified two key challenges for an insolvency framework:

(i) need to prevent otherwise viable firms from prematurely being pushed into insolvency and

(ii) increase in the number of firms that will not survive the crisis without resolution of insolvency. In India, the threshold of default for initiation of insolvency proceedings was raised from Rs.1 Lakh to Rs.1 crore.

Further, regulations were amended to provide that the lockdown period will not be counted in the timeline for ongoing proceedings for certain activities. In this context, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 was promulgated on June 5, 2020.

The Ordinance notes that COVID-19 has created uncertainty and stress for businesses for reasons beyond their control and it is difficult to find an adequate number of resolution applicants to rescue the corporate debtor who may default in discharging their debt.

Key Features

  • Prohibition on the initiation of insolvency proceedings for certain defaults: The Code allows the corporate debtor as well as its creditors to initiate insolvency resolution process.  The Ordinance provides that for defaults arising during the six months from March 25, 2020 (extendable up to one year), no insolvency proceedings can ever be initiated by either the corporate debtor or its creditors.
     
  • Liability for wrongful trading:  A director or a partner of the corporate debtor may be held liable to make personal contributions to the assets of the company in certain situations. This liability will occur if despite knowing that the insolvency proceedings cannot be avoided, the person did not exercise due diligence in minimising the potential loss to the creditors. The resolution professional may apply to the NCLT to hold such persons liable. The Ordinance prohibits the resolution professional from filing such an application in relation to the defaults for which insolvency proceedings have been prohibited.

PART B: KEY ISSUES AND ANALYSIS

Bar on the initiation of insolvency resolution process for certain defaults

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The Insolvency and Bankruptcy Code, 2016 (IBC) allows the corporate debtor as well as its creditors to initiate the insolvency resolution process. The Ordinance provides that for defaults arising during the six months (extendable up to one year) from March 25, 2020, no insolvency proceedings can ever be initiated by either the corporate debtor himself or any of its creditors.  We discuss some related issues below:

Need for the complete suspension of the corporate insolvency resolution process

The Ordinance prohibits initiation of insolvency proceedings against defaults arising during the specified period.  This raises the question whether a complete suspension is required. On one hand, there is a need to safeguard companies, which were viable before the pandemic and whose insolvency is temporary, from being prematurely pushed into insolvency. On the other hand, a complete suspension of insolvency proceedings may take away a distressed company’s opportunity to seek recourse under the IBC framework. For certain companies, the deferral of insolvency proceedings may lead to further deepening of their financial stress and the resultant loss in value.  

The Ordinance also states that it is difficult to find an adequate number of resolution applicants during this period. This may increase the risk of liquidation of a company which could have been rescued by sale as a going concern in a normal situation.

However, another possible outcome of an insolvency resolution process is debt restructuring where debt obligations are reorganised to resolve insolvency, but the company is not sold to a third-party buyer. In United Kingdom, for instance, the insolvency law was amended in June 2020 to provide certain new types of restructuring options for companies facing financial difficulty.

Further, it raises a question whether all defaults during the specified period need to be treated in the same manner. There may be defaults which were not induced due to COVID-19 related disruptions but are a result of distress in companies before the pandemic. That said, whether a default is induced by COVID-19 or not will be subject to interpretation and may lead to disputes which can result in increased litigation.

Corporate debtor is prohibited from initiating insolvency proceedings

The Ordinance prohibits the initiation of insolvency proceedings by the corporate debtor. The question is whether the corporate debtor should be prohibited from initiating insolvency proceedings. The corporate debtor may be better placed to assess whether the recourse under the insolvency framework is warranted. A voluntary and timely initiation of insolvency proceedings by an insolvent debtor could maximise the benefits for the debtor as well as creditors. Note that in countries such as Spain, Germany, and France, while creditor-initiated insolvency proceedings were restricted and the duty of the debtor to file for insolvency were relaxed, voluntary insolvency proceedings by the debtor have been allowed.

Insolvency proceedings against the specified defaults are prohibited forever

The Ordinance states that no insolvency proceedings can ever be initiated against defaults occurring during the specified period. This could result in a scenario where creditors are unable to hold the company liable for these defaults even after the company’s ability to repay has been restored. It is unclear why a debtor should be protected from the liability for these defaults even after its temporary adverse situation has been resolved.

Initiation of insolvency proceedings against the personal guarantor to a corporate debtor

Under the Code, insolvency proceedings can be initiated against the personal guarantor of a corporate debtor. This is an individual who provides a guarantee for the debt of a corporate debtor. While the Ordinance prohibits insolvency proceedings against the corporate debtor for the defaults occurring during the specified period, it does not disallow such action against the personal guarantor. The question is whether the personal guarantor should be held liable for defaults for which the original debtor’s liability itself has been relaxed.

Source: PRS India

Frequently Asked Questions(FAQ’s)

1.What are the amendments in Insolvency and Bankruptcy Code Amendment Act 2020?

Ans. A new section 10A is inserted into the Act.

2.Can we file for CIRP?

Ans. You can’t file for CIRP on or after 25th March, 2020 for a period of 6 months or such further period, not exceeding 1 year from such date.

3.What is the status of pending CIRP?

Ans. Section 10A will not apply to any default committed before 25th March, 2020.

4.When will the amendments become effective?

Ans. From 5th June,2020

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