THE INSOLVENCY AND BANKRUPTCY CODE (AMENDMENT) ORDINANCE, 2020

THE INSOLVENCY AND BANKRUPTCY CODE (AMENDMENT) ORDINANCE, 2020

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 ("Ordinance") was issued on June 5^th, 2020 which suspended the initiation of CIRP (Corporate Insolvency Resolution Process) under the Insolvency and Bankruptcy Code, 2016 ("Code") for 6 months.

The main reason behind the Ordinance, as stated in the Ordinance, is the disruption caused by COVID -19.

The amendments introduced by the Ordinance are as follows:

No.1: The Ordinance inserted section 10A which states as follows:

“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 25^th March 2020.”

Section 10A which deals with Suspension of initiation of corporate insolvency resolution process mainly has two points to be looked into:

1.    Effective date when the period of 6 months will begin to run – This date in our opinion is 25^th March 2020;

2.   The proviso to section 10 saying that – “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.”

In our opinion, the interpretation of this proviso is that -the default during that period does not mean debt contracted/defaulted during the period.

Author’s take: The default under COVID-19 is more than double edged sword.

Under the Contract Act, 1872, if a subsequent intervening event impacts the performance, then only relief is available. Likewise, where the default is attributable to COVID-19, and can be so established, then only suspension should have been warranted. Otherwise, creditors’ interest will be unreasonably prejudiced and creditors at large will suffer.

For example, in RERA, we have seen multi layered extensions of registration/completion deadline.

There will be lot of litigation in MSME space at Micro and Small Enterprise Facilitation Council (MSEFC).

No.2: The Ordinance also inserts sub-section (3) to Section 66 of the Code

This prohibits the Resolution Professional from filing an application under Section 66(2) of the Code.

The provision of 66(3) reads as under:-

“(3) Notwithstanding anything contained in this section, no application shall be filed by a resolution professional under sub-section (2), in respect of such default against which initiation of corporate insolvency resolution process is suspended as per section 10A.”

Author’s take: This basically eliminated the suspension period from the look back range where the application under section 66(2) would otherwise lie to the Adjudicating Authority saying that the director/partner of the corporate debtor have acted in a manner prejudicial to the interest of the creditors.

Section 66(2) reads as follows:

“(2) On an application made by a resolution professional during the corporate insolvency resolution process, the Adjudicating Authority may by an order direct that a director or partner of the corporate debtor, as the case may be, shall be liable to make such contribution to the assets of the corporate debtor as it may deem fit, if-

(a) before the insolvency commencement date, such director or partner knew or ought to have known that the there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process in respect of such corporate debtor; and

(b) such director or partner did not exercise due diligence in minimizing the potential loss to the creditors of the corporate debtor.  

Explanation. – For the purposes of this section a director or partner of the corporate debtor, as the case may be, shall be deemed to have exercised due diligence if such diligence was reasonably expected of a person carrying out the same functions as are carried out by such director or partner, as the case may be, in relation to the corporate debtor. “