Keeping up with the needs of the fast-changing business environment, IBC has been amended for the fourth time since 2016 with multiple amendments under corollary laws in order to ensure a relentless spin of the wheels of the Indian economy. Covid-19 has retarded the momentum of wheels of the Indian economy, the corporates.
The All India Association of Industries had estimated a loss of INR 2,00,000 crore (USD 26.35 bn) by March 31, 2020, due to pan India lockdown. In order to prevent and absorb the effect of such huge losses and to respond to the dynamics of the business environment, the central government seems to be responding in a structured manner by providing various sops, relaxation, extensions, and amendments to the existing legal framework in the country. In such a scenario, it was viewed that insolvency resolution processes under the (Indian) Insolvency and Bankruptcy Code, 2016 (IBC) also needed added layers of cushion from different viewpoints.
HIGHLIGHTS FROM IBC 2020 AMENDMENT:
The salient features of the amendment are as follows:
- The Central Government has increased the minimum amount of default for the purpose of Section 4 of the IBC (which specifies the minimum amount of default for matters related to insolvency and liquidation) from INR 1 lakh to INR 1 crore.
- Section 7 was also amended by increasing the amount of minimum default for initiating CIRP. By way of the amendment, certain additional requirements for filing CIRP have also added for some financial creditors i.e. real estate allottees; and security or deposit holders represented by a trustee or agent. The application filed by these sets of financial creditors should be filed jointly by at least 100 such creditors or 10% of their number, whichever is lower.
- Section 14 has also been amended whereby if payments are duly made for use or continuation of any license, permit, quota, concession, registration, clearances or a similar grant or right during the moratorium period then such license, permit, quota, concession, registration or clearances shall not be suspended or terminated on account of insolvency. Secondly, the moratorium will not be applicable to such transactions, agreements, or arrangements as may be notified by the Central Government in consultation with the financial sector regulator or any other authority.
- Finally, if in the opinion of the IRP and RP, any goods or services are essential for preserving the value of the corporate debtor and managing its operations as a going concern, then the supply of such goods and services shall not be interrupted in any manner, subject to IRP or RP making a payment towards such essential supply.
- The IBC 2020 Amendment further introduced the provision of Section 32A to the Code. This provision provides that the liability of a corporate debtor for an offence committed prior to the commencement of the corporate insolvency resolution process shall cease, and the corporate debtor shall not be prosecuted for such an offence from the date the resolution plan has been approved by the Adjudicating Authority under Section 31 of the resolution plan results in the change in the management or control of the corporate debtor to a person who was not-
(a) a promoter or in the management or control of the corporate debtor or a related party of such a person; or
(b) a person with regard to whom the relevant investigating authority has, on the basis of material in its possession, a reason to believe that he had abetted or conspired for the commission of the offence, and has submitted or filed a report or a complaint to the relevant statutory authority or Court.
The provision further provides that no action shall be taken against the property of such Corporate Debtor in light of the aforesaid.
IMPACT OF IBC 2020 AMENDMENT:
Subsequent thereto, the Insolvency Bankruptcy Board of India (IBBI) has, vide notification dated March 29, 2020, amended the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 granting certain relaxations. Pursuant thereto, Regulation 40C was inserted, which provided that the period of lockdown shall not be counted for the purposes of calculation of timeline for any activity that could not be completed due to such lockdown, in relation to a CIRP.
In this regard Banks too came forward in aide of the citizens/ entities by extending the credit lines to ease the liquidity crisis of the borrowers.
However, the need of the hour was for having further far-reaching changes in the said statute. Accordingly, the Government on 17th May 2020, made a slew of changes to the statute providing much-needed respite to debtors, who could not meet their goals due to the pandemic situation.
Firstly, in the exercise of the powers conferred by Section 196(1)(t) read with Section 240 of the Insolvency and Bankruptcy Code, 2016, the Insolvency and Bankruptcy Board of India (IBBI) has introduced Regulation 47A to the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, whereby it has been provided that subject to the provisions of the Code, the period of lockdown imposed by the Central Government in the wake of Covid-19 outbreak shall not be counted for the purposes of computation of the time-line for any task that could not be completed due to such lockdown, in relation to any liquidation process.
Secondly, the Government in another endeavor to encourage ease of doing business in India has decided to suspend the initiation of fresh insolvency proceedings up to one year depending upon the pandemic situation.
Along with that, there is an exclusion of Covid-19 related debt/defaults. The MCA has been directed to issue a special circular to define the time period which will cover “COVID-related debt” to be exempted from default. However, no suspension of the insolvency process against personal guarantors to a company has been announced. Accordingly, if directors or promoters of a company have provided personal guarantees to its lenders, they may still be taken to the insolvency court under Part III of the IBC. Meaning thereby that a creditor cannot go against the debtor for a year, however, it can still initiate CIRP against the Guarantors.
Thirdly, further, the Government has also intimated that a special insolvency framework will be notified by way introduction of a new provision under section 240-A of IBC solely for MSMEs (i.e. Micro, Small, and Medium Enterprises).
Finally, the minimum threshold limit under Section 7, 9, and 10 to initiate the IBC process would continue to be enhanced from Rs. 1 Lakh to Rs. 1 Crore. This move could prevent companies, especially those within the MSME category, from being dragged to the National Company Law Tribunal for settlement of debts. This could be a breather for companies that are already struggling with business losses.
REASON BEHIND SUSPENSION OF IBC:
The reason behind suspending IBC for a year was that during the pandemic, going concern sales may not be possible or desirable. Buyers may not be available in the market. Or, there could be an oversupply of similar assets in the market due to industry-wide factors, pushing down the price for such assets.
In India, presently three routes to debt restructuring exist viz. Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions 2019 (“Prudential Framework”), providing fresh directions to lenders on the resolution of stressed assets, which provides an out-of-court restructuring option.
Second, the IBC, that could be used for restructuring under the aegis of the National Company Law Tribunal.
Third, a scheme of arrangement under the Companies Act, 2013, could also be used for debt restructuring through the NCLT.
Now with the IBC due to be suspended, the only companies would have the first and third route, as discussed above, for debt restructuring.
With these reforms in place, it will be a boost for the debtors which are genuine pain, however, there could be some debtors for whom such a change would only mean gaining more time to evade the process of law. It will be a great wait and watch if the government eventually relents to industry demands for suspension of key provisions of the IBC for as long as six months. Irrespective, these amendments are likely to smoothen the insolvency resolution process and may prevent the corporates from sailing close to the wind during this period of recession that India Inc. is set to face amidst the lockdown.
The aforesaid amendments would see a slew of cases filed for recovery and enforcement of charges under the various other statutes available. The Creditors still have the opportunity to file for recovery of their dues in Civil Courts. The provisions of the SARFAESI Act and the RDB Act would also see an influx of cases. For home buyers and some notorious builders, the doors of the consumer forum would again be the door to knock at. The path of the already existing legislation, apart from IBC, would again be taken by the Creditors, qua those debtors who have been trying to cover behind the veneer of these amendments, wearing the cloak of losses.
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This article is written by Mahima Rathod and edited by Rupreet Kaur Dhariwal.