Jun 6, 2020

Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020

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The nationwide lockdown being in force since 25th March 2020 has certainly disrupted the several business operations. To prevent the financially stressed companies being dragged into the corporate insolvency resolution process on account of unprecedented situation and difficulty to find adequate number of resolution applicants for a distressed/defaulting business, Government of India has amended the Insolvency and Bankruptcy Code, 2016 (‘Code’).

For aforementioned reasons, on 5th June 2020, came the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 (‘Ordinance’) and to implement the changes as announced by finance ministry. Ordinance shall come into effect from 05.06.2020.

Following are the key highlights:

  1. No application for any default committed by a corporate debtor arising on or after 25th March 2020 for a period of 6 months
    • Section 10 A has been inserted which states that no fresh application/s 7, 9 10 of the Code, can be filed against a corporate debtor for any default arising on or after 25.03.2020 for a period of six months but not exceeding 1 year from such date.
    • It has been provided that no application shall ever be filed against any corporate debtor for the default occurring during said period.
    • Further an explanation has been added that section 10A shall not be applicable to any default committed before 25.03.2020
    • CP Comments:

      It provides a major relief to the companies which are experiencing distress / defaults due to lockdown since no action under the Code can ever be taken against them for any default occurred during said period.

      Also the Ordinance removes the ambiguity in respect on the ongoing matters. The non-applicability of the Ordinance on pending/existing applications already filed gives a green flag to the creditors to pursue the pending matters against the corporate debtors for default occurred prior to 25.03.2020. This even allows the creditors to file the application where demand notices were already issued against the corporate debtor. Meaning thereby, and especially for cases of Operational Creditors, if a creditor has issued a notice u/s 8 of the Code prior to 25.03.2020, it may proceed with filing of the application u/s 9. However, one may argue contrary that such an interpretation would defeat the very purpose of relief from the rigors of IBC to the companies. In such a scenario, the explanation to the newly inserted Section 10A clarifies that Section 10A is not applicable to the defaults existing prior to 25.03.2020. Default is defined u/s 3(12) of the Code which provides as follows:

      “(12) “default” means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be”

      Therefore, one has to see that whether a default on the basis of debt becoming due and payable has occurred. Specifically, in the cases under Section 9 of the Code, there are catena of judgments that issuance of demand notice is sufficient to show the occurrence of default by the creditor. Moreover, under the Coode, the Operational Creditor is vested with a right to claim its dues u/s 7 & 9 wherein issuance of demand notice u/s 8 is mandatory. So in light of the ordinance and precedents available for interpretation of default, the cases where an operational creditor has issued a demand notice prior to 25.03.2020 would survive from the affects of the ordinance.

  2. No application to be filed by Resolution Professional under fraudulent trading in respect of such default as mentioned in newly inserted section 10A.
  3. Amendment has been made to Section 66 of the Code dealing with fraudulent trading or wrongful trading. It empowers the resolution professional to file an application against the director/partner of the corporate debtor if the business was carried to defraud the creditors or for any fraudulent purpose and seek directions against them to make contributions to the assets.

    Through the amendment, sub-section 3 has been inserted to Section 66 of the Code, which restricts the resolution professional to file any application under the said section in respect of any default against which proceedings has been suspended as per section 10 A (dealt above).

    CP Comments:

    By effect of the aforesaid amendment, a resolution professional will no more be able to file an application seeking contributions to the assets of the Corporate Debtor undergoing CIRP, in respect of such default against which initiation of CIRP is suspended as per Section 10A. It is particularly unimaginable that why the government would like to give relief to someone who is guilty of wrongful and/or fraudulent trading and causing loss to the creditors. Therefore, what exactly is delivered through this amendment is yet to see the light of day when the provisions hereof are argued before the Adjudicating Authority. Specifically in a scenario where by the language of Section 10A of the Code, the applicability is for uncertain time since the date from which the provisions of Section 10A would be applicable could be 25.03.2020 or any other date notified by the Government. However, one can say that presently there only seems to be the benefit of the present amendment to the person or directors of the Corporate Debtor who engaged in the fraudulent or wrongful during pandemic.

To view the Ordinance, please click on the link below:

Disclaimer: The write up has been prepared for information purpose only. Readers should take legal advice before applying the information contained/views expressed in this publication.

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