Insolvency and Bankruptcy Code

Faults in section inserted for the suspension of IBC amid pandemic

Note4Students

From UPSC perspective, the following things are important :

Prelims level : IBC

Mains level : Paper 3- Problems with IBC

Following the lockdown, the government announced the suspension of some provision of IBC to soften the blow of economic crisis. Section 10A was inserted to suspend the provision. But it giver rise to other questions. What are these questions? Read the article to know…

What changes were made?

  • In mid-May, the Finance Minister announced that the government was planning to bring in an ordinance to suspend provisions enabling filing of fresh insolvency cases for a period of one year..
  • Finally, on June 5, the government promulgated an ordinance which inserted Section 10A in the IBC.
  • The government said the ordinance was promulgated because the lockdown has caused business disruptions which may lead to default on debts pushing such companies into insolvency.
  • Therefore, it felt that suspending Sections 7, 9 and 10 of the IBC would be the right course of action.

What are the issues with section 10A?

  • Section 10A provides that “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 this period, as may be notified in this behalf”.
  • This means that these provisions shall remain suspended from March 25 till September 25, unless extended for another six months, which would extend the suspension up till March 25, 2021.
  • However, the proviso to the section states that no application for insolvency resolution shall ever be filed against a corporate debtor for any default occurring during the suspension period.
  • While the main Section 10A suspends such applications for a limited period, the proviso enlarges the scope to provide complete amnesty under the IBC for any default occurring during such period.
  • The role of a proviso in a statute is to restrict the application of the main provision under exceptional circumstances.
  • However, the proviso here expands the substantive provision in the main section.
  • Further, if the main provision is unclear, a proviso may be given to explain its true meaning.
  • In this case the main provision appears clear, only to be obfuscated by the proviso.
  • The proviso therefore does not appear to be legally tenable.
  • As creditors can still approach courts, and as banks/FIs can still approach Debt Recovery Tribunals, the protection given by this proviso seems illusory.
  • But Section 10A also suspends provisions of Section 10 of the IBC which enables voluntary insolvency resolution.
  • This is difficult to understand as such voluntary insolvency resolution should have been made easier for companies facing distress.

Painting all defaults with the same brush

  • The ordinance appears to consider every default occurring during the suspension period to be a consequence of the pandemic.
  • There could be cases where defaults were imminent due to other reasons, but which will now still enjoy this protection.
  • The ordinance should have protected only such defaults which may occur as a direct consequence of the pandemic or the lockdown and should have left this determination to the National Company Law Tribunal.
  • Also, a company defaulting on its payment obligations on March 24 (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 due to similar reasons.
  • This makes the suspension, in the absence of definition of a COVID-19 default, prima facie arbitrary.

Issue with increasing the default amount limit

  • Earlier, the government increased the minimum default amount to trigger corporate insolvency resolution from ₹1 lakh to ₹1 crore.
  • This was purportedly done to protect MSMEs from insolvency petitions.
  • However, this also operates against such MSMEs because they will now be forced to approach civil courts to recover undisputed debts below ₹1 crore.
  • The suspension of these provisions would now impact even claims above ₹1 crore for at least six months to a year.

Conclusion

The ordinance has opened itself up to a legal challenge on grounds of arbitrariness and untenability of the proviso due to the flaw in its drafting. It is unfathomable how these flaws arose despite the government having ample time to think this through.

B2BASICS:

 Insolvency and Bankruptcy Code, 2015

The code contains a clear speedy mechanism for early identification of financial distress and initiates revival/re-organisation of the company if it is viable.

Timeline

  • The bill proposes a timeline of 180 days to deal with the applications for insolvency resolution with an option of extending it by 90 days for exceptional cases.

Insolvency Resolution Plan

  • The insolvency resolution plan has to be approved by 75% of the creditors. If the plan is approved, then the adjudicating authority will give its sanction. In case of rejection of insolvency resolution plan, the adjudicating authority will pass an order for liquidation.

Insolvency Professionals (IPs) & Insolvency Professional Agencies (IPAs)

  • The resolution processes will be conducted by licensed insolvency professionals (IPs).  These IPs will be members of insolvency professional agencies (IPAs).  IPAs will also furnish performance bonds equal to the assets of a company under insolvency resolution.

Information Utilities

  • Information utilities (IUs) will be established to collect, collate and disseminate financial information to facilitate insolvency resolution.

Bankruptcy and Insolvency Adjudicator

  • The National Company Law Tribunal (NCLT) will adjudicate insolvency resolution for companies.  The Debt Recovery Tribunal (DRT) will adjudicate insolvency resolution for individuals.
  • The Debt Recovery Tribunal (DRT), which has jurisdiction over individuals and unlimited liability partnership firms. Appeals from the order of DRT shall lie to the Debt Recovery Appellate Tribunal (DRAT).

Insolvency regulators

  • The Insolvency and Bankruptcy Board of India will be set up to regulate functioning of IPs, IPAs and IUs.
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