In order to prevent companies to be dragged into insolvency under the Insolvency and Bankruptcy Code, 2016 ("Code") due to the present pandemic, certain announcements were made by the Government under the Code. In this article, we have analysed the effect of these announcements on possible scenarios that the creditors or corporate debtors may be faced with. Before proceeding with our analysis, it may be worthwhile to have a brief recap on the announcements by the Government.
- March 24, 2020 - The Union Finance Minister announced that the threshold for invoking insolvency proceedings was raised from Rs. 1 lakh to Rs. 1 crore, which was subsequently notified on same date. In the same announcement, it was mentioned that the Government may consider suspension of Sections 7, 9 and 10 of the Code.
- May 17, 2020 - The Union Finance Minister announced: (i) Special insolvency resolution framework for MSMEs under the proposed Section 240A of the Code; (ii) Suspension of fresh initiation of insolvency proceedings upto 1 year depending upon COVID-19 situation and (iii) Empowering the Central Government to exclude COVID-19 related debts from the definition of "default" under the Code for the purpose of triggering insolvency proceedings.
Keeping in mind the aforesaid announcements and various insolvency measures adopted by countries like U.S.A1 , United Kingdom. 2 , Australia3 etc., the Central Government has now introduced an ordinance dated June 5, 2020 ("Ordinance") to suspend initiation of corporate insolvency resolution process of a corporate debtor under Sections 7, 9 and 10 of the Code for any default arising on or after March 25, 2020 for a period of six months, or such further period not exceeding 1 year ("suspension period"), as may be notified in this regard.
The Ordinance also suspends filing of an application by the resolution professional under Section 66(2) of the Code against directors or partners of corporate debtors in respect of such default against which initiation of corporate insolvency resolution process would be suspended by virtue of the Ordinance.
Newly inserted Section 10A and its proviso: Different treatments for the same subject matter?
The newly inserted Section 10A by which the suspension is given effect reads as follows:
"Section 10A: Suspension of initiation of corporate insolvency resolution process
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 removal of doubts, it is hereby clarified that the provisions of this section shall not apply to any default committed under the sections before 25th March, 2020."
- It is apparent from the above reading of Section 10A that the operative part of the section as well as its proviso deal with the same subject matter i.e. default arising on or after March 25, 2020. While the operative part of the section provides for a temporary suspension on initiating corporate insolvency for any default arising on or after March 25, 2020, it appears that the proviso seeks to give permanent immunity to such defaults from the Code.
- Does the immunity mean that the creditors will never ever be able to proceed against the corporate debtor for such default under the Code? - As the Ordinance reads now, it seems that the Ordinance, literally, debars the creditors from proceeding under the Code in relation to defaults occurring during the suspension period. However, one plausible view could be that 'default', as defined under the Code, continues to remain a 'default', until it is paid in full, or as agreed.
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Originally published June 8, 2020.
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