Decoding the Insolvency and Bankruptcy (amendment) bill, 2020

Introduction


The Insolvency and Bankruptcy (Amendment) Bill, 2020 is the latest in a slew of measures introduced by the government to ameliorate the condition of India’s ailing businesses. The sudden lockdown imposed on 24th March left many businesses in disarray and the complete halt of all economic activity has hurt the finances of these businesses really hard.

It is here that businesses have fallen victim to insurmountable debt which has increasingly led to widespread default. As a result of the prevailing economic situations, the President on June 5th exercised his powers under article 123 of the constitution. This promulgated the Insolvency and Bankruptcy Amendment Ordinance, 2020 which effectively suspended the operations of sections 7, 9, and 10 of the code. Section 7,9 and 10 essentially permits a financial creditor, an operational creditor, and the company itself to apply for CIRP The ordinance follows another notification by the central government which raises the threshold of filing for Corporate insolvency resolution processes CIRP from 1 lakh to 1 crore.

In the words of the government itself, the main intent behind the proposed amendment is to “to provide relief to companies affected by COVID-19 to recover from the financial stress without facing the immediate threat of being pushed to insolvency proceedings.” The proposed amendment will repeal the earlier ordinance which had been issued on June 5th by the President.

What are the amendments?

There are two primary amendments to the act. The first amendment is to insert section 10A which provides temporary suspension to the operation of sections 7,9 and 10. The second amendment inserts subsection (3) to section 66 which prevents an Insolvency resolution professional from filing a petition to the adjudicating authority under subsection (2).

Section 10A of the code.

As per the amendment bill, section 10A reads that

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:”

The amendment act suspends the right of creditors and the corporate debtor itself to bring CIRP against the latter. The suspension of these sections in essence is suspending the code itself. The main intent of section 10A is to protect MSME’s who have become particularly vulnerable to the economic backlash caused by the Pandemic. The protection of MSMEs is also what prompted the central government to raise the minimum threshold of default under the code to 1 Crore from 1 Lakh.

Section 66(3)

The amendment bill also insets sub-section (3) to section 66 which holds a director or a partner responsible in the event he did not exercise due diligence in minimizing the potential loss to the creditors. Subsection (3) temporarily suspends this provision for the stipulated period

Subsection reads

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 the corporate insolvency resolution process is suspended as per section 10A."

What does it mean for the stakeholders?

Banks

While no doubt the suspension of the code is greeted with a sigh of relief by businesses, banks however seem less optimistic about the amendment. Banks worry that businesses will rush to commit default during this period so as to seek protection under the amendment bill. The government has failed to state whether the amendment bill is absolute or there will be certain exceptions. For banks that have already doled out thousands of crores in relief packages the failure to realize proceeds from default under the code will come as a blow. The banking system has previously seen the IBC as a “sort” of messiah after the experiences under the SARFAESI Act and the RDBFI act. These Banks are already stressed under the burden of increasing Non-performing assets (NPA) and the suspension of the code is not helping their situation.


Operational creditors

For businesses, the amendment bill is indeed a lifejacket thrown while they drown in rough waters. The suspension of the code gives these businesses the much needed time to adapt and reorient in the pandemic. With the amendment giving protection to businesses from the default, this has worried a class of businesses who are under the code classified as operational creditors. Most operational creditors are businesses themselves who supply goods and services to others generally on credit. For operational creditors, the suspension of the code in essence provides an opportunity for their debtors to renege on their payment obligations. This essentially means that for the duration up until March 2021 most operational creditors will not be able to realize the debts owed to them under the code.

For operational creditors the amendment bill acts as a double-edged sword, on the one hand, it protects the Operational creditor from default but on the other hand, it also protects their debtors from default. This puts operational creditors in a very awkward situation.

Call for distinction.

One other aspect which the government has been urged to address is the matter distinguishing deserving businesses. This means that a distinction should be drawn up between businesses that deserve protection under the amendment bill and businesses that have already been in a precarious situation before the pandemic and are now seeking protection under the bill.

The opposition in particular has urged the government to not give blanket protection to all companies but rather ensure that the protection is only extended to those companies which have genuinely come under stress after the pandemic. The government however is yet to address this issue.

Conclusion

Businesses have indeed fallen victim to the pandemic and need rescuing as the suspension of the code is a lifeline the government has thrown. Important issues however remain to be addressed. Firstly, the government has to address the concerns voiced by banks and develop a mechanism that will discourage borrowers from early default to seek protection under the bill. More importantly, the concerns of the operational creditors also remain to be addressed. While there is no doubt the suspension is needed, the government needs to ensure that there is no misuse of these protections which will undermine the spirit and the objective of the IBC.

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