Doors Available to Creditors when Insolvency Resolution Process is Out of the Window

Suspension of Enabling Provisions of the Insolvency and Bankruptcy Code, 2016

The Ministry of Corporate Affairs, Government of India had proposed a relief package across the industries due to the impact of the COVID-19 pandemic, the consequent lockdowns and their aftermath on economic activities. One of such measures was to suspend certain provisions of the Insolvency and Bankruptcy Code, 2016 (“IBC”) to protect the small and medium scale industries from a financial breakdown ultimately leading to their liquidation on account of the pandemic. Accordingly, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020[1] (“Insolvency Ordinance”) was promulgated on June 05, 2020 and Section 10A was incorporated in the IBC. Section 10A suspended sections 7, 9 and 10 of the IBC preventing financial creditors, operational creditors, and corporate debtors, respectively, from filing an application for initiation of corporate insolvency resolution process (“CIRP”) for a period of 6 (six) months or such other later date as may be notified. The retrospective nature of the amendment was challenged in Ramesh Kymal vs. Siemens Gamesa Renewable Power Private Limited, however, the National Company Law Appellate Tribunal upheld the validity of the amendment.[2]

Tatva Legal, Hyderabad has an experienced team of corporate lawyers who, amongst other services, advise on a wide range of issues in relation to general corporate advisory[TL1]  and insolvency and bankruptcy including CIRP proceedings.

Extension of Suspension

Thereafter, the Insolvency and Bankruptcy Code (Second Amendment) Act, 2020[3] was passed on September 23, 2020 with effect from date of Insolvency Ordinance and subsequently a notification was issued by Ministry of Corporate Affairs dated September 24, 2020 which extended the suspension of the enabling provisions of the IBC for a further period of 3 (three) months ending on December 25, 2020. Now, again, the aforesaid suspension of the provisions of the IBC have been extended till March 25, 2020 by a notification issued by Ministry of Corporate Affairs dated December 22, 2020.[4] (Collectively, the “Extension Notifications”).

Analysis and Impact

It is understandable that the enabling provisions of the IBC have been suspended to protect corporate debtors in relation to defaults arising on account of COVID-19 and its aftermath. Additionally, if such measures were not taken, then corporate debtors who were not in default otherwise but for the impact of COVID-19 would have been dragged into CIRP resulting in corporate death due to lack in number of the resolution applicants. The decision of the Central Government to extend the suspension of the said enabling provisions of the IBC in a staggered manner after careful analysis is praiseworthy. However, there are certain misses which come along with the hits.

No distinction between the COVID-19 and non-COVID-19 related defaults: The cumulative reading of Section 10A of the IBC along with the Extension Notifications, imposes a universal ban on the filing of CIRP application at any time for defaults arising on or after March 25, 2020 till a period of 1 (one) year (“Suspension Period”). There appears to be a presumption that any default arising on or after the March 25, 2020 is necessarily a result of the pandemic.

Unlike the ‘Resolution Framework for COVID-19 related Stress’ notified on August 06, 2020 by the Reserve Bank of India,[5] Section 10A of the IBC does not distinguish between the defaults by corporate debtors on account of the pandemic and defaults for any other reason. Therefore, imposition of a universal ban on filing of CIRP applications in relation for such defaults may not align with the intention with which the Insolvency Ordinance was promulgated. Further, the creditors have faced and will continue to face the economic burnt due to the aforesaid universal ban.

Perpetual ban on filing CIRP application: The proviso to Section 10A, instead of providing any clarification, expands the scope of suspension of Sections 7, 9 and 10 for perpetuity in relation to defaults arising during the Suspension Period. The impact of the proviso to Section 10A may be considered disproportionate when it comes to balancing the interests of creditors and protecting debtors. It remains to be seen how the tribunals and courts would respond to the CIRP applications filed in relation to the defaults which first arose during the Suspension Period but continue beyond the Suspension Period, they may: (a) reject the application on the ground that the default beyond the Suspension Period is a continuing default and not a fresh default; (b) accept the application on the ground that continuing default amounts to a fresh default; (c) accept the application if it is filed only for such portion of the default which occurred post the Suspension Period.

No exemption for applications by corporate debtors: Additionally, Section 10A of the IBC does not provide any exception/exemption permitting a corporate debtor to file a CIRP application. Promoters and shareholders of a company are the ones who know the actual worth of the company and not providing them the opportunity for resolution of a default/restructuring, if required, would only lead to erosion of the value and worth of the company at the end of the Suspension Period. Without any shadow of doubt, the aforesaid consequence was never the intended object of the IBC.

Alternative to CIRP

It is clear from the aforesaid that recourse under the IBC is not available presently, therefore, creditors or corporate debtors themselves, as the case may be, would have to venture into different avenues.

For the purpose of restructuring of debts, eligible creditors can consider the mechanism provided under Resolution Framework for COVID-19 related Stress or the Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions 2019. Further, the secured creditors may consider enforcing securities under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002.

As an alternative to filing of CIRP application by a corporate debtor itself, the company can file an application with the National Company Law Tribunal under Section 230 (power to compromise or make arrangements with creditors and members) of the Companies Act, 2013.

In the context of home buyers, as they would not be able to file CIRP application as financial creditors as per the provisions of IBC, remedies available to them under the Consumer Protection Act, 2019 may be considered.

Operational creditors can file civil suits for recovery of money. Additionally, creditors may also consider initiating arbitration proceedings, if the same was agreed upon under the relevant agreements executed between them and the defaulting corporate debtor.

Therefore, it may be concluded, that there are other remedies available to creditors, even in the absence of the IBC. However, the costs and time invested in pursuing such other remedies will vary and interested parties must evaluate the same before finalising their course of action.

The views and opinions expressed in this article belong solely to the author and do not reflect the position of Tatva Legal, Hyderabad.

[1] Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 available at https://ibbi.gov.in//uploads/legalframwork/741059f0d8777f311ec76332ced1e9cf.pdf

[2] Ramesh Kymal vs. Siemens Gamesa Renewable Power Private Limited, Company Appeal (AT) (Insolvency) No. 701 of 2020, decided by the National Company Law Appellate Tribunal on October 19, 2020.

[3] Insolvency and Bankruptcy Code (Second Amendment) Act, 2020 available at https://ibbi.gov.in//uploads/legalframwork/c1d0cde66b213275d9cf357b59bab77b.pdf

[4] Ministry of Corporate Affairs, Government of India, available at https://ibbi.gov.in//uploads/legalframwork/df55d4f612f270d6c637ee4b3c8131c8.pdf

[5] Resolution Framework for COVID-19 related Stress, available at https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11941&Mode=0