INTRODUCTION
The COVID-19 pandemic has widely influenced all aspects of lifestyles. The dramatic influence can also be seen in different facets of the economy. In order to deal with the adverse effects of COVID-19 on the economy of the country, the Indian government has taken several steps to protect those most impacted by the epidemic.
The Finance Ministry’s announcement of key policy changes in the IBC on 17 May 2020 as part of the 5th phase of the above scheme had left stakeholders bewildered by several peculiarities that arose after the official release. On 5 June 2020, the Government of India promulgated “IBC (Amendment) Ordinance 2020” and the revised laws were implemented immediately. The Ordinance was passed with two objectives. First, to protect the businesses “(Debtors- MSMEs and Corporate Debtors)” who have badly hit by the pandemic. Second, to clarify certain rules in light of IBC (Amendment) Act, 2016 passed on 12th March 2020.
The Ordinance dealt primarily with issues relating to clauses such as “default” and “wrongful trading”. Whether the Ordinance has made clear everything about the policy or is still open to different interpretations and incredulity is something which needs to be viewed through critical analysis of the changes.
CHANGES BROUGHT FORTH
The following are the key points of the issued ordinance:
1. Insertion of Section 10A: As the IBC provides for the initiation of a ”Corporate Insolvency Resolution Process (CIRP)”, Section 10A states that, for any default which is arising on or after 25 March 2020, no such application for CIRP initiation could be filed under IBC Sections 7, 9 and 10. This shall extend, as may be informed, for a duration of six months or any further time, not extending beyond one year from that date. Therefore, unless the additional 6 months are extended, the suspended duration will operate from 25 March to 25 September 2020. Furthermore, the proviso to Section 10A specifies that no CIRP application “shall ever be filed” for the defaults that will happen during this period.
2. Insertion of Section 66(3): Section 66(3) was inserted by way of the Ordinance. This amendment offers protection for the corporate debtor’s directors and partners who may in future undertake CIRP. The amendment places an embargo on the resolution professional to file an application pursuant to Section 66(2), based on defaults that happen during the period of suspension specified in Section 10A.
CRITICAL ANALYSIS
We shall analyse these particular measures keeping in mind the overall global socio-political scenario due to the impact of COVID-19 and determine whether it could fully realize its objectives and address its grey areas.
1. Suspension of Section 10: The suspension of Section 7 and Section 9 can be justified as they are related to the kinds of creditors i.e. “Financial Creditors and Operational Creditors”. But the suspension of Section 10 relating to Corporate Applicant does not stand the litmus test. This defeats a primary objective of the IBC i.e. to provide a second chance of redemption to the firms even if they fail operationally and financially by providing a locus standi to initiate CIRP against itself and free up its ‘idle assets’. Adversely, restricting optimum utilization of assets won’t allow the firms to oust their debts suo moto that have occurred even before 25th March. This, in all probability, would lead to a ‘spiral’ or ‘debt trap’ for the firms, affecting their functionality.
2. Lack of an Alternative Framework: On the course of this ongoing pandemic, inadvertently, there would be a severe credit crunch faced by the firms. But, the ordinance fails to provide for an alternative framework to address the lack of credit availability. The suspension of IBC and a lack of alternative framework would make the creditors sheepish and a tendency to squeeze credit shall prevail in the market. It is to be noted that there has been no change in the definition of ‘default’ under Section 3(12) of IBC. It shall be difficult, more often than not, to determine the period of occurrence of the debt, thus having its adverse effects on both the Corporate Debtors and MSMEs. Many Corporate Debtors would take advantage of IBC Suspension even if defaults occur prior to the IBC suspension. Thus, many MSMEs, who might be the creditors, shall not be able to recover their debts. Conversely, many MSME Debtors would not be entitled to the IBC Suspension if the occurrence of default was before 25th March, but the consequences had to be faced during the pandemic period. The Ordinance should have come up with an alternative framework to address the issue of the credit crunch and the effective determination of the ‘default period’.
3. Insertion of Proviso to Sec 10A: This states that “no application shall ever be filed…” for defaults occurring in the given period. If the literal interpretation of the same is to be taken, manifold ambiguities do spring up. Firstly, when this pandemic situation would be over, if the debtor is in a position to repay his/her debts, entitling him to enjoy the unjust protection of the IBC Suspension shall be a gross misuse of vested rights. Furthermore, there is a high chance that it might prompt the debtors to adopt an ‘escape to pay’ approach which shall draw them into reckless borrowing and result in enormous piling of debts. Lastly, this may lead to further squeezing of credit availability by the creditors for lack of certainty of repayment, even after the situation normalizes.
4. Insertion of Section 66(3): The said section deals with fraudulent trade practices such as Insider Trading and protects the corporate debtor from the filing of a resolution by the Resolution Profession on such instances. This is in gross contravention with principles of justice and in turn, legitimizes fraudulent trade practices. At the most, such proceedings can be deferred or an e proceeding may be opted for but a blanket ban is never justified.
5. Benefitting only financial creditors and not operational creditors: As per the Reserve Bank of India (RBI) Notification “RBI / 2019-20/244 D.O.R No. B.P. BC 71/21.04.048/2019-20”, RBI has already given a loan moratorium of six months to term loans. Thereby, the Financial Creditors, who mostly are Banks and Financial Institutions, are at a safe end; but it is the Operational Creditors like the MSMEs who are at a disadvantage under this Suspension. They barely have sufficient cash reserves to sustain themselves and have no further guard from the RBI. Thereby, the two kinds of creditors are being treated differently; one favored over the other. This is in violation of the Essar Steel Judgment which necessitates putting both the types of creditors on parity. Such a situation could have been avoided by suspending the right of only Financial Creditors and not Operational Creditors.
6. No Protection of Insolvency Recovery Process against the Personal Guarantor: The Liability of a Personal Guarantor is coextensive as that of Corporate Debtor, but the ordinance provides no protection from such liability.
7. No distinctive insolvency regime for the MSMEs- Despite an announcement made by the Finance Minister, under the proposed scheme, there has been no distinctive insolvency regime for the MSMEs. We have already outlined the various shortcomings faced by the MSMEs under the existing regime.
8. Grey areas in light of recent amendments and Government Notification: Under Section 4 of the amended IBC the MSME creditors are not entitled to file for defaults lower than Rs 1 crore but there is no exception to Section 16 of the MSME Act, 2006 which mandates them to pay interest on default payments. Also, under the “Ministry of Corporate Affairs – Notification- S.O. 1205(E)” it has not been made clear whether the amendment will apply to cases before 25th March. It is well known that prospective application of an act is the rule and retrospective application is an exception but it is still not clear whether it applies only to an amendment or to a Notification or subordinated delegated legislation. The ordinance throws no light to the same.
9. No protection of ‘Good Performing Assets’: The ordinance ignores the fact that a pre-COVID ‘good performing asset’ may degrade into a Non-Performing Asset’ post-COVID and takes no action regarding the same.
So, this ordinance has more questions than answers to offer and a few major concerns are yet to be addressed.
CONCLUSION
The Ordinance created uncertainties and posed some concerns which need to be addressed further. Through this, though, some things are already addressed for the stakeholders, however, more than that the drafting has invited different interpretations that undoubtedly challenge the purpose behind it. Some guidelines IBBI should release for clarifications as the new Ordinance has created so many doubts among all the stakeholders that if the Board fails to release any guidelines then they would take legal recourse like approaching the NCLT, NCLAT and even the Supreme Court of India, which would, in turn, lead to unnecessary litigation, which is the last thing one wishes to face in this time of distress.
This article has been written by Aayush Akar, a third-year law student pursuing BA.LLB(Hons) from National Law University Odisha and Koustav Bhattacharya is a third-year law student pursuing BA.LLB(Hons) from National Law Institute University.
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