Abeyance of CIRP amid Covid-19: Pros and cons

Reading time : 8 minutes

  1. INTRODUCTION

As the economy recovers from the recession and damage caused by COVID-19, the Minister Of finance has declared self-imposed termination of Sections 7, 9 and 10 of the Insolvency and Bankruptcy Code as a result of the monetary relaxation initiative as well as to foster the long-supported aim of “Aatmanirbhar Bharat.” The State’s aim in enacting this measure is just to relieve the pressure on businesses while also expecting their recovery, as the World Bank has cautioned that India is experiencing a massive economic slowdown. This article attempts to discuss the macroeconomic consequences of the IBC cessation whilst suggesting that there really are explanations why blanket-suspension of the IBC can never be a solution around for an effective recovery of such corporations and also what, on the other hand, might be the potential solutions that can be implemented.

On the 5th of June 2020, the Insolvency and Bankruptcy Code (Amendment) Ordinance 2020 was promulgated, which added Section 10(a). It forbids any application for the commencement of the insolvency resolution process (“CIRP”) within sections 7, 9 and 10 (i.e., by FC, OC, and corporate debtors)[1]. This restriction has been enforced for 6 months and was further extended from time to time which made the amendment to stay in effect for about one year. It was enacted to protect corporate persons who might be in crisis as a result of a one-of-a- kind circumstance against being forced into insolvency proceedings under the IBC for an extended period of time. The writers agree that taking away the right to file for bankruptcy from both creditor and debtor is counterproductive to the Ordinance’s goals.

Without a question, MSMEs needed special intervention to avoid the defaults caused by COVID-19. To address this issue, the CIRP ceiling has been raised from 1 lakh to crores via a gazette notification March 24, 2020. This can be deemed a rational decision, but just  for a short span of time. The stay on IBC, on the other hand, is likely to be viewed with nothing but a grain of salt for a number of purposes. Throughout history, insolvency laws in multiple nations had changed as a result of unexpected events such as the Great Recession, the Asian Depression, and so forth. Even so, instead of suspending the proceedings, both economies have emphasized contemporary and more efficient techniques of reorganization.

Indian corporates have experienced many turbulences amid COVID-19. The ‘suspension’ was established to curb such turbulences and crisis faced by the corporates. But over the period of time, the scenario has changed, there have been speculations that the suspension may have acted as bane to the Corporates. If the suspension is not looked into then it will lead to failure of the very objective of it and the interest of the corporates. The evolving insolvency and bankruptcy code is making the understanding of it more complex. Hence, to efficiently control the insolvency and bankruptcy practices, it is important for the regulatory authority to keep the regulations updated to meet the challenges of the present issues. Financial Creditors, Operational Creditors may have fallen prey to the suspension of the provisions but it might have proved as a blessing to the corporates. In order to prevent the creditors from facing further losses, it is important for authorities to amend the suspension  provisions which poses to be a problem for the creditors as well as to the corporates since,  the ever-changing market situation makes it hard for them to adapt but on the other hand protects the creditors from falling prey to fraudulent and unfair trade practices of the corporates. Though it may be difficult for regulatory authorities in the developing law that balances the interest of creditors as well as the corporates amid Covid-19 situation but the  efforts towards the same should not be reduced.

  1. CORPORATE INSOLVENCY AND BANKRUPTCY INITIATION PROCESS(CIRP)

The Code regulates the insolvency of a body corporate, establishing a time-bound and efficient mechanism of Insolvency Professionals serving as liquidators. Based on the nature of the debt, such as ‘financial debt’ or ‘operational debt,’ the Code classifies lenders of a Corporate Debtor into either ‘financial creditors’ and otherwise ‘operational creditors’. The Code describes a ‘financial debt’ as one that could be distributed without regard to the period cost of cash. Whereas Worker liabilities and state dues as well as taxes are examples of operating debt. The IBBI modified its CIRP Rules to recognize ‘other creditors’ (those who do not fit the description of a ‘FC or OC) as a result even the homebuyers can be financial creditor and apply for CIRP proceedings.[2] A company’s financial or operating creditors, as well as the corporate itself, may file to the National Company Law Tribunal (NCLT) for a resolution admitting the Corporate Debtors to the corporate insolvency resolution process (CIRP)[3]. The claimant must demonstrate that a failure in payment by the corporate debtor exceeding Rs. 1 crore has occurred. The NCLT must issue an order of accepting or refusing the application in less than 14 days.[4]

The CIRP Proceedings can be initiated by: –

A.    Financial Creditor

The term financial creditor has been defined under Section 5(7) of Insolvency and Bankruptcy Code as an individual to whom an amount is due to be paid and also the individual to whom such amount is lawfully assigned or transferred. The financial creditor can file for CIRP Proceedings against the corporate debtor in NCLT by paying Rs. 25,000/- (Rupees twenty-five thousand only). The financial creditor is given the rights to initiate CIRP proceedings under section 7 of IBC. The financial creditor can himself or with other financial creditors can initiate such proceeding to recover default by paying requisite prescribed fees and mentioning the default amount as well as the name of resolution professional.[5] The Adjudicating Authority i.e., NCLT then has to look into the application and the records of the resolution professional and has to accept or reject the application within 14 days from such application been made by the corporate debtor. The financial creditor need not send the demand notice to the creditor for initiating the CIRP proceeding. They can directly initiate application in NCLT for CIRP.

B.    Operational Creditor

The term Operational Creditor (OC) has been defined under Section 5(20) of Insolvency and Bankruptcy Code has an individual to whom the working debt has been owned or an individual to whom such debt has been lawfully assigned or transferred to. The procedure for initiating the CIRP proceeding by a Operational Creditor is similar to that of financial creditors with the only difference of requirement of Operational Creditor to send the 10 days prior demand notice to the corporate debtor stating the amount defaulted and the corporate debtor has the option to repay the amount or settle the dispute within 10 days from receiving the notice.[6] If the corporate debtor fails to pay back the Operational Creditor or a reply then the Operational Creditor can file an application for CIRP before NCLT by furnishing the demand notice, affidavit and certificate of no payment being made by corporate debtor and any other information may be submitted by the Operational Creditor to NCLT with prescribed fees of Rs. 25,000 (Rupees Twenty-Five Thousand Only).[7] The adjudicating authority can then within 14 days from such application being made can accept or reject it.

C.    Corporate Debtor

The term has been defined under Section 5(8) of the Insolvency and Bankruptcy Code  as a body corporate which owns debt to any other individual or corporates. The Corporate Debtor (CD) can himself initiate the CIRP proceedings before the NCLT in case of default. The Corporate Debtor along with the application should submit the books of account for the defaulting period, the name of resolution professional and pay the prescribed fees.[8] The Adjudicating authority then should accept or reject the application filed by the corporate debtor.

The CIRP Process established through the IBC Code also consists of certain irregularities and laws which need to be looked upon by the legislators such has the priority given to Financial Creditor over Operational Creditor whatever the reason may be. Also, the unclear and disadvantageous position of unsecured financial creditors under insolvency proceedings, repayment plan approach of CIRP, the aim during CIRP proceedings of the corporate should be to revive them instead of just repaying the creditors etc. This are the matters which needs to be looked upon by the regulators apart from new forced challenges faced due to Covid-19 period.[9]

  1. OBJECTIVE OF CIRP PROCEEDINGS

The CIRP’s main goal was to bring together and reform existing laws pertaining to insolvency of corporations, limited liability, partnerships, and persons, which were previously spread across a variety of statutes. Another goal of the proceedings is to establish a time-bound mechanism for resolving insolvency in terms of improving the significance of corporate individuals’ resources; and to give parties the autonomy they need to reach at the most acceptable solution for resolving shared ownership issues through negotiations. The process also provides for The Code a forum for negotiations among creditors and outside financiers, which may lead to such reorganizations. Most importantly it establishes a market framework for rescuing financially distressed businesses and facilitating their dissolution in times of economic hardship, in compliance with the Code’s frameworks and legislation and standards. The code helps the corporate and the creditors to reach at the amicable settlement or for the creditors to get paid of their dues with the help of NCLT and certain experts such as resolution professionals.

Whereas the objective of the ordinance passed now is to prevent companies in crisis as a result of the COVID-19 disease outbreak against being forced into insolvency proceedings, and exempt failures resulting from the COVID-19 disease outbreak for the purposes of the insolvency procedure stated Insolvency and Bankruptcy Code, 2016.[10]

  1. COVID-19 PANDEMIC AND ITS IMPLICATION ON THE CODE

To tackle the outbreak of the Covid-19 pandemic, that has had a significant effect on India’s industry, capital industry, and economy, the Indian government has taken the following measures in the debt holders’ favor to help them reconstruct their businesses:

A. Initiation of CIRP with a higher required minimum limit of default

The required minimum lower limit of default for triggering insolvency proceedings that was formerly INR 1 lakh has now been raised to INR 1 crore in order to protect businesses, especially Micro Small Medium Enterprises (MSMEs). The relevant authorities are expected to announce a separate insolvency resolution process for MSMEs under Section         240A of the Code.

B. Exclusion of debt owned amid pandemic from the definition of “Default”

This ensures that all debt accrued by corporations amid Covid-19 period would not be included in default, and therefore no insolvency proceedings would be brought for them. MCA will issue a specific circular outlining the timetable through which certain “Covid- 19 associated debt” will be exempt from such default.

C. Suspension of initiating fresh CIRP Proceedings U/s 7, 8 & 10 of IBC, 2016

Withdrawal of CIRP against the corporate debtor for any default in payment occurring  on or after March 25, 2020, for a term of six months or a maximum of one year.[11] Furthermore, the RP is prevented from filing any claim under Section 66(2) deceptive  dealing or dishonest dealing, i.e. transactions performed to deceive Operational Creditor or financial creditor or Corporate Debtor, to classify and keep responsible those individuals who are liable for such suspicious transactions, in respect of any default occurring on or prior to the date March 25, 2020 for a period of six months.[12] In Ramesh Kymal vs. M/s Siemens Gamesa Renewable Power Pvt. Ltd.[13]the Supreme Court has stated the period within which the suspension of CIRP will apply. The issue of the enactment of the ordinance been done      at 5th June 2020 and its retrospective application from 25th March 2020 was upheld by the Court.

However, if we will look into Section 10 of the IBC, it was really a boon to the corporate debtors to not just save them from financial distress but also to provide them with proper resolution process under IBC. Unfortunately, due to temporary suspension of Section 10, the corporate debtors were left with no other option then to wait for the statutory bar to get over and then file for insolvency proceedings and look into the acceptability of the application. Section 10A acts as a non-obstante clause which will triumph over anything contained in Section 7,8 & 10 of IBC, 2016.[14]

According to a latest report by rating agency ICRA (Investment Information and Credit Rating Agency of India Limited), lenders may only receive Rs. 60,000-65,000 crores throughout the current financial year with the help of the effective resolution plans under the IBC, particularly in comparison to about Rupees One lakh crore in 2019-20, a 40% decrease.[15]

  • ADVANTAGES OF SUSPENSION OF CIRP PROCEEDINGS
  1. The Amendment has given statutory recognition to the corporate activities by suspension   of Section 7, 8 & 9 of IBC.
  2. The Amendment has enabled the corporate body facing financial distress with the opportunity by providing them with more time for corporate strategies.
  3. Have avoided the filing of CIRP of defaults below 1 Crore hence, will reduce the case  burden on NCLT.
  4. The genuine cases of defaults which occurred due to extraordinary and unforeseeable situations like COVID has been saved by suspension of section 7, 8 & 10 of Insolvency and Bankruptcy Code, 2016.
  5. The suspension of CIRP proceedings has ensured that the assets of the corporate debtors are not shifted to that of creditors, since, the conditions are out of the control of the corporate debtor.
  6. The tribunals will not be over-burdened with the cases which currently do not have proper  infrastructure to meet the needs during such pandemic. If the provisions would not have been suspended then it would have paved a way to untimely resolution resulting in massive  loss of the corporate debtor as well as the creditor.[16]
  7. The proposed ordinance enables businesses that have been severely impacted by the pandemic to concentrate on getting back on their feet without fear of going bankrupt.

DISADVANTAGES OF SUSPENSION OF CIRP PROCEEDINGS

  1. Although the purpose of the Amendment seems to want to shield the administration of     corporate debtors suffering damage as a result of COVID’s negative financial impact, the requirements of the Amendment (as currently   drafted) can   be   abused   by corporate debtor’s directors/partners, as the Regulation prohibits the RP from bringing any application against the wrongdoer.
  2. For defaults that occurred during the period of suspension, no claim for the commencement of insolvency proceedings through the Insolvency Code could be made, which bars the genuine claimers from resolving to CIRP Proceedings.
  3. The transactional default limit occurs before or after the Suspension Period ends, a claim for insolvency would only be lodged if the sum of the debt is 1 crore or more will now bar the creditors below one crore to initiate their CIRP proceedings.
  4. The suspension of CIRP proceedings without proper definition of debts occurred amid corona is arbitrary for all the CIRP applicants.
  5. Such blanket prohibition will enable the corporate debtor to further continue with debts and avail the benefit during the prescribed prohibition.
  6. Intentional defaulters would have an undue incentive to absolve, or at the very least delay, liability due to the moratorium on triggering insolvency. It is critical that the suspension relief be limited to actual defaulters, with stringent evidence needed before the CIRP benefit is granted.
  7. The imposition of a CIRP restriction, as well as the effect of the recently announced rise in the insolvency limit, would limit operational creditors’ ability to pursue default proceedings in still overloaded court system. It would negate the intent of Section 10 of the IBC’s formalized bidding process, which gives companies the opportunity to reorganize itself.[17]

CONCLUSION

The updated iteration of Section 10A makes no distinction among default payment induced due to corona outbreak and defaults that corporate debtors may make for several reasons other than corona. This could be due to the complexity of determining if or not a specific financial default has been incurred as a result of the COVID-19 pandemic. As a consequence, lenders are unable to submit an application within the Insolvency Code against corporates who are not affected (or are less affected) by the economic slowdown caused by COVID-19, but have decided to postpone payment of debt due to the protection provided by the Ordinance from insolvency proceedings for an indefinite period. There might also be tremendous increase in filing of CIRP proceedings after the suspension is uplifted by the IBC authorities and many corporates might go in insolvency and bankruptcy which will be completely opposite from the purpose the amendments were done for. The Legislation also prohibits a corporate debtor from initiating a voluntary insolvency petition. As a consequence, a corporate debtor who already has defaulted on payments during the Period Of suspension and is unable to perform business caused by a lack of resources will be unable to seek the adjudicating authority and seek protection through the Insolvency Code to shield itself from any claim or Court action.


[1] Mesha Khandelwal & Ananya Ghosh, Suspension of CIRP during Covid-19: A Boon or a Bane? IndiaCorpLaw, July 28, 2020, https://indiacorplaw.in/2020/07/suspension-of-cirp-during-covid-19-a-boon-or-a-bane.html.

[2] Insolvency and Bankruptcy (Amendment) Code, 2017, Acts of Parliament, 2017 (India).

[3] Insolvency and Bankruptcy Code, 2016, § 3, Acts of Parliament, 2017 (India).

[4] Insolvency and Bankruptcy Code, 2016, § 7(4), Acts of Parliament, 2017 (India).

[5] Insolvency and Bankruptcy Code, 2016, § 7, Acts of Parliament, 2017 (India).

 [6] Insolvency and Bankruptcy Code, 2016, § 8, Acts of Parliament, 2017 (India).

[7] Insolvency and Bankruptcy Code, 2016, § 9, Acts of Parliament, 2017 (India).

[8] Insolvency and Bankruptcy Code, 2016, § 10, Acts of Parliament, 2017 (India).

[9] Zakkariya T H, Revisiting the Corporate Insolvency Resolution Process under the IBC, 2016: Problem and Prospects, Journal of Law and Justice, Vol. II, Issue IV, December 2019, ISSN (online): 2581-8694

[10] Mustafa Motiwala & Dinesh Gupta, India: Suspension of the Insolvency Proceedings in India: An Overview, MONDAQ, August 05, 2020, https://www.mondaq.com/india/insolvencybankruptcy/973004/suspension-of-the- insolvency-proceedings-in-India-an-overview-.

[11] Insolvency and Bankruptcy Code, 2016, § 10 (a), Acts of Parliament, 2017 (India).

[12] Ahlawat & Associates, Insight into the Bankruptcy, Insolvency and Rehabilitation Proceedings in India, INTERNATIONAL LAWYERS NETWORK, June 15, 2020, https://www.ilntoday.com/2020/06/insight-into- the-bankruptcy-insolvency-rehabilitation-proceedings-in-India/.

[13] Civil Appeal 4050 of 2020

[14] Puneet Agarwal, Shuchi Agarwal & Gaurav Gupta, Implication of CIRP Suspension on IBC Ecosystem,

LawStreetIndia, July 17, 2020, http://www.lawstreetindia.com/experts/column?sid=436.

[15] Suspension of fresh IBC proceedings, pandemic woes may hit resolution pace for stressed assets, THE ECONOMIC TIMES, December 31, 2020, https://economictimes.indiatimes.com/news/company/corporate- trends/suspension-of-fresh-ibc-proceedings-pandemic-woes-may-hit-resolution-pace-for-stressed- assets/articleshow/80042303.cms

[16] Ramya Hariharan & Asmita Rakhecha, India: Decoding the Suspension of Insolvency and Bankruptcy Code, MONDAQ, July 02, 2020, https://www.mondaq.com/india/insolvencybankruptcy/961132/decoding-the- suspension-of-insolvency-and-bankruptcy-code.

[17] Manish Jha &Vishruti Sahni, Is Suspension of Insolvency Process in India Detrimental to the Interest of Lender?, TheNewsMinute, May 21, 2020, https://www.thenewsminute.com/article/suspension-insolvency-process-india- detrimental-interest-lenders-125024.

Author: Kumari Akanksha, VIT School of Law    

Editor: Kanishka VaishSenior Editor, LexLife India.

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