The speculations over altering the operation of Insolvency and Bankruptcy Code, 2016 ("IBC") have been doing rounds since the outbreak of COVID-19. The Finance Minister, clearing the air over the speculation, on 24.03.2020 announced several relief measures relating to statutory and regulatory compliance across various sectors including increasing the threshold of 'minimum default amount' under the Insolvency and Bankruptcy Code, 2016 to INR 1 Crores from INR 1 Lacs. Putting an end to speculations, it was also announced that Central Government is considering suspension of Section 7, 9 and 10 of IBC 2016 for a period of 6 months. The intention was to prevent companies (Corporate Debtor(s) from going into insolvency proceedings due to increasing uncertainty in the market and consequent defaults. On 17.05.2020, the Finance Minister while making announcements regarding the economic relief packages amidst Covid-19 crisis further made it clear that initiation of fresh insolvency cases would be suspended up to one year along with excluding COVID-19 related defaults under IBC and an Ordinance to that effect would soon be promulgated. The much-awaited ordinance suspending initiation of Corporate Insolvency Resolution Process ('CIRP') was promulgated by the President of India on 05.06.2020 vide the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020.
THE INSOLVENCY AND BANKRUPTCY CODE (AMENDMENT) ORDINANCE, 2020
The Rationale behind the Ordinance
The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 ('Ordinance') has been passed as a preventive and protective step, with an objective of enabling and safeguarding the corporate debtors who may default in the discharge of their obligations and are experiencing distress on account of the unprecedented situation. The Ordinance aims to provide stability to companies experiencing financial difficulties due to the coronavirus by enabling them to take advantage of Atma Nirbhar Bharat Package aid or to make financing or restructuring arrangements with creditors and capital providers. Another rationale for bringing the Ordinance paucity of resolution applicants to rescue the corporate debtors as most of the Corporate Persons (prospective resolution applicants) are under stress in the wake of Covid-19. Therefore, there may not be many resolution applicants who would be interested in infusing capital for the revival of the Corporate Debtor. Resultantly, most of the corporate debtors will be pushed into premature liquidation wherein, the assets would have distress sale, realizing abysmally little for creditors. Consequently, the object of IBC of the revival of a distressed Corporate Debtor and maximization of the value of the assets would fail.
Amendments brought under the Principal Act through the Ordinance
The Ordinance inserts two new sections under the principal Act (i) Section 10A and (ii) sub-section 3 to Section 66 of the Principal Act. Section 10 A introduced in the principal act in effect suspends initiation of corporate insolvency resolution process contained under Section 7 which empowers a financial creditor to initiate it, Section 9 initiation by operational creditors and Section 10 initiation by the corporate debtor of IBC for any default arising on or after March 25.03.2020 when lockdown began for six months or such further period as may be notified for this purpose. However, this period cannot exceed one year that is, up to 24.03.2021. The Ordinance specifically clarifies that CIRP can be initiated for the debt defaults prior to 25.03.2020.
Furthermore, the Ordinance by way of a proviso specifies that no Application shall "ever" be filed for initiation of CIRP against a corporate debtor for the said default occurring during the said period (6 months or extendable up to 1 year). In our view, this proviso shall be read in a manner to mean that no suspension shall operate for filing of insolvency proceedings in relation to default occurring beyond the stipulated period of suspension. In all likelihood, the interpretation of the proviso will be tested by the Adjudicating Authority in the near future.
Understandably, the new subsection (3) to Section 66 of the Principal Act stipulates that a resolution professional cannot initiate an application for fraudulent trading or wrongful trading against directors of companies in respect of defaults against which initiation of CIRP is suspended as per Section 10 A.
SUSPENSION OF CORPORATE INSOLVENCY RESOLUTION PROCESS: OPTIONS AVAILABLE TO CREDITORS
IBC is special legislation which is created to consolidate and amend laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals, in a time-bound manner. The code has proved to be a game changer till date as it has revolutionized the business scenarios in the country and has provided a specific legislation which focuses on time-bound and expeditious resolution for financial debts. IBC has reduced the time taken for winding up companies in India from over four years to less than a year. It is also estimated that IBC through its faster resolution mechanism has a potential to address around Rs 10 trillion of non-performing assets (NPAs) in India's banking system. Therefore, IBC has been the profuse choice of every creditor when it comes for recovering or restructuring of debts. Though IBC has proved to be one of the most expeditious modes for resolution of the default, however, the insertion of the Section 10-A has forced the creditors and the legal fraternity to find a suitable alternative which may possess the potential to address the need of creditors without leading to the lengthy-time taking litigation. Following are some alternative which may cater to the immediate needs of the creditors:-
- Scheme of Corporate Debt Restructuring
Indian law provides three modes through which a creditor may get the default of debt restructured. The modes are Insolvency and Bankruptcy Code 2016, the restructuring scheme prescribed under Section 230 of Companies Act and the RBI Prudential Framework for Resolution of Stressed Assets. Due to the IBC (Amendment) ordinance, 2020 the creditors are left with two options mainly i.e. (i) approach NCLT for implementation of restructuring scheme under Section 230 of Companies Act or (ii) the RBI Prudential Framework for Resolution of Stressed Assets. The mechanism of restructuring under the Companies Act and the RBI Prudential Framework for Resolution of Stressed Assets are explained below:
1. Companies Act 2013
The restructuring scheme under the Companies Act 2013 can be utilized by an array of creditors. It does not differentiate any creditor into financial and operational like IBC. Unlike the mechanism of IBC which puts creditor in control, the scheme under the Companies Act 2013 puts' debtor in control' thus it does not absolve the liabilities of the directors even after the restructuring plan is approved and they remain in power. The Scheme is collective in nature as it involves actions by creditors of each class, shareholders and thereafter approval of NCLT. Thus it may lead to larger satisfaction among all stakeholders. One of the key features of the scheme is the involvement of other statuary bodies under Section 230(3).
The procedure under the Companies Act 2013t can provide as an economically feasible substitute to IBC which works on the participation of all classes of creditors and the members of the company. The role of Court is also limited to determining whether the resolution plan is fair and reasonable to all class of creditors. Thus, the scheme of restructuring under the Companies Act can be a useful mechanism to restructure the debts during the suspension of IBC.
2. Stressed assets framework of the Reserve Bank of India (RBI)
This framework has been released by Reserve Bank of India for the restructuring of the stressed assets by banks and financial institutions. This framework is only applicable to banks, Financial Institutions (FIs) and Non-Banking Finance Companies (NBFCs). The framework operates by proposal of a resolution plan which has to be put in place after the approval of the board based on resolution policy by the lender for the stressed assets. One of the key features which has been introduced by the new framework is the predetermination of decision making on terms of outstanding credit as well as a number of the lenders. The framework also protects the interest of dissenting lenders as the framework mandates that the dissenting lenders shall get the liquidated value of their due share.
The framework can be used while determining the restructuring of the defaults of the financial institutions. The major benefit of this framework is the expedited process of restructuring and protection of dissenting lenders. This is a suggestive framework by RBI and it does not lay any bar on either insolvency proceedings or restructuring under the Companies Act. Thus secured creditors can consider this as an alternative option for the restructuring of debt and default during COVID-19 crisis.
B. Commercial Courts Act, 2015.
Commercial Courts Act has been lately amended by the legislature to reduce the lagging and pendency and backlog of commercial litigation. . Though the act still lacks behind IBC when it comes to expeditious disposal and restructuring mechanism however commercial courts act can be considered as a viable substitute for creditor due to the striking changes. The Act applies to commercial disputes which have been defined under section 2(c), which covers a variety of subject matters which includes disputes pertaining to agreements including shareholder agreements and Joint venture agreements, dispute pertaining to transactions, Intellectual Property Rights, arbitrations objections and appeals,. It also considers the time constraint of litigation and attempts to provide a quick disposal mechanism. The new section in the form of section 12-A has been inserted which mandates the pre-trial mediation before a trained mediator which may resolve the dispute on amicable terms without entering the arduous litigation. The Act also includes the concept of summary judgment which can be implemented by either of the parties at any stage and also bars the appeal against interlocutory order which reduces the time and expedites the proceedings. Further, the Act has mentions that the appellate courts are duty bound to dispose of the appeal within 6 months from date of filing of the appeal.
Thus with the above mentioned modifications the Commercial Courts Act has been revived to face the challenges of modern commercial litigation however, the amendments require very strict implementation of the modifications to match IBC and till the suspension of IBC, Commercial courts can be a very useful mode to aid the stressed creditors.
C. The Micro, Small and Medium Enterprises Development Act, 2006.
Micro Small Medium Enterprises largely known as MSMEs were expecting a distinct set of reliefs after the announcement of "20 Lakhs Crores Adma Nirbaher Bharat Package". However, the new ordinance has not declared any special resolution mechanism for them. The suspension of the insolvency proceedings with no other alternative remedy which is as effective as IBC will lead the creditors to MSME Act to find a resolution. Due to the application of Section 10-A in IBC, MSME Act could become a useful tool for operational creditors for recovering the debt from the corporate debtors. One of the silent features of this Act is "buyer's liability' which is defined under Section 15 of the Act as it mandates the buyer to make the payments within 45 days from date of goods supplied/ services rendered and in case of default Act lays down a mandatory provision for payment of compound interest from the date of appointment at a rate thrice to the bank rate making it very stringent along with penal provision which may impose a fine of up to Rs 10000/- for subsequent defaults. Though the Act is a complete code however it does not match the bar established by IBC however in the distress times, creditors of MSMEs can seek remedy.
D. Real Estate (Regulation and Development) Act, 2016 / Consumer Protection Act 2019
One of the biggest beneficiaries of the IBC were the home buyers who were considered as the financial creditors. IBC has been considered as the quickest forum of providing relief to such homebuyers. The suspension of IBC could prove very burdensome for such homebuyers as they have been already stressed by the developer due to default in providing possession despite receiving huge portion of costs. However, in amidst of such crisis Homebuyers can approach RERA authorities (Real Estate Regulation Act). The Act protects the homebuyers against the malafide practices followed by the developer. The Act prescribes that the complaint under RERA shall be disposed within 60 days from date of filing, hence provides a time bound relief. Similarly, the Consumer Commission established under Consumer Protection Act 2019 can also be an alternative remedy. These two statues can cater to the need and requirement of homebuyer however there are few major concerns due to which they lack behind IBC, but they can still provide as an alternative to IBC in times of distress.
E. The Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002
The Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 also known as the SARFAESI Act can be considered as an alternative to IBC. This Act though relates to many provisions of IBC, however, it has a unique mechanism for secured creditors to claim back their invested amount. The whole procedure of recovery under the Act is regulated by RBI. The process of recovery under the Act is undertaken with the assistance of a District Magistrate. This Act provides an elaborative mechanism for the secured creditors to recover the debt owed to the borrowers which may be corporate entities. The mechanism under the SARFAESI Act does not require intervention of courts for enforcement of security interests by a secured creditor. The Act empowers the secured creditor to acquire the possession of the Secured Assets, take over the management of borrower's business, appoint any person to manage the affairs of the secured assets and to receive the money of any person who owes the borrower an amount who may discharge the secured creditor's debt within 60 days if any borrower fails to discharge his liability of repayment of any secured debt. Though the Act has very limited application which is restricted to secured creditors only, SAEFEASI can be considered as an alternative for IBC during the operation of Section 10-A by the secured creditors.
IBC has already proved to be an ace for creating a secured and business friendly environment in India. It has acted as a catalyst for enhancing the investment and trust amongst the investors through its restructuring and resolution mechanism. However, as a result of the pandemic, IBC posed a stringent threat for the existence of many debtor companies who have failed to discharge their debts and obligations due to the nationwide shutdown. The Government, considering the situation and the crisis have taken an affirmative step with attempt to protect the debtor companies who are suffering heavily due to the widespread pandemic to survive the calamitous business scenario by passing the ordinance suspending the proceeding under Section 7,8 and 10 of the code by inserting section 10-A. The suspension of IBC will insulate the corporate debtor and will provide an opportunity for them to recover from the crisis. The ordinance also exempts the debt arising in the pandemic from the category of default for future proceedings also. This Ordinance will aid the debtor companies however, the same will become troublesome for the creditors who will be adversely affected and the Court will be required to interpret this clause in light of equity and justice. Since IBC has been the most preferable forum in the past few years, however, the application of Section 10-A has forced the creditors to look for some alternative forum where they could seek remedy. To aid the creditor in such hour of crisis Authorities established under Companies Act, Reserve Bank of India Regulations, SARFAESI Act, MSMEs Act etc. may come to rescue for such creditors The same may not be as expeditious as IBC, however, will surely provide the required oxygen to prevent such creditors from suffocating.
Siddharth Batra is the Partner at Satram Dass B & Co and Advocate on Record at the Supreme Court of India. Abhinav Sood is Partner / Advocate at Satram Dass B & Co. The author's views are personal.
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