Insolvency and Bankruptcy Code, 2016 (IBC) is a bankruptcy law in India that seeks to consolidate the existing framework by creating a single law, which was framed due to the tremendous increase in the number of cases for insolvency and bankruptcy. It is considered to be concise, clear and the biggest insolvency reform that ever existed in India. The code outlines separate insolvency resolution process for individuals, partnership firms and companies.
This process may be initiated by either debtors or creditors and they can start‘recovery’ proceedings against each other. When a default in repayment occurs,creditors gain control over debtor’s assets and must take decisions to resolve insolvency. The Insolvency and Bankruptcy Code (Amendment) Act, 2019 has increased the mandatory time limit of three hundred and thirty three days including the time involved in legal process to complete the resolution process. The main aim of the code is to protect the interests of the creditors including shareholders in the company,to revive the company within a stipulated time period, to maximize the value of assets of the company, to get necessary relief to the creditors for the non-payment of their debts by the company.
In the present scenario, India is facing one of the biggest challenges of survival of its citizens and the economy due to the pandemic COVID-19. It has resulted in nationwide lockdowns and restrictions on the movement of people, goods and services. Due to its major impact on the economy, an ordinance was passed by the Finance Minister on March 24th, 2020 regarding the threshold limit to file an application under IBC which was made ₹1 crore from ₹1 lakh and recently it was also held that for an year IBC is be suspended. It led to a lot of ambiguity regarding the further functionality and applicability of this code.
On June 5th, 2020, Insolvency and Bankruptcy Code (Amendment)Ordinance, 2020 came into effect, which was most awaited from the past two months. According to this ordinance, the President provides for insertion of Section 10A and Section 66(3) to the code. The basic principle of the Ordinance is to suspend fresh bankruptcy proceedings that are filed against persons and corporations due to COVID-19 for at least six months and upto a period of maximum one year.
There is a chronology of amendments which took place during the pandemic starting from where the threshold limit for filing the petition increased to 1 crore from 1 lakh on 24th March, 2020. IBBI (insolvency resolution process for corporate person) in its third amendment introduced a special provision of Section 40(c) relating to the timeline which provides an exemption of lockdown in relation to the timeline mentioned under CIRP on 29th March, 2020. IBBI (liquidation process) in its second amendment introduced a provision of Section 47 (a), providing for the exemption of lockdown timelines mentioned under the liquidation process on 17th April, 2020.
An embargo on fresh proceedings under the code for the next 1 year on 17th May, 2020 was announced by the Finance Minister, in order to increase the ease of doing business initiative. On 5th June, 2020, an ordinance was passed by the Government regarding the recent developments under IBC. The corporate insolvency resolution process was suspended for six months. Major changes like section 10A and section 66 were inserted by this ordinance of 2020 with no fresh default cases from 25th March, 2020 i.e. the day on which the 1st nationwide lockdown was announced by the Prime Minister.
The NCLT Kolkata vide an order dated 20.05.2020 in the case of M/s. FosecoIndia Limited v. M/s. Om Boseco Rail Products Limited held that it is a well-settled law that a statute is presumed to be prospective in nature unless it is held to be retrospective either expressly or by necessary implications. The key highlights during this pandemic were firstly the suspension of section 7, 9, 10 of IBC in case of defaults which arose on or after 25th March, 2020. Secondly, the time period in which suspension of initiation of CIRP will be effective is yetto be notified but for now it is for a minimum period of six months which could extend upto a maximum period of one year. Only if the default arose before 25.03.2020 and the amount of default is more than one crore, the application to initiate CIRP for corporate debtors is allowed.
The amendments which were brought under the Insolvency and Bankruptcy Code, 2016 during this pandemic are confusing and it raises uncertainty as well. Due to lack of clarity and ambiguity, many debates are going on as to whether these amendments are going to fulfill their objective to protect the person/entities that are genuinely impacted due to COVID-19 from being dragged to bankruptcy. As a step to avoid meaningless interpretations, the government and NCLT should make clarifications in respect of the ordinance for its applicability in the future.
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