President Ramnath Kovind promulgated the amendments to Insolvency and Bankruptcy Code Ordinance, 2020 and the new rules have been enforced from July 5th 2020 with a view to ease the financial strain on businesses, financial markets and economy. The operations of Section 7, 9 & 10 of the IBC with respect to default arising on or after March 25th , were effectively suspended for a period of six months which can be extended for a maximum period of one year if required. Section 10A has been inserted in the Act, stating;
“Notwithstanding anything contained in Section 7, 9 & 10, no application for initiation of corporate insolvency resolution process of a corporate debtor hall be filed, for any default arising on or after 25th March 2020, for a period of six months or such further period not exceeding one year from such date, as may be notified in this behalf.
Provided that no application shall ever be filed for initiation of corporate insolvency process of a corporate debtor for the said default occurring during the said period.”
Further Section 66 has been added with sub-section (3) that states that no resolution professional should file any application with respect to such default against which CIRP has been suspended as stated in Section 10A. The Centre has stated that expedient suspensions of Section 7, 9 &10 were made in order to prevent corporate persons from experiencing excessive financial strain on account of the recent lockdown imposed.
CONDITIONS TO NEWLY INSERTED SECTION 10A
- The application for the initiation of corporate insolvency resolution process (CIRP), shall not be filed for any default arising on or after March 25th for a period of 6 months or 1 year as the case maybe.
- Section 7, 9 & 10 were in force before March 25th 2020.
- Section 10A was enacted to protect the scope of the code as the ordinance considers practical difficulty of corporate persons who find it difficult to discharge their debt obligations.
- The effect of this ordinance extends to all companies who had given Corporate Guarantees before March 25th.
AMBIGUITIES ARISING OUT OF SECTION 10A
- Which date shall be considered to measure the period of 6 months as provided in the Act?
- The Ordinance does not clarify if whether post the expiry of the said period the creditor will be prevented from seeking initiation of CIRP, irrespective of whether the debtor has recovered financially or not.
- The ordinance does not specify the amount of default. What if a major amount of the default occurred between March 25th and the rest after that date.
- If the debtor commits another default against the same creditor, then would that default meet the threshold under Section 4. In short, whether the default arising during the Covid period can be coupled with the default occurring thereafter.
- How will the Adjudicating Authorities cater to an increasing number of resolution applicants seeking a revision of their existing resolution plans that are pending approval.
- Does sub-section 3 of Section 66, enable Directors of a Corporate Debtor to not be liable for any fraudulent transactions committed during the period of the pandemic?
The IBC ordinance has failed to mark a clear demarcation between protection, compliance and defaults. The ordinance definitely protects the vulnerable debtors on one hand, but on the other hand fails to provide a standard check on the wilful defaulters.