Introduction
The Insolvency & Bankruptcy (Second Amendment) Bill, 2020 was introduced in Rajya Sabha and was passed on September 21, 2020. This bill seeks to amend the Insolvency & Bankruptcy (Amendment) Ordinance, 2020 & Insolvency & Bankruptcy Code, 2016. One of the objectives of the Code is to determine the solutions for Non Performing Assets. This Code provides for the collective mechanism for resolving the insolvency within the framework of equity and fairness to all the stakeholders and to preserve economic value in the process.
It prescribes for the process that is time-bound for resolving Insolvency in companies as well as among the individuals. Insolvency occurs when the companies or the individual are unable to pay their Outstanding Debts. The Insolvency & Bankruptcy Code provides for the National Company Law Tribunal, Debt Recovery Tribunals and creation of Insolvency and Bankruptcy Board of India which will govern the Insolvency & Bankruptcy Processes in India. The Insolvency & Bankruptcy (Second Amendment) Bill, 2020 seeks to suspend the Corporate Insolvency Resolution Process also known as CIRP and is mentioned under Chapter 4 of Insolvency & Bankruptcy Code, 2016. This Bill replaces the Insolvency & Bankruptcy (Amendment) Ordinance, 2020 which was passed by the Indian parliament on June 5, 2020. In light of the COVID-19 pandemic, the World Bank has identified two challenges for an Insolvency Framework in these difficult times i.e. (i) need to prevent otherwise viable firms from prematurely being pushed into insolvency and (ii) increase in the number of firms that will not survive the crisis without resolution of insolvency.
An ordinance that was passed on June 5th, 2020 forbids the initiation of the insolvency proceedings for all the defaults arising during the next six months from March 25, 2020 (extendable up to one year as per the notification of the Central Government, now extended till December 25th). The Ordinance passed earlier, suspends the Section 7, 9 & 10 of the Insolvency & Bankruptcy Code, 2016 on various grounds, like, the pandemic has created uncertainty and stress for the businesses for reasons that are beyond their control; the Nationwide Lockdown also hampered the normal Business Operations. Section 7, 9 & 10 of the Code provides for the filing of insolvency matters by the Financial Creditor, Operational Creditor and also by the Corporate Debtor for restructuring the Debt. This Ordinance does not apply to the defaults that arise before 25th March 2020.
The proceedings initiated before this date doesn’t come under the preview of this Bill. The Finance Minister, while presenting this Bill said that Insolvency & Bankruptcy Code is not a recovery Law. As per the Report of Reserve Bank of India’s report on Trend and Progress of Banking in India 2017-18(Crisil), Exactly three years later, the code was legislated, it has made material progress in addressing the deadlocks and it also helped in faster recovery of stressed assets and quicker resolution timelines. Recovery through the Code was of Rs 70,000 crore in the year 2019, which is twice of Rs 35,500 crores that were recovered through other resolution mechanisms such as the Debt Recovery Tribunal, Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002, and Lok Adalats in the year 2018.
The Finance Minister said that the Ordinance passed or the Bill does not provide any protection to the Frauds so made and section 166 of the Companies Act, 2013 will not be impacted by this Bill thus, this bill does not protect from the Fraud. However, the government chose to extend it only by three more months at the expiry of the first six months and the Suspension was extended till 25th December 2020. This calibrated extension shows a wait-andwatch approach of the government and the confidence that economic conditions may improve Slowly.
Key Features of Insolvency & Bankruptcy (Second Amendment) 2020:
For Firm Disputes no Insolvency Proceedings can be initiated: This Code allows the Corporate Debtor & Creditors to initiate the Proceedings. The Bill provides that for defaults arising during the Six Months extendable up to one year from 25th March 2020, no insolvency proceeding can ever be initiated by Financial or Operational Creditor and as well as from Corporate Debtor. This Bill provides for the Liability for Wrongful Doing: Under the Insolvency & Bankruptcy Code, any director or the partner of the corporate debtor might be held liable to add their contributions to the assets of the company in certain situations.
This liability can occur even after the known fact that the insolvency proceedings cannot be avoided, the person did not exercise its due diligence in minimizing the potential loss to the Financial & Operational creditors. The (RP) Resolution Professional may apply to the National Company Law Tribunal to hold such persons liable. The Resolution Professional is appointed to manage the resolution process upon the acceptance of an application for initiation of Corporate Insolvency Resolution Process. This bill prohibits the Resolution Professional from filing such an application in relation to the defaults for which initiation of Corporate Insolvency Resolution Process has been prohibited.
Why was there a need to suspend the Insolvency Bankruptcy Code? – An analysis
The Insolvency and Bankruptcy code was suspended on the principle that Covid-19 pandemic does not allow the business to work as usual as they used to work earlier. Due to the Nationwide Lockdowns and Closing of Businesses will lead the businesses into greater losses which may lead them to insolvent and it is suspended in order to protect the businesses. Another concern may be that it will reduce the burden of the NCLT(National Company Law Tribunal) which hears all the cases related to the Insolvency. Though, Insolvency & Bankruptcy Code is considered to be one of the finest reforms that happened in the Country. But Suspension of the Bankruptcy Code may not serve the purpose of the Code as it is the reform which promotes the Ease of Doing Business in India. The main objective of the Code is to simplify and expedite the Insolvency & Bankruptcy Proceedings in India as well as to curb down the fraudulent corporate persons who have been defaulting for the payments for a long time.
The Insolvency & Bankruptcy Code proposes the paradigm shift of ‘Debtor in Possession’ to ‘Creditor in control’ regime. We must note that the whole Insolvency & Bankruptcy Code is not suspended but only certain provisions are temporarily Suspended. The suspended Provisions are Sections 7, 9 & 10 of the Insolvency & Bankruptcy Code, 2016. Section 7 & 9 of the Code confers powers to the financial & operational Creditors for applying for the Insolvency Proceedings has been taken away by the Ordinance, which will trigger the Creditor in Control Regime and these recent changes will shift again to the Debtor in possession Regime. This will force the Creditors to follow unnecessary demands of the Corporate Debtors and the Control will again revert to the Debtor. The term Financial Creditor is a person to whom the financial debt is owed & Includes a person to whom such debt legally assigned or transferred. Similarly, the term Operational Creditor means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred. Section 10 of the Code, provides for the Initiation of the Insolvency Process by the Corporate applicant. The suspension of Section 10 may be used by the wilful defaulters to escape from the Legal Proceedings/Insolvency Proceedings.
As said earlier, the full Insolvency & Bankruptcy Code is not suspended but only certain provisions are suspended and we must note here that the proceedings that can be initiated under the Code against the Personal Guarantors are not suspended. If the promoter provides personal Guarantee to someone, then the persons may initiate the insolvency proceedings against the Company and can file an application for initiation of the Insolvency Resolution Process. The term Corporate Debtor means a corporate person who owes a debt to any person. The Creditor may go for alternative remedies as well till when the suspension of IBC remains. The Creditors may go for the legal proceedings that will lead to them an unnecessary delay. The Creditors may file the suit in the Court of Law under Order XXXVII of Code of Civil Procedure, 1908. The lenders can also go under the SARFAESI Act, 2002 if they hold a mortgage over the property of the Corporate Debtor.
Effect of the recent amendment on stakeholders and society:
First, the recent second amendment 2020 is destined to have a ‘cascading’ effect on the economy. This can be understood in simple terms wherein there is a blockage of money. The creditors by the virtue of this amendment would not be able to initiate the insolvency proceedings as provided under section 7 of the Insolvency and Bankruptcy Code which is temporarily suspended. Moreover, the chain of events continues as the money gets stuck at this particular point with the firms. The progress of the economy is hampered as there is no flow of cash from one place to another.The fundamentals of economics dictates an economy prospers when there is a flow of cash in the market and this amendment proposes a contrary front. Even in such situations of crisis the government tries to improve liquidity through liquidity cash injections, there is a high change that these are proven ineffective as people in such times prefer to store the money for unforeseen medical expenses or expenses arising out of sudden unemployment and market unpredictability.
Secondly, there is an imminent danger that the foreign investments will decline. Foreign investors while investing should be assured safety in their investments and a display of lack of confidence would make India lose credibility. This would surely dissatisfy the investors and they would consider alternative countries to invest their money. The importance of high foreign investment is such that it can raise both the actual and potential Gross Domestic Product of a country. The policy framework stability is one of the pillars to attract foreign investments.
Suggestions:
The Government has also made an amendment to exclude ‘COVID-19’ related debt from the definition of default under the Insolvency and Bankruptcy Code and increases the threshold limit from Rs. 1 lakh to Rs. 1 crore which is serving the purpose of the government to protect the MSMEs and Small Corporate Debtors from the insolvency proceedings under the Code. But this amendment seems to be redundant in the light of the Suspension of Code. The Government can also release a notification regarding the increase in the Moratorium Period which is of 180 days as per Section 14 of the Code.
The Court in the case of Bhupinder Singh v. Unitech Limited (Supreme Court, 20/01/2020), The Court granted the Two months moratorium period to Unitech from any legal proceeding against the Company’s Management. Moratorium Period is a period given after the commencement of the Insolvency Resolution Process, during which all the suits and legal proceedings etc. pending against the Corporate Debtor are kept in suspension to give some time to the entity to resolve its status. The Court can also take an approach of giving a Moratorium Period to the Corporate Debtor based on various factors like nature of the default and economic interest etc. Many countries across the globe have changed their procedures for the Insolvency Resolutions but did not suspend their Insolvency & Bankruptcy Laws.
A suggestion can be laid down on the basis of section 10 of the Insolvency and Bankruptcy code. While the government has taken a progressive step, it has errored in suspending section 10 of the amended code as a company which is not in a position to pay its debts and the debt keeps mounting up is not allowed to initiate insolvency proceedings. This is a huge gap in the bill that must be addressed and the clarification on the same should be provided. A mechanism for the same should be developed while maintaining the legality. Thus, the effects of the suspension of insolvency proceedings there is a need to revisit the decision, and the government has to draft a policy by balancing the interest of both creditors and debtors so that the main purpose of paradigm shift of Debtor in Possession to Creditor in Control should take place.
Objections Raised:
The objections which were made by the various members of parliament should be given consideration here.
First, there was an allegation placed on the government they discriminate between the common man and corporate as they favour crony corporates. However, this may be a far-fetched argument as the bill proposes progressiveness and takes a stride in making the economy better. The fallacy of comparison must not be applied when one good is compared with a non-action on a second subject matter. The whole contention is based on the basis that nothing is done for the small-scale firms which is a fallacy as the agenda of the discussion is the viability of the second amendment.
Secondly, it was argued that section 10-A of the bill gives immunity from the initiation of corporate insolvency resolution process to ‘all business’ and a differentiation is not created between COVID affected firms. However, the effect of pandemic is global and every firm is directly or indirectly affected by it, to distinguish and rule out the possibility of even the slightest impact of the pandemic would not be possible. To create such a classification and to analyse each and every case on a fact-based inquiry would be not practical.
Third, the objection was made that the COVID may not end in a year and such suspension of sections 7,9 and 10 is not a permanent solution to the problem. Whenever there is a crisis, short term plans must be launched immediately to bring stability and the government through this bill has done the same. However, a valid point is raised here that there is a need to construct a long-term strategy and to not be contingent on the assumption that a vaccine would be developed. There are possibilities that COVID may not end by the year and for such instances the government must be ready.
Fourth, it is argued that Gross NPA of banks went up from Rs 2.63 lakh crore in March 2014 to Rs 10.3 lakh crore in March 2018, the objective of Insolvency & Bankruptcy code is to avoid the wilful default by firms and this Bill destroys the very objective.This argument does not hold much value as in the time of pandemic, this not a ‘wilful’ default, it is because of the global world order during this pandemic that these defaults are occurring. Moreover, as to the increase in NPAs are a subject-matter of ‘normal times’, the current measures are taken in the time that is specific to pandemic.
Conclusion:
While there was some opposition to this bill there was overwhelming support as this bill aims at improving the economic condition of the nation. The bill has been termed as progressive and the two features of the bill provide aid to the companies in this time of pandemic. As stated by Nirmala Sitaraman, the priority is to keep the company to be a going concern rather than to liquidate them at the earliest. From the promulgation of the Insolvency & Bankruptcy Code, 2016 a total for 258 companies were saved from bankruptcy and 965 firms went in for liquidation.
Among these three fourths were provided viable liquidation solutions and therefore we see a decline in loss of employment. With these two new amendments the position of Insolvency and Bankruptcy is temporarily changed. This Code as said earlier provides for the initiation of the Insolvency Resolution Process against personal guarantors in the event of their default of payment. This Amendment only suspends Section 7, 9 & 10 of the Code. The main intention of the legislature was to give immunity against the Corporate Insolvency during the COVID period. After analysis it can be said that, this ban will only be confined to the defaults that may arise in the COVID Period and will not impact the applications filed before March 25, 2020.
It is also to be noted that IBC is not a recovery law, and the main objective of this amendment is to save the lives of the Companies and as explained earlier the Insolvency Proceedings can also be initiated under other Laws and Acts. The Insolvency & Bankruptcy Code (Second Amendment) Act, 2020, has created some complexities and has raised certain questions in the mind of the stakeholders that need to be answered with time. The viability of this amendment as a long term solution if the pandemic prolongs is one thing that raises ambiguity in the minds of many. The societal and stakeholders interest must be kept in mind before re-approaching this topic while even taking into consideration the interests of minority shareholders.