The ongoing impact of COVID-19 pandemic on the business, financial markets and economy has led to uncertainty and stress in the business for the reasons beyond control of the corporate persons. To contain the spread of COVID-19 the Government of India brought into force the nation-wide lockdown since 25th March, 2020 which has further added to disruptions on usual business operations. These have led to lack of adequate number of resolution applicants to rescue the corporate persons who may fall into committing default in discharging their debt obligations during this difficult time.
In order to prevent corporate persons (i.e. companies, limited liability partnership firms and other limited liability entities) facing distress on account of the ongoing unprecedented situation from being pushed into insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (“IBC”) for an interim period, it was considered desirable to suspend the operation of section 7, 9, and 10 that deals with initiation of corporate insolvency resolution process (“CIRP”) by the financial creditors, operational creditors, and corporate applicant respectively.
Considering that the Parliament is not in session and the President of India is satisfied that it is necessary to take immediate action, the President has promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 (“Amendment Ordinance”), in exercise of the powers conferred under article 123(1) of the Constitution of India. Key highlights of the Amendment Ordinance are as under:
- Suspension of the operation of section 7, 9, and 10 and bar of the initiation of insolvency proceedings
A new section has been inserted after section 10 of the IBC: “10A. Notwithstanding anything contained in sections 7, 9 and 10, no application for initiation of corporate insolvency resolution process of a corporate debtor shall 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 resolution process of a corporate debtor for the said default occurring during the said period. Explanation – For the removal of doubts, it is hereby clarified that the provisions of this section shall not apply to any default committed under the said sections before 25th March, 2020.”
By way of the above legislative insertions it has been ensured that no application for initiation of CIRP of a corporate debtor shall 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. Not only this, by way of a proviso therein it has been further accorded that no application shall ever be filed for initiation of CIRP of a corporate debtor for such default occurring during the said period. For avoidance of doubt, it has also been specifically clarified by way of an explanation that the aforesaid provision shall not apply to a default committed before 25th March, 2020.
- Bar on action against the directors / partners for not exercising due diligence in minimising the potential loss to the creditors before the insolvency commencement date in respect of default falling under section 10A:
Section 66(2) of the IBC provide for sanction against the directors or partners for failing to exercise due diligence in minimizing potential loss to the creditors in cases where the director/partner had knowledge, actual or constructive, of no reasonable prospect of avoiding the commencement of CIRP of the corporate debtor. In such a case the Adjudicating Authority may, on an application moved by a resolution professional during the CIRP, pass an order making the director/ partner liable for contribution to the assets of the corporate debtor.
Considering that the initiation of CIRP of a corporate debtor itself shall be prohibited during the interim period as mentioned in the newly introduced section 10A of the IBC, the power of RP to move an application for getting an order issued against the directors/ partners for their failure to exercise due diligence to minimize the potential loss to the creditors in respect of defaults falling under the immunity provided under section 10A has been taken away, by way of insertion of sub section (3) after subsection (2) of section 66. Sub-section (3) of section 66 thus reads as under:
- Notwithstanding anything contained in this section, no application shall be filed by a resolution professional under sub-section (2), in respect of such default against which initiation of corporate insolvency resolution process is suspended as per section 10 A.
Interestingly, section 10A introduces prohibition/ bar, and not “suspension” as attributed by the new subsection(3) of section 66 on filing of application for initiation of CIRP of a particular class, viz, applications for default committed during the period commencing on 25th March, 2020.
Secondly, sub section (3) of section 66 has been seemingly inserted to iron out and avoid the confusing situation that might crop up in its absence, i.e. existence of a provision to initiate action against the directors/partners for not exercising due diligence to avoid CIRP in respect of defaults against which initiation of CIRP itself is suspended. Non-insertion of sub-section (3) would have technically caused a tangled-wire like situation, more so because action against the directors/partners can be taken during the CIRP by the resolution professional. Therefore, strictly speaking, the introduction of new sub-section (3) to section 66 seems to be merely clarification based, and made by way of abundant caution for removal of doubts, as without it too the position of law would have been the same. Section 66(3) is a non obstante clause prohibiting filing of application under section 66(2) in respect of default which is immune from initiation of CIRP by effect of section 10A. Generally non obstante provision is meant to over-ride the operation of a provision which would otherwise operate. In case of defaults which would be covered by section 10A and therefore would not lead to a CIRP, the provisions of section 66 (2) will not come into play at all, because section 66(2) is attracted only to the applications made “during” the CIRP. There was no need to provide for a separate sub-section (3) to de-operationalize section 66(2) in the particular set of circumstances where it would even otherwise not operate.
Having said that, one should also not forget that in order to provide immunities as above, a retrospective immunity has also been granted, by implication, to the directors/partners on their failure to discharge the duty of exercising due diligence to protect the interest of creditors which might have got triggered way before the default committed on or after 25th March, 2020. It therefore requires deeper consideration and deliberations by the legislature to analyze the implications and the amendments required, if any. However, the present Amendment Ordinance shows the anxiety of the framers to give maximum succor to the corporate world in the ongoing situation. Hopefully, the Amendment Ordinance will achieve its objects and give much needed comfort and breathing space for the businesses undergoing financial difficulties, and support the Aatmanirbhar Bharat campaign and the economy revival strategies. Sangeet Rai is Partner, Lexolve Partners, Law Firm
