IBC Amendment Ordinance 2020

In a democratic setup it is the responsibility of the Legislature to make laws that are attuned to the realities of the present and in the interest of the society at large. At present the entire world is witnessing an unprecedented crisis and India is not immune to the impact of this global crisis. The governments at the centre and state levels have been implementing policies to tackle the crisis, whether it is at safeguarding human lives or securing economic interests.

One such measure taken by the Central Government was to promulgate The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020, on June 5, 2020, which amended certain provisions of the IBC. Prior to promulgating the Ordinance, the Central Government while exercising the power conferred upon it under Section 4 of IBC, increased the minimum threshold to trigger a default under IBC from Rupees One Lac to Rupees One Crore through a notification dated March 24, 2020. This was done in order to prevent any default, under the IBC, that would trigger insolvency proceedings against the small and medium enterprises during the pandemic. However, to prevent any further rise in insolvency proceedings due to the non-performance of legal obligations during the pandemic the Central Government through the Ordinance has suspended any new cause of action against companies under the IBC for a minimum period of six months with effect from March 25, 2020, which may extend up to a period one year depending on the prevailing circumstances.

The Code

The Insolvency and Bankruptcy Code aimed at providing a time bound resolution process to companies and individuals against a debtor by taking over the assets of the debtor and handing over the control to the creditor. Since IBC has come into force, it has given creditors a sense of confidence that their investment is secured and they can recover in case of default, while it has instilled financial discipline and fear of losing control over assets belonging to the corporate debtor in case the resolution fails. IBC has proven to be more of an economic reform than a statutory imposition; the recovery through IBC route has been significant in numbers as compared to other recovery mechanisms, while maintaining a strict time frame.

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The Ordinance

Now the Ordinance intends to not only prevent any new application under Section 7 (by a financial creditor), Section 9 (by an operational creditor) and Section 10 (by the corporate debtor itself) to be filed against a debtor before the National Company Law Tribunal during the subsistence of the Ordinance, but also suspends any right of a creditor to take any action under IBC against the corporate debtor in future for a default that takes place during this period. Therefore, essentially the Ordinance means that a creditor’s right to recourse under IBC for a default taking place during this period has been extinguished. The reasoning to the Ordinance provided by the government is that the pandemic has impacted business, financial markets and economy, which has created an atmosphere of uncertainty and stress on business, and that in times like this, when normal business has been disrupted, it is difficult to find adequate resolution applicants that could rescue a corporate debtor. 

The Ordinance further restrains the Insolvency Professional from approaching the Tribunal under Section 66(2) for passing directions against the directors or partners of the corporate debtor to contribute towards the assets of the company of firm in case of any fraudulent transactions that were made with the intent of defrauding the creditors and the directors or partners knew or should have known about the fraudulent transaction and did not exercise due diligence to minimise the potential loss to creditors.

However, the Ordinance is silent on action against a personal guarantor under IBC. 

The Impact

In the absence of any right to initiate insolvency proceedings against a corporate debtor under IBC, a creditor’s hope of getting time bound recovery of its dues will almost be lost at a time when creditors are looking at ways and means to recover their dues and keep their business from slowing down. While the banks have options available under the SARFAESI Act, it is the operational creditors that have been left to explore other options to recover the dues. In the current scenario where courts are trying to work with the available resources, it is difficult to predict the amount of time that a creditor would have to wait to recover.

Companies that were looking to restructure their debt by approaching the Tribunal, during this period or after the pandemic, so that they may say afloat till business is revived, are the ones that are going to take the maximum hit. If there is no application, there is no moratorium to protect the corporate debtor from any legal action under any other law in force.

Therefore, from the perspective of a creditor the Ordinance has not only slowed down the recovery process but also extinguished their rights to approach the Tribunal under IBC for recovery of debt. At the same time, the corporate debtor has been left exposed to litigation that may result in time and resources being spent on both the sides.

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The Alternatives

As mentioned earlier, financial institutions still have the option to approach the Debt Recovery Tribunal under recovery laws such as the SARFAESI Act and Recovery of Dues Act, however, with the RBI imposing a moratorium, that has been extended up to August 31, 2020, on financial institutions from proceedings against a debtor, it would be difficult to proceed in any manner to recover the debt. 

An operational creditor may institute a civil suit for recovery of dues or trigger the arbitration clause, however, the time frame for either of the options is longer than the IBC route. Since the right to initiate proceedings under IBC has been extinguished, a creditor will have to approach a civil court.

Conclusion

The Ordinance seems to have digressed from the main objective of IBC when it comes to securing the assets of the corporate debtor. By suspending the provisions of IBC temporarily and extinguishing the rights of the creditor permanently, the Ordinance has imposed a burden on already stressed out businesses. While on one side a creditor is looking to infuse liquidity into business, the debtor on the other side is hoping to restructure its debt so that it can revive itself after the pandemic. Businesses that can gain some form of capital at this moment may be able to buy some time and avoid any litigation, however, the ones that are not able to pay off the debts and have already defaulted are the ones that need some form of protection as an interim measure. Meanwhile, a creditor may negotiate to extend the time frame so as to give some respite to the corporate debtor and to circumvent the Ordinance suspension period.