The outbreak of Covid-19 and the subsequent nationwide lockdown to curb spreading of the infection, have significantly impacted economic activities throughout the country and the world at large. Supply chains are disrupted, valuation of the stocks have decreased and the valuation of businesses have fallen sharply. With the Government directives from time to time a respite has been provided to the borrowers in repaying their loans. This article would deal with these directives and what is in store for the creditors.
The Insolvency and Bankruptcy Code (Amendment) Act, 2020 (Amendment Act), was notified on March 13, 2020, by the Ministry of Law & Justice, by which this amendment was given a retrospective effect from December 28, 2019, due to a prior Ordinance). That vide amending Section 5(15) of IBC, the Government was authorized to notify any debt as interim finance. In other words "interim finance" has been defined as any financial debt raised by the Resolution Professional during the insolvency resolution process period and such other debt as may be notified.
The salient features of the amendment are as follows:
- The Central Government has increased the minimum amount of default for the purpose of Section 4 of the IBC (which specifies the minimum amount of default for matters related to insolvency and liquidation) from INR 1 lakh to INR 1 crore.
- Section 7 was also amended by increasing the amount of minimum default for initiating CIRP. By way of the amendment, certain additional requirements for filing CIRP were also added for some financial creditors i.e. real estate allottees; and security or deposit holders represented by a trustee or agent. The application filed by these set of financial creditors, should be filed jointly by at least 100 such creditors or 10% of their number, whichever is lower.
- Section 14 have also been amended whereby if payments are duly made for use or continuation of any license, permit, quota, concession, registration, clearances or a similar grant or right during the moratorium period then such license, permit, quota, concession, registration or clearances shall not be suspended or terminated on account of insolvency. Secondly, moratorium will not be applicable to such transactions, agreements or arrangements as may be notified by the Central Government in consultation with financial sector regulator or any other authority. Finally, if in the opinion of the IRP and RP, any goods or services are essential for preserving the value of the corporate debtor and managing its operations as a going concern, then supply of such goods and services shall not be interrupted in any manner, subject to IRP or RP making payment towards such essential supply.
- The Amendment further introduced the provision of Section 32A to the Code. This provision provides that the liability of a corporate debtor for an offence committed prior to the commencement of the corporate insolvency resolution process shall cease, and the corporate debtor shall not be prosecuted for such an offence from the date the resolution plan has been approved by the Adjudicating Authority under Section 31, if the resolution plan results in the change in the management or control of the corporate debtor to a person who was not-
(a) a promoter or in the management or control of the corporate debtor or a related party of such a person; or
(b) a person with regard to whom the relevant investigating authority has, on the basis of material in its possession, reason to believe that he had abetted or conspired for the commission of the offence, and has submitted or filed a report or a complaint to the relevant statutory authority or Court.
The provision further provides that no action shall be taken against the property of such Corporate Debtor in light of the aforesaid.
Subsequent thereto, the Insolvency Bankruptcy Board of India (IBBI) has, vide notification dated March 29, 2020, amended the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 granting certain relaxations. Pursuant thereto, Regulation 40C was inserted, which provided that the period of lockdown shall not be counted for the purposes of calculation of timeline for any activity that could not be completed due to such lockdown, in relation to a CIRP.
In this regard Banks too came forward in aide of the citizen/ entities by extending the credit lines to ease the liquidity crisis of the borrowers.
However, the need of the hour was for having further far reaching changes in the said statute. Accordingly, the Government on 17th May 2020, made a slew of changes to the statute providing much needed respite to debtors, who could not meet their goals due to the pandemic situation.
Firstly, in exercise of the powers conferred by Section 196(1)(t) read with Section 240 of the Insolvency and Bankruptcy Code, 2016, the Insolvency and Bankruptcy Board of India (IBBI) has introduced Regulation 47A to the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, whereby it has been provided that subject to the provisions of the Code, the period of lockdown imposed by the Central Government in the wake of Covid-19 outbreak shall not be counted for the purposes of computation of the time-line for any task that could not be completed due to such lockdown, in relation to any liquidation process.
Secondly, the Government in another endeavor to encourage ease of doing business in India has decided to suspend initiation of fresh insolvency proceedings up to one year depending upon the pandemic situation. Along with that, there is an exclusion of Covid-19 related debt/defaults. The MCA has been directed to issue a special circular to define the time period which will cover "Covid-related debt" to be exempted from default. However, no suspension of the insolvency process against personal guarantors to a company has been announced. Accordingly, if directors or promoters of a company have provided personal guarantees to its lenders, they may still be taken to the insolvency court under Part III of the IBC. Meaning thereby that a creditor cannot go against the debtor for a year, however, it can still initiate CIRP against the Guarantors.
Thirdly, further the Government has also intimated that a special insolvency framework will be notified by way introduction of a new provision under section 240-A of IBC solely for MSME's (i.e. Micro, Small, and Medium Enterprises).
Finally, the minimum threshold limit under Section 7, 9 and 10 to initiate IBC process would continue to be enhanced from Rs. 1 Lakh to Rs. 1 Crore. This move could prevent companies, especially those within MSME category, from being dragged to the National Company Law Tribunal for settlement of debts. This could be a breather for companies that are already struggling with business losses.
The reason behind suspending IBC for a year was that during the pandemic, going concern sales may not be possible or desirable. Buyers may not be available in the market. Or, there could be an oversupply of similar assets in the market due to industry-wide factors, pushing down the price for such assets.
In India, presently three routes to debt restructuring exists viz. Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions 2019 ("Prudential Framework")1, providing fresh directions to lenders on the resolution of stressed assets, which provides an out-of-court restructuring option.
Second, the IBC, that could be used for restructuring under the aegis of the National Company Law Tribunal.
Third, a scheme of arrangement under the Companies Act, 2013, could also be used for debt restructuring through the NCLT.
Now with the IBC due to be suspended, the only companies would have the first and third route, as discussed above, for debt restructuring.
With these reforms in place, it will be a boost for the debtors which are genuine pain, however, there could be some unscrupulous debtors for whom such a change would only mean gaining more time to evade the process of law.
The aforesaid amendments would see a slew of cases filed for recovery and enforcement of charges under the various other statutes available.
The Creditors still have the opportunity to file for recovery of their dues in Civil Courts. The provisions of SARFAESI Act and RDDB Act would also see an influx of cases. For homebuyers and some notorious builders, the doors of the consumer forum would again be the door to knock at.
The path of the already existing legislations, apart from IBC, would again be taken by the Creditors, qua those debtors who have been trying to cover behind the veneer of these amendments, wearing the cloak of losses.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.