Brief Introduction

COVID-19 has indeed had an unparalleled, unprecedented impact on the whole of mankind. After a brief standstill of about 6 months, nations around the world have initiated the process to kickstart their operations. However, most nations find themselves at a deadlock with no plausible ways to move forward.

With the global economy expected to have its biggest slack since World War II, the blame game cannot be shifted on the industries that are going to run bankrupt in the coming days and months that lie ahead of us. A huge chunk of these companies is expected to leave the global market with no other alternative measures in place.

Backdrop to the Ordinance

India too has had its fair share of issues, in this regard. With an already struggling economy, the going has got really tough for the industries. The respective ministries such as the Finance, MSME, so on and so forth, have taken to announcing a plethora of packages and schemes to regain lost ground and support the distressed entities.

The latest aid pertaining to the same has come in the form of the Insolvency and Bankruptcy Code (Amendment) Ordinance[1], which was promulgated by the Hon’ble President of India on the 5th of June, 2020, on the advice of the Prime Minister and the Cabinet.

The same has been promulgated in accordance with the Powers granted to the President Article 123 of the Constitution, since the Parliament has not been in session since the 23rd of March, 2020, owing to the coronavirus scare.

The Ordinance & Amendments

The Amendment Ordinance suspended the use of the original Insolvency and Bankruptcy Code of 2016 for ‘initiation of any claims pertaining to corporate insolvency resolution against a corporate debtor for a period of six months’.

The same has been facilitated by adding a new Section 10A to the original Code, which suspended the operation of Sections 7, 9 & 10 of the Code. The Ordinance also clarified that the newly included section would shield only those defaults after the 25th of March, 2020, that is, the date from which the nationwide lockdown was imposed by the centre.

Therefore, proceedings on defaults of payment before the 25th of March can be proceeded with by the creditors in accordance with sections 7, 9, and 10 of the IBC, 2016.

Also, a sub-section has been added to Section 66 of the original Code. The added sub-section 66(3) debarred any application under 66(2) of the original Code by a professional, for which the resolution process is suspended under Section 10 A, in the first place.

Thus, in a gist, these amendments would freeze the insolvency and bankruptcy proceedings for defaults after the 25th of March, 2020, for a period of six months.

The Creditor Crisis

While the Ordinance talks a lot about the welfare and needs of the debtor, it keeps a mum on the fate of the operational creditors. Essentially a part of the Objective of the Ordinance, reads as follows:

“And whereas, COIVD-19 pandemic has impacted business, financial markets and economy all over the world, including India and created uncertainty and stress for business for reasons beyond their control”

While the Ordinance does seem to present an inclusive figure and ambit, the amendments as a matter of fact, do not talk about the creditors. The only thing that they can cheer about is the 25th March clause.

In saying so, one must also keep in mind that the SARFAESI Act[2] still places, and creditors may willfully make use of the relevant provisions under the same. The Companies Act, 2013[3], and Section 230 under the Act which talks about ‘Schemes and Corporate Debt Restructuring’ also has to be considered. However, these are early days to develop a substantiate understanding as to how things will move forward in these tracks.

The MSME Sector

The ordinance has had mixed responses. While the corporate sector has welcomed this move, there exist a lot of ambiguities surrounding the Ordinance.

On the 17th of May, 2020, Hon’ble Finance Minister Nirmala Sitharaman, during her press meet on the ‘Atma Nirbhar Bharat Abhiyan’ had announced that a special insolvency resolution framework would be released for the Micro, Medium and Small Industries Sector in accordance with Section 240 A of the Insolvency and Bankruptcy Code[4]. The effect of the same and its corroborative effect on the current Amendment needs to be seen.

Also, an operational creditor under the IBC is an entity to whom an operational debt is owed. These entities are usually the good suppliers, traders, and other relevant entities.

Reading this with regard to the MSME sector, it has a majority of operational creditors in play, and thus, any corporate entity owning a default will have no legal protection under this Code. This in turn will prove to be highly detrimental to the MSMEs, the very sector that the government is trying to protect in this time of distress.

Voluntary bankruptcy has again become a polarizing concept with experts placing their views on both sides of the coin. Several experts have pointed out the fact that voluntary debtors would lose their protection under IBC, 2016 if Section 10 were to be done away in its fullest, which has been done in this case.

Critical Analysis

The Government has indeed taken a very accommodative stand, in this regard. The disruption is supply chains worldwide, which has, in turn, disrupted everything else that follows. Thus, this will provide the industries a vital breathing space to kick start operations and look at other alternatives to clear the debts.

Conclusion

On an endnote, the Amendment Act has its objectives set at reviving the sector. The Act can be amended beyond a six-month period for a maximum of one year depending on the ground situation.

This Amendment Act, going in tandem with the RBI’s six-month moratorium period can indeed work wonders for the MSME sector and all other industries.

Having said this, this may come at the cost of some untoward collateral damage, courtesy of the creditor complications that might arise, as presented above.

REFERENCES


[1] The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 ( Ordinance No. 9 of 2020 dated 5th June 2020).

[2] The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act,  2002 (Act No. 54 of 2002 dated 17th  December 2002).

[3] The Companies Act, 2013 (Act No. 18 of 2013 dated 29th August, 2013).

[4]Finance Minister announces Government Reforms and Enablers across Seven Sectors under Aatma Nirbhar Bharat Abhiyaan, Ministry of Finance, (May 17, 2020),

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