Opportunity in Insolvency Laws post COVID
In December 2016, when the Insolvency and Bankruptcy Code of 2016 was notified in the Official Gazette, the Legal industry ran about helter-skelter to understand the code and opine to clients. It was boom time for Legal advisory on the new law with Company Petitions being filed in the hundreds and later thousands in just the first few months under the fresh formats provided in the book of the Code. Litigation, especially commercial litigation was never simpler with the introduction of National Company Law Tribunals – the Adjudication Authority under the Code that provided simple steps for filing, modern infrastructure (but for no apparent reason were unable to hold a properly functional website for manning matters).
The Code was a product of the efforts of Bankers and the Financial industry who sought to codify the many Acts that comprised Insolvency law prior to 2016 because Financial institutions had no meaningful mode of checking out of defaulting accounts or stressed assets and foreign investment needed easy way of pulling out which was complicated under existing laws at the time. Revival of sick companies was a process taking decades by which time such company affairs and assets were often atrophied. Therefore, a need was felt for a fresh legislation to counter these deficiencies; hence IBC was envisaged.
At its inception itself, the IBC was malleable and was contoured by the Tribunals and Appellate Tribunal from time to time. The Ministry of Corporate Affairs, Ministry of Finance and the Ministry of Law also are responsible for driving a number of Amendments over the past 3 years and continuing. As a result, there has never been dearth of work under this area of practice for Legal practitioners, Company Secretaries and Company Representatives. To this day the law is evolving and this only means that it is fertile grounds for developing practice in commercial litigation.
Recently with the COVID19 Pandemic gripping the human bubble of economy worldwide, it is apparent that all means to secure the same had to be mobilised. A major portion of the load for saving the economy by way of legislation as a contributing agent in the effort, has fallen on the IBC. It is clear that the IBC was the go-to option for the Indian Government to bring about meaningful changes and respite.
Some of the steps taken by the Government and the National Company Law Appellate Tribunal in this direction are:
- Increased the threshold limit of default to One Crore Rupees.
- Regulation 40C: Special provision relating to timeline.
- Regulation 47A: Exclusion of period of lockdown for liquidation process.
- Exclusion of lockdown period for the purpose of counting of the period for Resolution Process.
- Suspending the operation of Sections 7, 9 & 10 of the Code by inserting Section 10
The Central Government while exercising its power as provided under proviso to Section 4 (1) of IBC vide Notification No. S.O. No. 1205 (E) dated 24.03.2020 has increased the threshold limit of default to One Crore Rupees. The Notification provides as follows:
“In exercise of the powers conferred by the proviso to section 4 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), the Central Government hereby specifies One Crore rupees as the minimum amount of default for the purposes of the said Section.”
This single step has been viewed as greatly suffocating to the Start-up Entrepreneur and MSME Operational Creditors as they are the entities that are suppliers of wares and services to many companies. As such, they have effectively been fogged out of the Code and will have hardly any entitlement to remedies under the Code going forward. It is not unreasonable to suppose that most MSMEs will not bear debts of up to 1 Crore rupees (including or not including interest) before taking action for recovery. Even if they were to wait, there is no telling how lenient the NCLT Benches are likely to be post Pandemic. More likely, the MSMEs will have an array of defaulting clients, the collective debt of which could well surpass 1 Crore rupees and they would not be able to fall back on the IBC for resolution. It was widely known that the IBC was a speedier way of forcing the Corporate Debtor, i.e. Company in debt to the negotiation table and this enabled settlement of dues in a timely and cost effective fashion. However, it is apparent that Directors of companies will now observably allow debts to mount up to the threshold limit for each Operational Creditor as there is no fear of folding or losing control of company affairs by the Board.
Another scenario may arise where actually defunct companies may still remain operational merely because they keep incurring debts of up to 1 Crore rupees with various Financial institutions and Operational Creditors thereby slipping under the lens of former IBC scrutiny. These companies may still have action against them but this will not be accompanied by the aforementioned fear of folding.
This does not mean there are no other remedies in law. The Operational Creditors will still be at liberty to move the Courts of Law in Civil Jurisdiction for recovery of dues in Money Suits as the case may be for any amounts outstanding. The effectiveness of this route is only as hard hitting as any other litigation; it comprises long drawn litigation whose result can often frustrate Start-ups. Banks will still have the Debt Recovery Tribunals and the SARFAESI Act to recover their bad loans. However, the leverage Start-ups and MSMSEs had with IBC is lost. It now appears to be an elite Code only for shark size debts.
Insolvency and Bankruptcy Board of India (‘IBBI’) has amended the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 vide Press Release No. IBBI/PR/2020/06 dated 29.03.2020 by way of insertion of Regulation 40C as follows:
“Regulation 40C: Special provision relating to timeline- Notwithstanding the time-lines contained in these regulations, but subject to the provisions in the Code, the period of lockdown imposed by the Central Government in the wake of COVID19 outbreak shall not be counted for the purposes of the time-line for any activity that could not be completed due to such lockdown, in relation to a corporate insolvency resolution process.”
This is a welcome move and I may dare to only classify it a clarification as such. It is obvious that the Resolution Professional (RP) who takes control of the Corporate Debtor after initiation of Corporate Insolvency Resolution Process (CIRP) by order of the Tribunal will be in no position to carry on CIRP and the work of the Corporate Debtor if it is a going concern. Timelines prescribed under the CIRP Regulations would therefore essentially be redundant in this scenario and even in the wake of the Hon’ble Apex Court of the Country in its suo motu judgements having held that timelines for cheque bounce cases for instance and that limitation for all matters shall not expire during this pandemic, it is not surprising that the Government would also introduce this saving provision in the Regulations. A separate challenge in this respect would be payments of CIRP cost. We are likely to soon see litigation on this ground before NCLT benches all over the Country.
IBBI vide Notification No. IBBI/2020-21/GN/REG060 dated 17.04.2020 came up with Insolvency and Bankruptcy Board of India (Liquidation Process) (Second Amendment) Regulations, 2020 and inserted Regulation 47A for exclusion of period of Lockdown as follows:
“Regulation 47A: Exclusion of period of lockdown - 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.”
Liquidation of the Corporate Debtor is a complex process requiring strict statutory compliance. As such, a lockdown would make it impossible to complete certain requirements within the prescribed timeline and non-adherence thereof would result in cause of action against the Liquidator. In such circumstance in order to insulate the professional from such action owing to natural difficulties and handicap, this Regulation has been inserted. Ultimately, this move seeks to secure the objective of liquidation, i.e. to derive the best possible value of the assets of the Corporate Debtor and distribution of realised liquidated sums to the claimants.
A problem that may arise is with the wording of this Regulation which mentions “lockdown” and not pandemic or COVID outbreak period to be excluded from the computation of timeline. This means that even as the pandemic ravages through businesses, unless it is not State imposed lockdown, the liquidation must go on. This appears to be insufficient insulation to the Liquidator and the Regulation deserves to be read with leniency by Members of the Bench.
The National Company Law Appellate Tribunal (hereinafter referred to as ‘NCLAT’) vide Suo Motu – Company Appeal (AT) (Insolvency) No. 01 of 2020, order dated 30.03.2020 has held that:
“That the period of lock-down ordered by the Central Government and the State Governments including the period as may be extended either in whole or part of the country, where the registered office of the Corporate Debtor may be located, shall be excluded for the purpose of counting of the period for ‘Resolution Process under Section 12 of the Insolvency and Bankruptcy Code, 2016, in all cases where ‘Corporate Insolvency Resolution Process’ has been initiated and pending before any Bench of the National Company Law Tribunal or in Appeal before this Appellate Tribunal.”
As per the Regulations under the Code CIRP can be held for a period 180 days and extendable up to another 180 days, 90 days at a time by Application, up to a maximum period of 360 days in total and the CIRP period cannot exceed 360 days before a Resolution Plan is submitted to the Adjudicating Authority for its approval. It makes sense to allow the period of lockdown where no business is possible and where carrying out of work is prohibited, to be excluded from the calculation of CIRP because if this is not done, the RP will have lost valuable time to bring a Resolution Applicant to rescue the Corporate Debtor and this would frustrate the entire purpose of the Code. However, it will still need to be seen whether this would have the meaning of suspension of activities of CIRP for the said period as this would have major impact on payments under CIRP costs as for instance payments of RP fees per month, appointments made in respect of CIRP, salaries to employees if the Corporate Debtor is a going concern, etc. This is likely to be a contention of litigation in the coming months and it is also foreseeable that many RPs would be instituting Miscellaneous Applications before the Tribunals for obtaining orders of Exclusion of lockdown period from calculation of CIRP period.
The Ordinance suspending the operation of Sections 7, 9 & 10* of the Code by inserting Section 10A, came into effect on 5th June 2020 ( https://ibclaw.in/ibc-cirp-suspension-ordinance-2020/ ) [*Section 7 of the IBC allows a financial creditor to initiate CIRP against a Corporate Debtor. Section 9 provides for application of insolvency by an Operational Creditor, while Section 10 is for initiation of CIRP by a Corporate Applicant, i.e. the Company itself declaring Insolvency]. The Ordinance is as follows:
“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.”
This was done to provide relief retrospectively to borrowers from being dragged into Insolvency for any debt /default incurred for 6 months, extendible at the decision of the Parliament up to 1 year beginning 25th March 2020. Equally, borrowers will themselves also not be able to declare bankruptcy for this period amid the struggle with the impact of the lockdown. It means that no new Company Petitions can be filed for 6 months till 25th September 2020 even if the default amount exceeds the threshold of 1 Crore rupees.
This particular move of the Legislature has raised many an eyebrow in the legal and financial worlds as it has the effect of suspending the entire trigger of the Code for an entire year till March 2021. The surest question asked is, what challenges will the Financial Institutions face amid such wide protection to companies and what about MSME providers for such defaulting companies. On the other hand, it appears to be a move to shield companies from going under presuming that due to business and economy slowdown, they are bound to incur many debts and the same is not a reflection of the heath of the company but rather of the economic situation. Helping companies stay afloat will also allow the economy to run without too much disruption and help maintain asset value. Should there be no suspension of the trigger for Insolvency, it is believed that many companies that would enter CIRP and be under moratorium would ultimately be pushed into liquidation rather than resolution as data shows that there has been only 44% recovery since inception of IBC in 2016.
Prospects for practice:
As discussed above, now the time is ripe for preferring before the Tribunals:
(i) Application for exclusion of lockdown period in calculation CIRP period,
(ii) Application for excluding lockdown period in respect of liquidation timelines, (iii) Disputes regarding payment of CIRP and Liquidation costs and, similar applications.
In the wake of dynamic uncertainty with IBC law made more precarious by the pandemic, it is unclear whether adopting this practice at this juncture would be profitable. What is undoubtable is that it would add to a wealth of experience for any professional. This will amount to returns many fold after one is established in the given practice area and builds an advantageous network. It is also in general seen that businesses are usually eager to protect their commercial interests and cut costs. Therefore, if one has the knowledge in order to advise companies on the legal position, then there is tremendous opportunity in growing your presence in the said practice area. Presently the legal position on many issues is unsettled and open to argument and this leads to a wide gateway for introduction of fresh entrants in the practice.
India is yet to legislate a fool proof Insolvency Code. In the meantime, it is to be remembered that any period of confusion in law, any newness, is an opportune time for extensive litigation practice.
Counsel, Bombay High Court
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