TWENTY SIX YEARS OF THOUGHT LEADERSHIP IN INSOLVENCY

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Insolvency and Bankruptcy (Amendment) Ordinance, 2020 dated 5 June 2020

By EDITORIAL TEAM - INSOL India Posted On : July 27, 2020

In light of the COVID-19 pandemic which has adversely impacted businesses, financial markets and economies all over the world, including India, creating uncertainty and stress for businesses nationwide, the President of India promulgated the Insolvency and Bankruptcy (Amendment) Ordinance, 2020 dated 5 June 2020(“Ordinance”) to provide respite to companies and businesses which could have been pushed into insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (“IBC”) for reasons beyond their control. Furthermore, the economic impact of the pandemic has resulted in a failure to identify an adequate number of resolution applicants capable of rescuing the corporate debtor since the economic impact of COVID-19 has hamstrung several prospective resolution applicants with insufficient cash flows and thus, rendered them capable of defaulting in the discharge of their obligations under the IBC.
 
In light of these circumstances, the Ordinance has introduced the following changes to the IBC: 

  1. Insertion of Section 10A : This section restricts the filing of any application seeking theinitiation of the corporate insolvency resolution process (“CIRP”) of a corporate debtor, for any default arising on or after 25 March 2020, for a period of six months or such further period (not exceeding one year) as may be notified by the Government in this regard. This section imposes a suspensionon the initiation of CIRP pursuant to applications filed under sections 7, 9 and 10 of the IBC for a default arising on or after 25 March2020. However,the section also clarifies that its applicability is restricted only to defaults arising on or after 25 March 2020 and the suspension of section 7, 9 & 10 shall not be applicable for defaults arising before 25 March 2020.
     
  2. Insertion of Section 66(3): The Ordinance also introduced a non-obstante clause as subsection (3) of section 66 of the IBC. Section 66(3)provides protection to the directors of a corporate debtor from being implicated in ‘fraudulent’ transactions during the COVID-19 pandemic and states that no application can be filed by a resolution professional under section 66(2) of the IBCin respect of such defaults against whichtheinitiation of CIRP has beensuspended under the newly introduced section 10A of the IBC.
During these unprecedented times, these legislative changescan be viewed as a timely intervention by the government to ensure continuity in business while taking into account the prevailing conditions. However, like two sides of a coin, there are also arguments against suchblanket suspension of initiation of CIRP under the IBC. Only time will telltheimpact of these legislative changes on the IBC and its future implementation upon the lifting of the suspension on the initiation of CIRP.