Updated: Apr 9
The increase in the default threshold from INR 1 lakh to INR 1 crore was one of the first COVID-19 relief measures announced by the Minister of Finance. The Finance Ministry had also indicated that the government is also considering suspending initiating new insolvency applications for a period of 6 months.
The government's announcement to suspend the bankruptcy proceedings under the Atmanirbhar Bharat relief package further added to the confusion. Though the government was clear about the suspension, there was still uncertainty about the debt and defaults that the suspension could cover.
There have been mixed views regarding the situation of Insolvency proceeding after the promulgation of the Insolvency and Bankruptcy (Amendment) Ordinance, 2020. This article will put light on the reasonable queries that might arise in the context of the recent 2020 Insolvency and Bankruptcy (Amendment) Ordinance.
Whether there exists a bar on the initiation of insolvency proceedings?
There have been various debates as to whether there will be a bar on fresh insolvency proceedings and the answer to this concern is No, there will not be a bar on the initiation of fresh insolvency proceedings. As per the Insolvency & Bankruptcy Code 2016, a petition for initiation of insolvency can be filed on the occurrence of a default in payment of a debt.
The recent amendment to the 2016 Insolvency and Bankruptcy Code suspension concerns only to the defaults which have occurred on or after 25th march 2020. The corporate debtor will not be protected as per the code if the debt has been defaulted prior to 25th March 2020.
What will be the duration of the suspension and from what date does the suspension come into force?
As per the amendment, the Suspension will extend for a period of six months from 25th March 2020. As per the recent introduction of section 10A by the ordinance, the central government will also have the power to extend the suspension up to a period of one year through notification if there exists a need.
Whether insolvency proceedings can be initiated post the suspension period in respect of the defaults that occurred during the suspension period?
As per the proviso clause of the recently included section 10A of the IB code, no application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the default occurring during the said 6 months from 25th March 2020. Even after the completion of the 6 months or a year, applications regarding the defaults that have occurred in the said period cannot be filed before the NCLT.
What will be the status of the applications that are pending before the NCLT?
The status of the petitions pending before the NCLT will not be hammered because of the recent amendment as most certainly the date of default of each and every pending application would be prior to that of 25th March 2020.
The recently added Section 10A to the IB code will not apply to the petitions in which the date of default is before 25th March. Therefore, as per the facts and circumstances of each case, the NCLT may admit the petition for initiation of insolvency resolution.
whether a fresh insolvency application can be filed before the NCLT for defaults that have occurred before 25.03.2020?
Certainly, fresh insolvency petitions can be filed before the NCLT for the defaults that have occurred before 25th march 2020. The protection of Section 10A of the IB Code will only be given in the case where the defaults have occurred on or after 25th march 2020 and not before. The proviso clause of section 10A very well explains as to when the protection of this section will not be given to the corporate debtors.
Whether the 2020 amendment protects the debt that has been incurred during the suspension period?
Therefore, if a debt has become due during the suspension period and if the corporate debtor defaults that debt within the suspension i.e during the period of 6 months or 1 year from March 25, 2020, then such default shall be protected by the virtue of Section 10A of 2016, IB Code. However, if the debt arose during the suspension period and the default occurs after the laps of the suspension period then that default may not have the protection of recently added Section 10A.
However, the facts of the case, nature of the agreement, communication between the parties etc will come into the picture while interpreting as to when the debt became due and payable and exactly when the default happened.
Whether the suspension regarding Insolvency proceedings gives rise to any legal issues?
If we look at how debt becomes due we’ll understand the chain of events which ultimately leads to default. The World Health Organization declared COVID-19 as a Pandemic in the month of March 2020 however, it was in December 2019 when the World Health Organization identified the Wuhan Cluster. Nevertheless, businesses across the world were running prior to December 2019 and between December 2019 to March 2020 and even before the suspension period the businesses across the world were affected because of the lockdowns and closures.
The rigid date of suspension given by the Ministry can have ill effects on the businesses defaulting a day or two prior to 25th March 2020. Non-realization of export proceeds, cancellation of orders, non-arrival of cargo etc can affect the financial health of a company and there exists a high possibility that an entity might have defaulted on 24th march 2020 or 2-3 days before 24th march 2020 on account of the above-mentioned factors. COVID could be the reason for default however the rigidity regarding the date of suspension may prevent the applicability of the suspension.
Identification of the default date might be contentious. This is more so when there are no clear terms between parties regarding the due date of the debt. Further, the default amount calculation in cases of a continuing default might bring ab