CORONA CRISIS: DEVELOPMENTS IN
INSOLVENCY AND BANKRUPTCY LAWS TO SAVE DEBT-LADEN COMPANIES
- Karan Sahi and Pranay Bhattacharya
- Karan Sahi and Pranay Bhattacharya
1.
INTRODUCTION
1.1.
The changing market dynamics, from crashing
stock markets to restaurants, airlines and businesses shutting down, the Coronavirus
(“Covid-19”) has hit almost every sector. The pandemic has not only
caused global business disruption by halting the international trade, it has
also caused major economic unrest affecting the small companies and organizations
that were already struggling with financiers and creditors to repay their
debts. Due to the status-quo orders of the state and the central government for
lockdowns, the business owners are facing difficulties to meet their expenses
and obliging their pre-existing liabilities. The third quarter (i.e., October
to December[i])
has almost witnessed around 1961 Corporate Insolvency Resolution Process (“CIRP”)
against companies. In the current situation, the number is likely to soar with
the economic in the country have come down to standstill.
1.2.
Amidst the ongoing crisis, effort has
made by every regulatory authority (be it Reserve Bank of India, SEBI,
Ministry of Corporate Affairs or Courts) to ease the burden on general
public by recalibrating their existing regulatory frameworks. In this backdrop,
the IBBI has taken certain measures to protect these debt-laden entities and
Non-Performing Assets (“NPA”) of the Corporate Debtor that are already
facing severe liquidity crunch and provided relaxation to companies facing
difficulty to replay their claims.
2.
Amended
Legal Provision and Regulations
2.1
Deferred
Timelines for Completing CIRP:
The IBBI through a
notification dated 29th March, 2020 has decided that the 21 days of lockdown
period cannot be used within the outer-limit of CIRP time-frame, where the
process has been triggered. The companies will get an extension of 17 days
(staring from March 29th) as against the due date for completion of
the process.
The present timeline requires the
CIRP to be completed within a period of 180 extendable up to 270 days, and in
exceptional cases within 330 days (as
decided in Essar Steel Judgment).
This time frame remains unchanged. This means, even after the extension, the
outer limit of completing the CIRP remains same. In this light, a 3rd
amendment is made in the Insolvency
and Bankruptcy Board of India (Insolvency Resolution Process for Corporate
Persons) Regulations, 2016 with insertion of Regulation 40C
as a Special provision relating to time-line to defer the payment excluding the
period of lockdown.
“Regulation
40C: 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.”
(Emphasis
Supplied)
The
IBBI further clarified that “the period
of lockdown imposed by the Central Government in the wake of COVID-19 outbreak
shall not be counted for the purposes of the time-line for any activity that
could not be completed due to the lockdown, in relation to a corporate
insolvency resolution process. This would, however, be subject to the overall
time-limit provided in the Code”.
2.2
Revised
IBC Threshold Limit
The Union Finance
Minister through a press conference and notification[ii]
dated 24th March 2020 also decided to raise the threshold for filing an
insolvency application about 100% i.e. from Rs 1 lakh to Rs 1 Crore.
Before such notification, the provision under Part
II, Insolvency Resolution and Liquidation for Corporate Persons under Section 4
required a minimum default amount of Rs 1 lakh for initiating CIRP; with an
additional power to the central government to increase it to Rs 1 crore at
its discretion. The government analyzing the need of the hour exercised this
right to protect the corporate debtor against the creditors filing Insolvency
for meager amounts, given such low threshold amount. This move will allow the
corporate debtor a breathability time from multiple recovery cases during this
period.
2.3
Suspension
and extension of timeline for certain filings under limitation laws:
The NCLAT extended any provisions relating to the laws of limitation, or where
any timeline such as appearance or filing of affidavit is required within a
particular date, such timelines are extended till further notice. The NCLAT
took a suo moto cognizance of the matter and passed an order
dated 30.03.2020[iii]
under Rule 11 of National Company Law Appellate Tribunal Rules, 2016. The same
measure has already been taken by the Supreme Court on 23rd March, 2020 in Suo
Moto Writ Petition (Civil) No(s).03/2020 for all cases and matters taken before
the apex court.
3.
POINTS
TO PONDER
Apart from the various measures taken by
the IBBI, there are questions that still remain unanswered and require much
clarity amidst the pandemic. Some of these are:
3.1.
Whether
the defense of Force Majeure clause is applicable in Insolvency Cases?
3.1.1.
In Parvesh Magoo v. IREO Grace
Realtech Private Limited,2019[iv], the
NCLAT observed the view of Hon’ble Supreme Court as referred in Pioneer Urban Land and
Infrastructure Limited v. Union of India, 2019[v]
and held that it is upon the Adjudicating Authority (NCLT or NCLAT) to decide
whether the default has been caused due to the fault of the Corporate Debtor,
or is it a force majeure condition (“FMC”) due to which he has failed to
comply with his obligations. And, if the default has not caused due to the
Corporate Debtor, but due to any force majeure event, it can be adduced that
the Corporate Debtor has not made any default. These two cases, in particular,
are related to the real estate sector. It is to be seen whether, these
judgments can be used as a precedent to seek an extension of the moratorium
period or the outer-limit CIRP timeline.
3.1.2.
It would be interesting to note, if such
matters come up during this period, whether the NCLT or NCLAT considers the
existence of a pre-existing FMC in the contract, or the situation has to be
taken from the point of view of the Adjudicating Authority. Therefore, it would
be interesting to note, whether the corporate debtor can seek relief by
invoking the FMC against insolvency if any disruption is caused due to the
outbreak of Covid-19.
3.2.
Whether
the threshold of Rs 1 Crore is applicable to individual creditor or group of
creditors?
3.2.1.
For
Financial Creditor (“FC”): Section 7 (1) of Insolvency and
Bankruptcy Code, 2016 (“IBC”) allows the FC to file an application either by
himself or other financial creditor for filing CIRP against a default by the
corporate debtor. With the default amount being raised, it is still unclear
whether the application can be initiated by individual FC or jointly with other
financial creditors. Given the present circumstance and analyzing it from the
perspective of Section 4 of IBC, which allowed individual financial creditor to
trigger CIRP, the same can be applied here. However, since the amount is too
high for an individual creditor, there is no bar to include other creditors, if
the default amount gets fulfilled as per the notification. Therefore, the default
amount stands aggregated sum of Rs 1 crore from all the creditors jointly or
individually to fulfil the revised threshold amount.
3.2.2.
Further, the
Insolvency and Bankruptcy Code (Amendment) Act, 2020 under Section 7 also
requires the financial creditors such as allottees, agents/ trustees of deposit
holders to file an application jointly by not less than 100 of such creditors
in the same class or not less than 10%. Therefore, such proviso will also be
applicable to initiate CIRP during this pandemic period to reach the threshold
of Rs 1 crore. The above move will not only protect the
exiting corporate debtors but also MSMEs and start-ups. The number of
applications will be reduced.
3.2.3.
For
Operation Creditor (“OC”): The IBC does not provide any
particular provision for threshold amount to be fulfilled by the OC,
individually or conjointly. Therefore, for an application under Section 9, in
light of the revised provision, an OC is required to fulfil the threshold
amount of Rs 1 crore for triggering CIRP.
3.3.
Whether
the resolution plan can be changed after initiation of CIRP?
3.3.1.
In Rahul Jain v. Rave Scans (P) Ltd[vi], the
Supreme Court held that once a plan has been approved , the plan has attained
finality. Therefore, no modifications and amends can be made by the
Adjudicating authority i.e. the NCLT or the NCLAT. The same has been held by
the NCLAT in R.G.G. Vyapaar Pvt. Ltd. v. Arun
Kumar Gupta & Anr[vii].
3.3.2.
Although, as of now, there have been no
precedents or provisions of amending the resolution plan once submitted. Given
the current situation, and larger objective of the IBC to protect the corporate
debtor as well as the investor by maximum realisation of assets, such a measure
should be allowed. The resolution plan submitted to the adjudicating authority
by the Committee of Creditors (“CoC”) may not meet the haircut amount due to
the affect of Covid-19. Therefore, the CoC should be allowed to reconsider on
the previous plan, and submit a revised plan by approval of 90% of the CoC.
4.
Way
Forward:
4.1.1. Suspension of Section 7, 9 and 10
i.e. Initiation of CIRP: Apart from the measures taken, the
government has additionally proposed to suspend Section 7, 9 and 10 if the present
situation continues. Therefore, suspending these provisions may give additional
relief from getting dragged into insolvency amidst this crisis.
4.1.2. Raising finance for the Corporate
Debtor through Interim Finance measures under Section 5 (15) of IBC: In
light of the 2020 amendment[viii]
under Section 5 (15) of the IBC, the government has inserted the word "and such other debt as may be notified"
in addition to "during the insolvency resolution process period".
This gives a leeway to the IRP/ RP to raise finances as and when the need
arises. Therefore, this provision can be applied in the present situation of
pandemic, where the IRP/ RP can raise short term finances for the corporate
debtor to keep the business as going concern. This can be done by taking bank
loans to maintain the liquidity/ cash flow and avoid increasing debts in the
wake of such disruption.[ix]
5.
CONCLUSION
With the number of cases increasing and the government taking different
measures to tackle the situation by making various reforms, IBC is no such
exception. The government recognizing the need of the hour has taken different
measures for survival and maximum realisation to protect the NPAs and debt-laden
entities. The measures taken by the government such as increasing the threshold
of triggering insolvency from 1 lakh to 1 crore, excluding the lockdown period
from the CIRP timeline may boost confidence and give some relief to these
ailing corporate entities. In this light, the measures taken by the government
will give extra time and space to the Corporate Debtors while ensuring best returns
to the creditors when this crisis ends.
[i] Quarterly Newsletter For
Oct-Dec, 2019, Insolvency and Bankruptcy Board of India at
[ii] [F. No. 30/9/2020-Insolvency]
Ministry Of Corporate Affairs Notification New Delhi, the 24th March, 2020 at
[iii] Suo Moto - Company Appeal (AT)
(Insolvency) No. 01 of 2020 at
[iv] National Company Law Appellate
Tribunal, New Delhi Company Appeal (AT) (Insolvency) No. 1141 of 2019.
[v] In the matter of Pioneer Urban
Land and Infrastructure limited & Anr. v. Union of India & Ors Writ
Petition (Civil) No. 43-2019 and other petitions.
[vi] In the matter of Rahul Jain Vs.
Rave Scans Pvt. Ltd. & Ors. Civil Appeal No. 7940-2019.
[vii] National Company Law Appellate
Tribunal, New Delhi Company Appeal (At) (Insolvency) No. 509 of 2018.
[viii] The Insolvency And Bankruptcy
Code (Amendment) Act, 2020 at
[ix] Coronavirus impact: These banks
are offering credit line with softer terms to retail borrowers at
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AUTHOR: -
Karan Sahi is a Lawyer and Company Secretary by profession.working in Vaish Associate & Advocates from last 2 years in Merger Department.
The author can be contacted at karan.sahi@vaishlaw.com.
CO-AUTHOR:
Pranay Bhattacharya, 3rd year student, pursuing BA LLB (Hons.) from Maharashtra National Law University, Aurangabad.
The author can be contacted at 17ballb46@mnlua.ac.in.
The author can be contacted at 17ballb46@mnlua.ac.in.
Disclaimer:
No reader should act on the basis of any statement contained herein without seeking professional advice. The results & the interpretation has been done on the basis of my understanding of the Act & Rules, where applicable and with reference to the general articles and analysis. The author explicitly disclaims any financial or other liability of any kind arising on account of any action taken pursuant to the results or interpretation of this document. With respect to information available herein before, the author doesn’t make any warranty, express/implied or assume any liability or responsibility for the accuracy, completeness, or usefulness of such information.
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