This article is written by Abhilasha Manturgekar, a student of ILS Law College, Pune
We all have been fervent spectators of the Pandemic. It was a year full of disorderliness for us commonalities, the Government, and business mammoths. The SARS-CoV-2 (Corona Virus – Epithet) has made some drastic changes in the business sphere. Although the Pandemic was a health emergency, it has laid down some ear-piercing impacts on the business sector.
Matters about liquidation were on a rise in 2020. The total number of organizations that entered into insolvency proceedings in 2020 was 2442. The majority of these cases came from the manufacturing sector. As per the information received from the Insolvency and Bankruptcy Board of India (IBBI) –
- 283 firms went into Corporate Insolvency Resolution Process (CIRP),
- 76 of these CIRPs resulted in resolutions; 128 were closed due to withdrawal, and 189 were liquidated,
- 30 Corporate Entities were dissolved/sold,
- 59 Corporate Entities went for the corporate liquidation process.
Economic recessions, since coons’ age, have been linked with an increase in insolvency filings, and hence this Pandemic is not any different. The factors responsible for such insolvencies or bankruptcies are lower sales, high unemployment, the existence of many irregularities in the balance sheet, and the capacity to endure liquidity challenges amidst the Pandemic.
But before we dive deep into Insolvency & 2020, we must hark back to the basics of Insolvency and Bankruptcy.
What is insolvency?
Insolvency is when an individual or an organization is no longer in a capacity to meet its monetary obligations. Such persons or organizations then get convoluted in insolvency proceedings. Such proceedings can be of any manner, such as,
- entering into informal agreements with their creditors,
- compiling alternative clearance/settlement arrangements
In India, we have the Insolvency and Bankruptcy Code, 2016. This bill acts as an umbrella for all insolvency procedures in India. The Act came into force on December 1, 2016. The act aims to provide clarity and consistency in law to support different stakeholders labored and affected by business failures or due to inabilities in paying back debt.
How the Act Acted during the Pandemic:
In June 2020, the President came forth with the Insolvency and Bankruptcy (Amendment) Ordinance, 2020 (henceforth called “Ordinance”) as a measure to support business organizations affected by the Pandemic. The ordinance brought with it some key alterations to the Insolvency and Bankruptcy Code, 2016.
SECTION 10A – This Section was inserted in the Code to restrict applications that were filed for the initiation of the Corporate Insolvency Resolution Process (CIRP). This was done to keep within bounds all applications against defaults arising after March 25 of 2020, for a time limit of six months or such period, but not exceeding a year from March 25 of 2020.
Further, a provision was also attached stating that no application shall ever be filed for initiation of Insolvency Procedure based on a default committed during this period, i.e. arising after March 25 of 2020 for six months.
Secondly, a clause was inserted in SECTION 66 of the Insolvency and Bankruptcy Code, 2016. This was done to provide a shield to the directors of a Corporate Entity. The clause stated that no application can be filed by a Resolution Professional against defaults in respect of which a resolution process or CIRP has already been suspended by the Code.
Hence, both these sections are interlinked and both act as an iron dome for business mammoths.
Although this Ordinance aims at providing breathing room for all businesses in India, there is still a chance that some debtors might abuse the suspension for other reasons (reasons other than the pandemic). The Pandemic has already hampered the economic standing, and hence this move has also summoned some criticism.
Provision of Moratorium – This provision puts a stay on any Institution or Resolution Professional having a claim against the debtor’s asset. This provision hence helps in preserving the value of assets. But since no fresh applications are accepted, the business will no longer have the protection of a moratorium.
Corporate Entities will not be able to restructure themselves under the Insolvency and Bankruptcy Code, 2016 nor will they be able to perform ordinarily or conventionally. Experts claim that the coherent goal of the Code was to move from the debtor-in-possession approach to the creditor-in-possession approach. The amendment, however, contradicts the purpose of the code.
Moreover, the Ordinance fails to answer the question –
What will happen to the entity that commits default even after the expiry of the specified period?
Lastly, the addition to Section 66 of the Insolvency and Bankruptcy Code, 2016 is vague, as one cannot interpret whether the shield is provided for a specific transaction or the whole business in general.
Regulatory changes in such times must be sympathetic, but also very thoughtful and well contemplated. Restricting applications will dig a hole for even bigger problems as this has no long-term benefit. We need deeper systematic changes in the Insolvency and Bankruptcy Code.