An Insight Into The Insolvency And Bankruptcy Code (Amendment) Ordinance, 2020

1. An Insight Into The Insolvency And Bankruptcy Code (Amendment) Ordinance, 2020 The Indian economy has been badly disrupted by the COVID-19 outbreak ("the pandemic"), with restricted cash flows and minimal corporate activity. The balance sheets of many organizations have been significantly impacted, resulting in a lack of finances not just for maintaining corporate operations but also for debt repayment. However, it should be noted that this lack of finances is not a symptom of company failure, but rather of temporary discomfort induced by the pandemic. Various initiatives have been implemented to alleviate the financial pain caused by the current economic recession for corporations and businesses. The Insolvency and Bankruptcy Board of India ("the IBBI") inserted Regulation 40C into the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, which provides for the exclusion of the time period of lockdown imposed by the Central Government in the aftermath of a pandemic from the time-line for any activity related to a corporate insolvency resolution process ("CIRP") under the Insolvency and Bankruptcy Code, 2016 ("Code"). 1 Furthermore, Regulation 47A was added to the IBBI (Liquidation Process) Regulations, 2016, which provides for the exclusion of time periods of lockdown imposed by the Central Government in the aftermath of a pandemic from the computation of the timeline for any activity related to any liquidation process under the Code. 2 The Reserve Bank of India ("the RBI") also allowed banks to give a three-month suspension on payment of any term loan payments due between March 1, 2020 and May 31, 2020. Most crucially, on June 5, 2020, the President of India promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 ("the Ordinance"). With the Ordinance in effect, the filing of applications for initiation of CIRP of corporate debtors under the Code for categorised defaults has been suspended for a certain period of time, so that corporate debtors facing financial distress as a result of the pandemic may be protected from being pushed into CIRP under the Code, giving them some time to regain business sustainability. The Code was enacted to offer a system for the timely resolution of enterprises and businesses in financial crisis, so that the value of such organizations' assets can be maximized and the flow of credit in the economy can be maintained. It was created with the goal of balancing the interests of all stakeholders, including creditors such as financial institutions and banks, employees, other secured and unsecured creditors of the corporate debtor, and the corporate debtor himself. Furthermore, there may not be many prospective resolution applicants who are interested in injecting cash into the corporate debtor's resurrection and, as a result, would provide for resolution plans for such corporate debtor. As a result, even if the corporate debtors are financially sustainable, they will be liquidated

2. prematurely with a poor rate of return on asset sale, negatively harming creditors' interests and the Code's objectives. As a result, the Ordinance was enacted to advance the Code's objectives, namely, maximum of asset value, balance of interests of all stakeholders, including creditors, and settlement of the hardship generated for corporate debtors by the ongoing economic pandemic. ANALYSIS OF THE ORDINANCE'S PROVISIONS Under sections 7, 9, and 10 of the Code, an application to begin CIRP can be filed with the National Company Law Tribunal ("NCLT"). By filing an application under Section 7 of the Code, a financial creditor can begin CIRP against a corporate debtor. Similarly, an operational creditor may commence CIRP by filing an application under Code Section 9. Finally, a corporate debtor might begin CIRP against itself by filing an application under Code section 10. The Ordinance proposes inserting Section 10A into the Code, which essentially states that no application can be filed to initiate the CIRP of a corporate debtor for a default caused on or after March 25, 2020 for a period of six months or such further period, not exceeding one year, as may be notified from such date. 4 The proviso to section 10A specifies further that no application can 'ever' be submitted to begin CIRP of a corporate debtor under the Code for such defaults as specified in the Ordinance. 5 In other words, for such defaults, applications under sections 7, 9, and 10 of the Code have been suspended for the period provided in the Ordinance. The Ordinance expressly states that section 10A does not apply to any defaults committed prior to March 25, 2020. Sections 7, 9, and 10 of the Code remain in effect, and petitions to begin CIRP can still be filed under the Code for defaults committed prior to March 25, 2020. According to Section 66(2) of the Code, if a director or a partner of a corporate debtor, as the case may be, knew or ought to have known before the insolvency commencement date that the commencement of CIRP of such corporate debtor cannot be avoided by any reasonable means, and such director or partner did not exercise due diligence in minimizing the potential loss to the corporate debtor's creditors, the resolution professional may file an application before the insolvency commencement date. 6 In this regard, the second part of the Ordinance now inserts sub-section (3) in section 66 of the Code, which states that no application shall be filed by a resolution professional under section 66(2) of the Code in respect of defaults for which CIRP initiation has been suspended pursuant to the newly introduced section 10A. 7 This means that a resolution professional cannot file an

3. application for fraudulent or unlawful trading against directors of firms for defaults for whom CIRP initiation is halted under section 10A. It is worth noting that Section 66(2) of the Code addresses the time lag that exists between when stakeholders learn that CIRP will be initiated against a corporate debtor and when CIRP actually begins. Furthermore, unlike Section 66(1) of the Code, which allows for liability for activities taken to cheat the corporate debtor's creditors or for any fraudulent purpose, Section 66(2) does not address any type of fraud. As a result, the intent behind the inclusion of section 66(3) in the Code is to provide immunity to corporate debtor directors for actions taken during the pandemic that may be detrimental to the interests of creditors but are otherwise taken to avert the financial risks to which the corporate debtors are exposed during the pandemic. The unanswered questions An effort has been made to mitigate the financial concerns of the companies and businesses by proclamation of the Ordinance. However, the Ordinance has certain fundamental flaws and left some glaring ambiguities that must be resolved. 1. Ambiguity in suspension duration determination: Section 10A allows for the suspension of filing petitions to commence the CIRP of a corporate debtor for a default occurring on or after March 25, 2020 for a period of six months or such extended term, not exceeding one year, as may be announced. 8 However, it is unclear whether the six-month suspension period, or any subsequent term not exceeding one year, shall begin from the date of the Ordinance's promulgation, or from March 25, 2020, or from any other date specified under Section 10A. 2. Perpetual nature of suspension of filing of applications for classified defaults: The Ordinance states that no application for CIRP of a corporate debtor under the Code can ever be filed for such defaults as defined in Section 10A. 9 This indicates that the prohibition on submitting applications to commence CIRP for such defaults as defined in section 10A is indefinite. However, the preamble of the Ordinance refers to the impact of the pandemic on businesses, financial markets, and the economy, stipulating that a moratorium on filing applications to initiate CIRP is necessary to prevent corporate persons facing financial distress as a result of the pandemic from being pushed into insolvency proceedings for some time, until the distress continues. As a result, a permanent restriction on filing applications to

4. commence CIRP for such defaults may be damaging to creditors' interests, as the distress will not last forever. The purpose of the Ordinance is to protect corporate persons throughout the period of financial crisis caused by the epidemic. Once the epidemic is over and corporate debtors are no longer in financial crisis, imposing a continuous blanket restriction on submitting petitions to begin CIRP for such defaults as indicated in section 10A is unreasonable. 3. Section 10A's impracticality: There are no criteria in section 10A for establishing whether a corporate debtor's default was caused by the epidemic. The Ordinance merely specifies a cut-off date, namely March 25, 2020, after which CIRP cannot be commenced against corporate debtors if defaults occur. As a result, it may hurt the financial interests of corporate borrowers who defaulted prior to March 25, 2020, but such defaults were triggered by financial distress induced by the pandemic. It defeats the goal of the Ordinance, which is to alleviate financial hardship caused by the pandemic. Furthermore, the lack of standards to judge whether a default was caused by the epidemic may incentivize corporate debtors to conduct wilful defaults after March 25, 2020, because creditors cannot launch CIRP even for such wilful defaults caused by corporate debtors. Section 10A provides for a blanket postponement of CIRP initiation for any defaults occurring after March 25, 2020, without taking into account the possibility that some corporate debtors may take unfair advantage of the immunity afforded to them. Furthermore, the power to determine whether default by a corporate debtor has been caused on or after 25th March, 2020 should have been left with the Adjudicating Authority (“the AA”) under the Code, which is NCLT or NCLAT. As a result, the AA must assess the incidence of default because it is the triggering event for the commencement of CIRP against a corporate debtor, 10 and the AA can only do so after filing applications under sections 7, 9, or 10 of the Code 11. Section 10A, on the other hand, places an unrealistic bar on filing applications, creating an abnormal position for the AA. 4. Ambiguity in the Ordinance's retroactive application: It is important to remember that the Ordinance will go into effect on June 5, 2020. The Ordinance is silent on the disposition of applications filed between March 25, 2020 and June 5, 2020 - whether the Ordinance's application is retrospective or prospective. This calls into question the Ordinance's rationale, as the Ordinance prohibits the filing of applications.

5. 5. Ambiguity in determining default amount: The minimum amount of default to be caused for submitting applications to begin CIRP of corporate debtors under the Code before March 24, 2020 was one lakh, twelve, which was increased to one crore by a notice dated March 24, 2020 ("the Notification"). 13 The higher threshold of minimal amount of default under the Notification must act prospectively, i.e., it shall not apply to the applications filed under sections 7, 9 or 10 of the Code before 24th March, 2020. 14 It is anticipated that corporate debtors will fail partially before and partly after March 25, 2020. However, the Ordinance does not specify whether such amount of default caused in part after March 25, 2020 is to be included or removed for determining the minimum amount of default under Section 4 of the Code for the purpose of initiating CIRP for defaults induced in part before March 25, 2020. It is also possible that corporate debtors will default partly within the suspension period granted by section 10A, and partly after the suspension period expires. This creates another ambiguity in the filing of applications for initiation of CIRP for defaults caused after the expiry of the suspension period provided under section 10A, because the Ordinance makes no provision for including or excluding such amount of default caused in part before the expiry of the suspension period provided under section 10A in calculating the minimum amount of default under section 4 of the Code for the purpose of initiation of CIRP. 6. Irrationality of Code Section 66 Subsection (3): As previously stated, the Ordinance proposes to insert section 66(3) into the Code, which provides immunity to the directors and partners of the corporate debtor from contributing to the assets of the corporate debtor in respect of defaults against which initiation of CIRP has been suspended pursuant to section 10A introduced by the Ordinance, even if the directors and partners of such corporate debt or do not exercise due diligence in minimizing the potential losers. This may alter the dynamics of the economy's credit market, as giving such immunity may dissuade creditors from lending to companies and businesses during the epidemic. The Ordinance contains no justification for providing total protection under section 66(3) of the Code in respect of such failures for whom CIRP initiation has been suspended under section 10A. Furthermore, section 66(3) of the Code prohibits a resolution professional from making an application under section 66(2) of the Code in respect of defaults for whom CIRP initiation has been suspended under to section 10A. 15 However, application under section 66(2) of the Code can be filed during an on-going CIRP. 16 As a result, the addition of section 66(3) to the Code is unnecessary, as the Ordinance already prohibits the beginning of CIRP for defaults classified under section 10A. 7. Ignorance of Micro, Small, and Medium Enterprises:

6. Despite this, the Ministry of Corporate Affairs ("MCA") published Notification 17 on March 24, 2020 to prohibit MSMEs from entering into insolvency proceedings under the Code by increasing the minimum amount of default for the beginning of CIRP from 1 lakh to 1 crore. However, the Ordinance makes no provisions for dealing with the problems of Micro, Small, and Medium Enterprises ("MSMEs"). In practice, the Notification and the Ordinance may have a negative impact on the financial situation of MSMEs. MSMEs give credit to firms in the form of operational debt or financial debt, as the case may be, and companies can default on debt owed to the MSMEs. However, during the suspension period specified in the Ordinance, MSMEs cannot commence CIRP against such corporate debtors who make financial defaults after March 25, 2020. Furthermore, starting March 24, 2020, MSMEs cannot pursue CIRP for defaults that occurred prior to March 24, if the amount of default is less than one crore. This means that after March 25, 2020, MSMEs can only commence CIRP for defaults in payment of debt owed to them if two conditions are met: first, the amount of default must be larger than or equivalent to 1 crore, and second, the default must have occurred before March 25th. As a result, by prohibiting MSMEs from commencing CIRP for defaults in payment of debts owed to them, the Ordinance, in conjunction with the Notification, may hurt rather than safeguard MSMEs' financial interests. 8. Unresolved issues in ongoing CIRPs: There is little doubt that all businesses are experiencing financial difficulties as a result of the pandemic. As a result, it is critical to evaluate the situation of ongoing CIRPs. Due to the financial suffering caused by the pandemic, resolution applicants may face challenges in implementing resolution plans in ongoing CIRPs. However, the Ordinance does not address the financial difficulties they have encountered in implementing resolution plans in ongoing CIRPs during the pandemic. In circumstances where CIRPs were launched before to the pandemic, the resolution plan for corporate debtors may not have been proposed, as corporations may not have bid for corporate debtors due to financial difficulty caused by the pandemic. If no resolution plan is received by the AA under section 30(6) of the Code before the end of the maximum term authorized for completion of the CIRP under section 12 of the Code, the corporate debtors will be forced into liquidation under the Code. 18 9. There will be no stay of proceedings against the personal guarantors: While the Ordinance suspends the initiation of CIRP for defaults as specifically stated in section 10A 19, creditors of corporate debtors can still go behind the personal guarantors of corporate debtors to recover money associated with defaults caused by the corporate debtors because the Ordinance does not suspend the initiation of proceedings against the

7. personal guarantors of corporate debtors. This may undermine the Code's goal of balancing the interests of all parties. The Ordinance fails to accommodate the interests of personal guarantors, putting their financial standing at risk as a result of corporate debtor defaults. Suggestions and the future Keeping in mind the ambiguities and flaws mentioned above, the following steps can be done to ensure the ordinance's seamless implementation: 1. The authorities may issue a notification confirming the start date of the suspension period specified in Section 10A of the Ordinance. 2. Instead of permanent immunity, corporate debtors could have been granted temporary exemption from being hauled into insolvency proceedings for failures induced by the pandemic. 3. Rather than introducing a cut-off date for categorizing defaults under section 10A, the default caused by the pandemic might simply be excluded from the definition of default provided by clause (12) of section 3 of the Code by adding a proviso to the definition. Furthermore, rather than suspending the filing of applications for the initiation of CIRP for defaults classified under section 10A, the NCLT could have been empowered to determine whether a default was caused by a corporate debtor due to distress caused by the pandemic after applications were filed. 4. The IBBI can provide clarification by stating that all such applications filed before June 5, 2020, for the beginning of CIRP for defaults induced after March 25, 2020, will be suspended. 5. If the defaults in debt payment were caused in part before or after the suspension period provided in section 10A, then the amount of default caused during the suspension period shall be allowed to be included in calculating the minimum amount of default under section 4 of the Code for the purpose of initiating CIRP for the default caused in part before or after the suspension period. Otherwise, if the amount of default caused during the suspension period is not allowed to be included in such calculation, it will encourage corporate debtors to

8. incur continued defaults in payment of their debts until the minimum amount of default is met under Section 4 of the Code. 6. The Ordinance grants complete immunity to the corporate debtor's directors and partners from contributing to the corporate debtor's assets in respect of defaults for which the initiation of CIRP has been suspended under section 10A, even if the directors and partners of such corporate debt or do not exercise due diligence in minimizing the potential loss to the corporate debtor's creditors. Instead, the NCLT may have been given the authority to decide the liabilities of corporate debtors' directors and partners on a case-by-case basis. 7. Provisions could have been included in the Ordinance to address the problems of MSMEs, as they have been disproportionately affected by the pandemic. There is an urgent need to address MSMEs' financial problems. Furthermore, because MSMEs offer debt to the economy's companies and businesses, they may have been allowed to commence the CIRP for the defaults listed in section 10A. Otherwise, if MSMEs are not made an exception to the creditors who cannot initiate CIRP for such defaults, their funds may be blocked, dealing a significant blow to their financial strength. 8. It is critical to postpone the implementation of already-approved resolution plans in ongoing CIRPs, as resolution applicants may be facing financial hardship as a result of the epidemic. Deferring the implementation of previously authorized resolution plans may ensure that they are implemented in a viable way when the resolution applicants' finances improve. Furthermore, if no suitable resolution applicant is found for corporate debtors against whom CIRP was commenced before March 25, 2020, actions should be made to postpone the CIRP of such corporate debtors in order to keep them from going into liquidation. 9. The insolvency and bankruptcy proceedings against the corporate borrowers' personal guarantors must be suspended in the same way that they were suspended for the corporate debtors. This will help the corporate debtors' personal guarantors to lessen their financial misery as a result of the epidemic, allowing them to provide better financial assurance to creditors in the future. Furthermore, it will ensure that the financial interests of the personal guarantors are balanced with the interests of other stakeholders. CONCLUSION

9. The image would have been substantially better if the Ordinance had been adopted with the above-mentioned flaws and uncertainties in mind. However, the Ordinance manages to maintain the spirit of corporate debtors and companies facing financial difficulties as a result of the pandemic. The Ordinance was drafted with the specifics of the Code in mind. It is critical to recognize that the Code is intended to address the misery of individual enterprises or industries, rather than the anguish caused by the entire economy or an economic crisis. As a result, the Ordinance cannot help the economy as a whole recover. It will also be fascinating to see how the NCLT and other agencies, such as the IBBI, respond to any uncertainties or challenges that may develop in the future as a result of the Ordinance's implementation. As the AA under the Code, the NCLT would have a significant role to play in ensuring the seamless implementation of the Ordinance. Regardless of the Ordinance's flaws, it is critical to recognize that the Code's overall goal is to save financially viable firms. In the case of Swiss Ribbons Pvt. Ltd. v. Union of India 20, the Hon'ble Supreme Court examined the Code's Preamble and determined that maximising the value of corporate debtors' assets is a critical goal of the Code, so that corporate debtors can be brought back into the economic mainstream and repay their debts. As a result, the viability of credit in the hands of banks and financial organizations improves. 21 The Code provided essentially two options for mitigating the financial distress caused in the economy by the pandemic. First, the initiation of CIRP could not have been postponed due to any debt payment defaults. It is critical to recognize that all companies are experiencing financial difficulties as a result of the pandemic. As a result, there aren't enough resolution applicants to save the corporate debtors who are causing defaults. Thus, the first approach could irreversibly force such corporate debtors into liquidation, even if they are experiencing temporary hardship as a result of the epidemic but are financially viable. The second option is what the Ordinance enacted, allowing all business debtors, whether financially viable or not, to achieve stability and return to the economic mainstream. It is conceivable to liquidate non-viable enterprises in the future, but it is not possible to undo the liquidation of financially viable companies that could have been liquidated if the Ordinance had not been enacted to postpone CIRP initiation for the defaults listed in the Ordinance. As a result, the overall impact of the Ordinance is in support of the Code's goal.