INSOLVENCY AND BANKRUPTCY CODE (AMENDMENT) ORDINANCE, 2020

inbatv Articles, India, Legal Reforms

The nationwide lockdown due to the COVID-19 pandemic had a huge impact on the economy of India which in turn has also disrupted the relationships between creditor and debtor under the purview of the Insolvency and Bankruptcy Code (IBC), 2016.

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 was passed on 5th June, 2020 which aims to suspend Section 7, 9 and 10 from the Code for six months by adding Section 10 A. The same has been added under Section 66. The Ordinance is prospective in nature and it clearly states that “…the provisions of this section shall not apply to any default committed under the said sections before 25th March, 2020.”

Section 7, 9 and 10 provides for the financial creditor, operational creditor and corporate applicant to initiate a corporate insolvency resolution process (CIRP) against the corporate debtor, respectively.

So, it can be said that the Ordinance would have no impact on cases which have already initiated CIRP before 25th March, 2020. However, this shows that the true purpose of passing this Ordinance could be lost for those entities which have committed default before 25th March, 2020 i.e. before the nationwide lockdown. These entities are not eligible to take benefits under this Ordinance for their financial strain.

The primary objective behind this Ordinance is to-

  1. Protect the interest of debtors under IBC who have been severely impacted economically by the lockdown and are in “near insolvency” situation.
  2. Exclude the defaults arising under IBC due to the impact of lockdown.

However, the primary objective of this Ordinance that is to save the interests of the debtors might not be achieved as planned. There are many ways for the creditors to enforce their claims upon the debtors and recover the amount. Some of them might be as described below-

  1. The suspension of these provisions would leave the creditor to look for other legal remedies and legal recourses to recover amount.
  2. Obtaining a time bound remedy provided under the Commercial Courts Act, 2016 by filing suits under it
  3. The creditor can claim amounts under various heads by filing recovery suits and summary suits under the Code of Civil Procedure, 1908
  4. The creditor can also claim amounts under SARFAESI in cases of secured liabilities
  5. Arbitration proceedings, if available, can be initiated instead of CIRP.

The Ordinance passed on 5th June, 2020 to protect the interest of creditors is a thoughtful and appreciated step by the Government after the notification dated 24th March, 2020 which increases the threshold for invoking provisions under IBC from ₹1 Lakh to ₹1 Crore. However, the Ordinance may not be able to fulfil its purpose truly. The corporate entities have undergone a major financial strain amid the nationwide lockdown due to the COVID-19 pandemic that they may seek for other possible legal recourses, if not any under IBC. They would contest their claims for the liabilities arisen during the lockdown and might demand the recoverable amount to the business of the corporate entities alive during and after the lockdown.

-Ayushi Mishra

Student Reporter, INBA