Insolvency and Bankruptcy Code Amendment Ordinance 2020:

This pandemic brought changes in everyone's life from a migrant worker to any MP sitting in the parliament. 25th March 2020 is the day when the nationwide lockdown was announced and has certainly disrupted the several business operations. There are many companies which are financially stressed and dragged into the corporate insolvency resolution process on account of the unprecedented situation and difficulty to find an adequate number of resolution applicants for a distressed/defaulting business, to prevent this Government of India has amended the Insolvency and Bankruptcy Code, 2016.

For the above reasons, on 5th June 2020, came the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 and to implement the changes as announced by the finance ministry. The ordinance shall come into effect from 05.06.2020.

These are some highlighting changes made in the act:

I. No application for any default committed by a corporate debtor arising on or after 25th March 2020 for a period of 6 months:

• Section 10 A has been inserted which states that no fresh application/s 7, 9 10 of the Code, can be filed against a corporate debtor for any default arising on or after 25.03.2020 for a period of six months but not exceeding 1 year from such date.

• It has been provided that no application shall ever be filed against any corporate debtor for the default occurring during said period.

• Further an explanation has been added that section 10A shall not be applicable to any default committed before 25.03.2020.

Explanation:

These above changes will provide a major relief to the companies which are suffering a lot of stress/ defaults due to the nationwide lockdown considering no action under the Code can ever be taken against them for any default occurred during said period.  

The ordinance also removes the vagueness with respect to ongoing matters. The non-applicability of the Ordinance on unresolved/current applications already filed gives a green flag to the creditors to continue the unfinished matters against the corporate debtors for negligence occurred prior to 25.03.2020. This also allows the creditors to file the application where demand notices were already circulated against the corporate debtor. Meaning thereby, and particularly for cases of Operational Creditors, if a creditor has issued a notice u/s 8 of the Code prior to 25.03.2020, it may continue with the filing of the application u/s 9. However, one may contend contrary that such an interpretation would destroy the very purpose of relief from the relentlessness of IBC to the companies. In such a situation, the explanation to the afresh inserted Section 10A explains that Section 10A is not appropriate to the defaults existing prior to 25.03.2020. Default is defined u/s 3(12) of the Code which provides as follows:

“(12) “default” means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be”

Therefore it is important to see whether a default on the basis of debt becoming due and payable has occurred. Specifically, in the cases under Section 9 of the Code, there is a catena of judgments that issuance of demand notice is enough to show the occurrence of default by the creditor. Furthermore, under the Code, the Operational Creditor is vested with a right to claim its dues u/s 8 & 9 wherein issuance of demand notice u/s 8 is obligatory. So in light of the ordinance and precedents available for interpretation of default, the cases where an operational creditor has issued a demand notice prior to 25.03.2020 would survive from the effects of the ordinance.

II. No application to be filed by Resolution Professional under fraudulent trading in respect of such default as mentioned in newly inserted Section 10A:

Amendment has been made to Section 66 of the Code dealing with fraudulent trading or wrongful trading. It empowers the resolution professional to file an application against the director/partner of the corporate debtor if the business was carried to defraud the creditors or for any fraudulent purpose and seek directions against them to make contributions to the assets. Through the amendment, sub-section 3 has been inserted to Section 66 of the Code, which restricts the resolution professional to file any application under the said section in respect of any default against which proceedings has been suspended as per section 10 A.

Explanation:

By the effect of the above-mentioned amendment, a resolution professional will no more be capable to file an application asking contributions to the assets of the Corporate Debtor undergoing CIRP, in respect of such default against which initiation of CIRP is suspended as per Section 10A. It is unusually unbelievable that why the government would like to give relief to someone who is guilty of wrongful and/or fraudulent trading and causing loss to the creditors. Therefore, what exactly is delivered through this amendment is yet to see the light of day when the provisions hereof are argued before the Adjudicating Authority. Specifically in a scenario whereby the language of Section 10A of the Code, the applicability is for uncertain time since the date from which the provisions of Section 10A would be applicable could be 25.03.2020 or any other date notified by the Government. However, one can say that presently there only seems to be the benefit of the present amendment to the person or directors of the Corporate Debtor who engaged in the fraudulent or wrongful during a pandemic.