In India Corporate Insolvency Resolution Process (CIRP) is governed by Insolvency and Bankruptcy Code, 2016. The insolvency law provides for faster settlement of disputes of insolvency cases, and also protects the interests of the financial and operational creditors in a time-bound manner. Under IBC the parties who can initiate CIRP are financial creditor, operational creditor, and corporate debtor.
The Code consolidated all these insolvency laws to bring them under one umbrella. The Code also provides for time bound insolvency resolution process i.e. 180 days after the process is initiated plus 90 days extension for resolving insolvency. In August 2019 the period was extended to 330 days.
COVID – 19 has brought the entire world to a halt, prompting governments around the globe to take strict measures for its containment. The year 2020 has been challenging for economies all around the globe where people around the world are battling the COVID-19 pandemic. It has affected the lives of around 3 million lives globally.
In India, the lockdown which was announced on March 23, 2020, has impacted all sectors of the economy. All kinds of activities came to halt excluding the essential services.
Several businesses are now struggling to exist as their functioning has been temporarily terminated. Amongst various other things, employees are unable to pay salaries to their employees. The business operations are at complete standstill creditors can be found lining up for the repayments of their loans. The governments even announced a 20-trillion-rupee economic package to mitigate the economic fallout of the COVID-19 pandemic
The government has introduced so certain relief measures to ensure the sustenance of businesses and prevent them from being insolvent.
1. Increase the minimum threshold for applications under the Insolvency and Bankruptcy Code (IBC) to ₹1 crore, from ₹1 lakh earlier
On 24 March 2020, the Finance Minister announced that the monetary threshold of default for filing an application for initiation of CIRP under the IBC be increased to INR 1,00,00,000
(Indian Rupees One Crore) from the current threshold of INR 1,00,000 (Indian Rupees One Lakh), under Section 4 of the IBC,2016.
Impact on MSMEs
According to me, this will aid small businesses which are under pressure because of the covid-19 lockdown and even before. The proposed amendment to the IBC will provide some respite to the MSME sector which has been the most affected by the pandemic. The government has also planned to bring in a special resolution framework for small businesses, which so far were largely on the same footing as their larger counterparts. Though the amendment will not impact applications that were filed before the lockdown and are still pending.
Micro, Small, and Medium Enterprises (“MSME”) are currently facing the heat of the coronavirus pandemic. Union Ministry has increased the threshold limit to save a lot of businesses that are already facing a threat of default. This action will safeguard against an economic meltdown by avoiding large-scale insolvencies.
The MSME sector employs millions of people in India, and due to casualties of the ongoing countrywide lockdown have led to the closure of factories and businesses as the government has taken steps to contain the covid-19 pandemic. The share of the MSME sector in India’s GDP was 30.3% in FY19, up from 29.7% in FY18, according to data submitted to Parliament in the year 2019.
Impact on operational creditors
The apparent impact of this amendment is on operational creditors. Most operational creditors may not have an outstanding operational debt of Rs. 1 crore or more and thus, the main criteria for the applicability of the IBC provision are not met. Further, it is unlikely that there would be any employee who is yet to receive an outstanding from his employer that equals to Rs. 1 crore or more and thus, such employee (the operational creditor) also does not find recourse under the provisions of IBC.
As per Section 7 of the Code, a financial creditor may apply by itself or jointly with other financial creditors against a corporate debtor which means that the amount of default shall include not only that of the applicant but also any other financial creditor. Thus, a financial creditor may satisfy the minimum requirement of the threshold of the amount of default either individually or along with defaulted debts of other financial creditors.
However, the scenario is very different concerning filing of an application by an operational creditor. Under the Code, an operational creditor is required to meet the threshold of the amount of default individually as there is no provision for operational creditors to file a joint application of combined debts against the corporate debtor. Given the nature of debts due to operational creditors, it is unlikely that individual operational debts would equal or exceed Rs. 1 crore and thus, the said amendment in effect wipes out the majority of this class of creditors from seeking resolution under the provisions of the IBC.
Weakness of operational creditors
Operational creditors are already on a weak footing in case their application is admitted by the National Company Law Tribunal owing to their position/rank in the waterfall arrangement mechanism and thus, their main attempt at applying is to arrive at a possible settlement with the corporate debtor and recover part of their dues, if not the entire amount.
Given the revised threshold, operational creditors may have to consider options that were available pre-IBC period:
1. Refer the matter to arbitration if the agreement permits the same; or
2. pursue a remedy through civil courts, which are already having a backlog in disposing of cases
3. Refer to the matter to be dealt with under the dispute resolution mechanism provided under Section 18 of the MSMED Act, provided the body/entity has obtained registration under the said Act.
2. Suspension of Sections 7, 9, and 10 of the IBC & no filing of fresh cases for insolvency for one year
Section 7 of the IBC Act allows a financial creditor to file for a corporate insolvency resolution process against a corporate debtor. Section 9 provides for the application of insolvency by an operational creditor, while Section 10 allows for the initiation of insolvency proceedings by a corporate applicant. Further operational creditors under the IBC have to file for insolvency within three years, after which it comes under limitation.
The suspension will not allow financial and operational creditors as well as corporate debtors themselves from initiating insolvency proceedings. Sections 7, 9, and 10 of the IBC, 2016 have been suspended “to stop companies at large from being forced into insolvency proceedings in such force majeure causes of default”.
The Force Majeure clause difficulty
Force majeure is a clause in a contract that provides ability to contracting parties to not perform their obligations without being held responsible for it, due to the happening of extraordinary events that were not in their control.
Generally, force majeure is not seen in loan agreements. However, business contracts that contain such clauses are likely to see parties invoking it, thereby rendering the performance of a contract for the period, impossible, which means that a corporate debtor, owing to zero or substantially lowered revenues during the lockdown is likely to default on its pay-outs to financial creditors as well as operational creditors. Worse, force majeure clauses in certain contracts may well be drafted in a manner that may not allow an interpretation to be taken such that a pandemic of this nature does not get covered.
Impact on operational creditors
As the IBC has been suspended, creditors, especially the operational creditors are hit hard. Operational creditors, unlike financial creditors, are engaged in the supply chain of the corporate debtor and if they are not paid due to invocation of force majeure, this shall further impact their ability to repay their creditors, thereby showcasing a devastating ripple effect on the economy.
It is likely to have adverse repercussions for certain sections e.g. the creditors. But, the situation may well be unavoidable since the initiations of insolvency proceedings during these times are likely to severely clog the courts.
Though they can resort to the alternate remedy available in the Companies Act, 2013. The remedy under Section 230 of the Companies Act, 2013 provides for a compromise, composition, or an arrangement between the company and any class of its creditors and members which continues to exist.
Also, Creditors will now have to adopt remedies available under the MSME Act, and file Summary Suits and/or Regular Suits for recovery of the outstanding payment by obtaining a money decree in alternative to the remedies under the Code.
In context with the Companies Act, 2013 as per the scheme of arrangement or compromise provided under Section 230(1), the Tribunal can order a meeting of the creditors or class of creditors, or the members or class of members, as the case may be, and such meeting to be conducted in a manner as directed by the Tribunal. Thus, ‘creditor’ and every class of creditor i.e. unsecured, secured, statutory creditors, comes under the purview of Section 230 of the Companies Act, 2013 to arrive at a compromise with the Debtor.
3. Period of lockdown excluded from timeline under IBC if activity about CIRP could not be completed due to the lockdown
The Insolvency and Bankruptcy Board of India has introduced Regulation 40C by way of an amendment to the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. In the notification issued by IBBI, the insolvency board stated that the decision was made with the understanding that it may be difficult for companies and insolvency professionals to complete various activities related to the CIRP within the stipulated timelines under the regulations.
The IBBI amended the CIRP Regulations to provide 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 timeline for any activity that could not be completed due to the lockdown, in relation to a corporate insolvency resolution process.
Under the IBC, companies are given 330 days to finalize the CIRP, including the time taken for litigation and other judicial processes. The amendment would allow the liquidator to exclude the entire time period of COVID-19 lockdown from all the timelines provided under the liquidation regulations of the IBC, thereby ensuring that unnecessary defaults do not occur in the future. This move would also ensure that the NCLT is not flooded with procedural applications seeking extensions and or con donation of delay in meeting timelines, once the lockdown is relaxed and the NCLT finally reopens and even anytime thereafter, during the liquidation process.
Thus it can be evidently deduced that all the above amendments will lead to the reduction in filings before NCLT (Tribunal) and it would unburden the Tribunal substantially. It should be seen as an opportunity by the Tribunal to focus on the speedy disposal of the pending cases so that the Corporate Debtor can run their business again.
To some extent it will prevent the fall of the economy by increasing employment rate since now it is highly probable that the pending cases pertaining to the approval of the resolution plan shall be dealt with expeditiously. The economic and legal impact of COVID-19 and the measures taken to prevent its spread could see many otherwise profitable and viable businesses undergoing financial distress.
Already, businesses across all industries are reporting cash shortages, sparking fear of failure amongst the companies and its employees. While businesses of all sizes are likely to suffer, MSMEs may have a more difficult time surviving. The measures announced by the Government will give confidence and assurance to the industry to continue their trade without the pressure that they might enter their enterprises into insolvency