Covid-19 Crisis: Analyzing the Reforms to Insolvency and Bankruptcy Laws

[Karan Sahi is a corporate lawyer and company secretary by profession, and Pranay Bhattacharya is a 3rd year BA LLB (Hons.) student at the Maharashtra National Law University, Aurangabad]

The changing market dynamics from the coronavirus (“Covid-19”) has impacted almost every sector. The pandemic has not only caused global business disruption by halting the international trade, it has also caused major economic unrest affecting small companies and organizations that were already experiencing strain with financiers and creditors seeking repayment of their debts. The third quarter (i.e., October to December) of the financial year 2019-2020 has witnessed the initiation of corporate insolvency resolution process (“CIRP”) against 1961 companies. In the situation that ensued in the subsequent quarter, the number is only likely to soar.

Amidst the ongoing crisis, every regulatory authority, be it the Reserve Bank of India, the Securities and Exchange Board of India, the Ministry of Corporate Affairs or the courts, has made efforts to ease the burden on general public by recalibrating their existing regulatory frameworks to addressing the emerging scenario. In this backdrop, the Insolvency and Bankruptcy Board of India (“IBBI”) has adopted certain measures to protect debt-laden entities and non-performing assets (“NPA”) of corporate debtors that are already facing severe liquidity crunch. It has also provided relaxation to companies facing difficulty to replay their claims.

Amended Legal Provisions

Deferred timelines for completing CIRP

The IBBI, through a notification dated 29 March 2020, has decided that the 21 days of lockdown period cannot be used within the outer-limit of CIRP time-frame, wherever the process has been triggered. The companies will get an extension of 17 days (staring from 29 March) as against the normal due date for completion of the process.

The present timeline requires the CIRP to be completed within a period of 180 days, which is extendable up to 270 days, and in exceptional cases within 330 days (as decided in The Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta). This time frame remains unchanged. This means, even after the extension, the outer limit of completing the CIRP remains the same. In this light, an amendment is made in the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 with insertion of regulation 40C as a special provision relating to the time-line to defer the payment, excluding the period of lockdown.

Regulation 40C: Notwithstanding the time-lines contained in these regulations, but subject to the provisions in the Code, the period of lockdown imposed by the Central Government in the wake of COVID19 outbreak shall not be counted for the purposes of the time-line for any activity that could not be completed due to such lockdown, in relation to a corporate insolvency resolution process.”

The IBBI further clarified 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 time-line for any activity that could not be completed due to the lockdown, in relation to a corporate insolvency resolution process. This would, however, be subject to the overall time-limit provided in the Code”.

Revised IBC threshold limit

The Union Finance Minister, through a press conference and notification dated 24 March 2020, also decided to raise the threshold for filing an insolvency application by 100 times, i.e., from Rs. 1 lakh to Rs. 1 crore. Before such notification, the provision under part II, Insolvency Resolution and Liquidation for Corporate Persons under section 4 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) required a minimum default amount of Rs 1 lakh for initiating CIRP; with an additional power to the Central Government to increase it to Rs 1 crore at its discretion. The Government, analyzing the need of the hour, exercised this right to protect corporate debtors against creditors filing insolvency proceedings for meager amounts, given such a low threshold amount. This move will allow the corporate debtor some breathing space from multiple recovery cases during this period.

Suspension and extension of timeline for certain filings under limitation laws

The National Company Law Tribunal (“NCLAT”) extended any provisions relating to the laws of limitation, and also timelines on matters such as appearance or filing of affidavit that is required within a particular date. The NCLAT took suo moto cognizance of the matter and passed an order dated 30 March 2020 under rule 11 of the National Company Law Appellate Tribunal Rules, 2016. The same measure has already been taken by the Supreme Court on 23 March 2020 in Suo Moto Writ Petition (Civil) No(s).03/2020 for all cases and matters taken before the apex court.

Points to Ponder

Apart from the various measures taken by the IBBI, questions still remain unanswered and require much clarity amidst the pandemic. Some of these are discussed below.

Whether the defence of force majeure clause is applicable in insolvency cases

In Parvesh Magoo v. IREO Grace Realtech Private Limited,2019, the NCLAT took note of the view of Supreme Court in Pioneer Urban Land and Infrastructure Limited v. Union of India, 2019 and held that it falls upon the adjudicating authority (the National Company Law Tribunal (“NCLT”) or the NCLAT) to decide whether the default has been caused due to the fault of the corporate debtor, or whether it a force majeure condition (“FMC”) that has resulted in a failure of the corporate debtor to comply with its financial and other obligations. Moreover, if the default has not been caused due to the acts or omissions of the corporate debtor, but due to any force majeure event, it can be deduced that the corporate debtor is not at fault. These two cases, in particular, relate more closely to the real estate sector. One needs to consider whether these judgments can be used as a precedent to seek an extension of the moratorium period or the outer-limit CIRP timeline.

It would be interesting to note if, when such matters come up during this period, whether the NCLT or NCLAT would consider the existence of a pre-existing FMC in the contract. Accordingly, it is necessary to consider whether the corporate debtor can seek relief by invoking the FMC against insolvency if any disruption is caused due to the outbreak of Covid-19.

Whether the threshold of Rs 1 crore is applicable to individual creditor or a group of creditors

For a Financial Creditor (“FC”):Section 7 (1) of the IBC allows a FC to file an application either by itself or along with other financial creditor to initiate a CIRP against a default by the corporate debtor. With the default amount being raised, it is still unclear whether the application can be initiated by an individual FC or jointly with other financial creditors. Given the present circumstance and analyzing it from the perspective of section 4 of IBC, which allowed individual financial creditor to trigger CIRP, the same can be applied here. However, since the amount is too high for an individual creditor, there is no bar to include other creditors, if the default amount is fulfilled according to the notification.  Therefore, the default amount stands aggregated at a sum of Rs 1 crore from all the creditors jointly or individually, which is necessary to fulfil the revised threshold amount.

Further, the Insolvency and Bankruptcy Code (Amendment) Act, 2020 under section 7 also requires financial creditors such as allottees, agents or trustees of deposit holders to file an application jointly by not less than 100 of such creditors in the same class or not less than 10% of such creditors, whichever is lesser. Therefore, such a proviso will also be applicable to initiate CIRP during this pandemic period to reach the threshold of Rs 1 crore. The above move will not only protect the exiting corporate debtors but also MSMEs and start-ups. The number of applications will likely be reduced.

For Operational Creditor (“OC”):The IBC does not carry any specific provision for a threshold amount to be fulfilled by the OC, either individually or conjointly. Therefore, for an application under section 9, in light of the revised provision, an OC is required to fulfil the threshold amount of Rs. 1 crore for triggering the CIRP.

Whether the resolution plan can be changed after initiation of CIRP

In Rahul Jain v. Rave Scans (P) Ltd,the Supreme Court held that once a plan has been approved, the plan attains finality. Therefore, no modifications and amendments can be made by the adjudicating authority, i.e., the NCLT or the NCLAT. This view has also been adopted by the NCLAT in R.G.G. Vyapaar Pvt. Ltd. v. Arun Kumar Gupta.

However, as of now, there have been no precedents or provisions for amending the resolution plan once submitted. Given the current situation, and the larger objective of the IBC to protect the corporate debtor as well as the investor by maximum realisation of assets, such a measure should be allowed. The resolution plan submitted to the adjudicating authority by the committee of creditors (“CoC”) may not meet the haircut amount due to the effect of Covid-19. Therefore, the CoC should be allowed to reconsider its views on a previous plan, and submit a revised plan by approval of 90% of the CoC.

Way Forward

Suspension of sections 7, 9 and 10, i.e., involving the initiation of CIRP

Apart from the measures taken, the Government has additionally proposed to suspend sections 7, 9 and 10 if the present situation continues. Therefore, suspending these provisions may give additional relief to corporate debtors from getting dragged into insolvency amidst this crisis.

Raising finance for the corporate debtor through interim finance measures under section 5(15) of the IBC

In light of the Insolvency and Bankruptcy Code (Amendment) Act, 2020, particularly to section 5(15) of the IBC, the Government has inserted the word “and such other debt as may be notified” in addition to “during the insolvency resolution process period“. This offers a leeway to the resolution professional (including an interim one) to raise finances as and when the need arises. Therefore, this provision can be applied in the present situation of pandemic, where the resolution professional can raise short term finances for the corporate debtor to keep the business as going concern. This can be done by taking bank loans to maintain the liquidity and cash flow, and avoid increasing debts in the wake of such disruption. 

Conclusion

With the outbreak of the Covid-19 and the ensuring business uncertainties, the Government has taken varying measures to tackle the situation by introducing reforms, and the IBC is no exception to such a phenomenon. Recognizing the need of the hour, the Government has taken different measures for survival and maximum realisation to protect the NPAs and debt-laden entities. These measures may boost confidence and provide some relief to ailing corporate entities. In this light, the measures will offer extra time and maneuvering room to corporate debtors while ensuring optimal returns to the creditors when this crisis ends. 

Karan Sahi & Pranay Bhattacharya

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