Suspension of CIRP during Covid-19: A Boon or a Bane?

[Megha Khandelwal and Ananya Ghosh are 4th Year B.A. LL.B. (Hons.) students at the National Law School of India University, Bangalore.]

The Covid-19 pandemic and its consequential lockdown has resulted in an economic ripple effect on businesses all across the globe. To mitigate its impact, governments of various countries have amended their respective insolvency laws and adjudicatory processes, which have had wide-ranging ramifications. India too has taken certain steps to modify its insolvency law i.e. the Insolvency and Bankruptcy Code, 2016 (‘IBC’).

Section 10A was inserted by the promulgation of the Insolvency and Bankruptcy Code (Amendment) Ordinance 2020 on 5 June 2020. It prohibits the filing of applications under sections 7, 9 and 10 (i.e., by financial creditors, operational creditors and corporate debtors respectively) for initiation of corporate insolvency resolution process (“CIRP”) in respect of defaults arising from and including 25 March 2020 for a period of six months, not exceeding 1 year. It was promulgated to prevent corporate persons who are experiencing distress on account of an unprecedented situation from being pushed into insolvency proceedings under IBC for some time. The authors believe that the withdrawal of power to initiate insolvency, from both debtors and creditors is not serving the purpose of the Ordinance.

As was justifiably observed in the Committee of Creditors of Essar Steel India Limited through Authorised Signatory v. Satish Kumar Gupta, the IBC is based upon the idea of balancing interests of all stakeholders. Keeping in mind the purpose of the IBC, the focus of the amendment should have been to ensure equitable distribution between the debtors and creditors.

In this article, the authors argue that India should have stressed on newer and effective methods of restructuring the IBC to mitigate the Covid-19 disruption, rather than putting a complete prohibition on CIRP. The authors have analyzed the amendment made to the IBC, while simultaneously pointing out their lacunae. Recommendations that can help India tackle the crisis firmly have been suggested. This has been done by comparing the amendment with other countries while keeping in mind the essence of the IBC.

 Ambiguity in the Language

In Siemens Gamesa Renewable Power Private Limited v. Ramesh Kymal pronounced on 9 July 2020, section 10A was interpreted and it was held that there shall be no insolvency proceedings in India according to section 10A’s proviso because “shall ever be filed” has been used. This might be an attempt by the judiciary to relieve itself from analyzing whether the cause of the financial crisis was Covid-19. Such a blanket protection under section 10A would incentivize a corporate debtor to accelerate default so as to bring it within the prescribed period and avail a permanent abatement. However, this might not have been the intent of the law makers. Thus, the ambiguous language of the amendment has given rise to various confusions regarding the scope of applicability of the amendment.

Suspension of Debtor’s Rights to Initiate Insolvency Proceedings

Insolvency law works within a system in which the rescue and the restructuring models are at two polar ends of the spectrum. The rescue model, as followed in the US, works within the debtor-in-possession (‘DIP’) framework and is pro-debtor in nature. The restructuring model as practiced in Australia and India is creditor centric which aims for asset maximization.

Given the need of the hour, this asset maximization approach disregards the businesses as a going concern. This is the reason behind the government coming up with the amendment to the IBC.

However, through the current mechanism the law makers have adopted a myopic approach with the sole purpose of reducing the burden of new suits before the National Company Law Tribunal (‘NCLT’) and saving the corporate debtors for the time being. As will be shown hereunder, the extreme stance of putting a complete prohibition on CIRP can prove to be counterproductive.

It has been a common scenario under the insolvency laws where companies opt for their restructuring through section 10 of the IBC due to unbearable financial crunch. This gives debtors an opportunity to resolve their debts and revive the company through a resolution process.  The companies have been deprived of this right due to the amendment. Debtors of the economically viable companies should be allowed to initiate insolvency. This will provide them with an opportunity to revive the company and will also protect them from the claims of creditors who might be driven by self-serving interests.

However, providing a relaxation to all might lead to an opportunistic behaviour by the debtors who might opt for an extraordinary departure from the general law. To tackle this problem, Spain has implemented a system of screening eligible debtors. Similarly, India should also follow a system of intelligible differentia. This might not be logistically possible due to the sheer number of claims that might arise. Therefore, debtors should be allowed the benefit of the amendment subject to the objections by the creditors.

The authors suggest that the burden of proof should be on the creditor to show that the debtor was in distress pre-Covid-19 to exclude it from the ambit of eligible debtors. If the creditor succeeds in proving that the debtor’s state of insolvency was not generated by the pandemic, then such creditors should be provided with the choice to initiate insolvency proceedings as per the general requirements of the IBC. In order to encourage this outcome, some sanctions can also be imposed upon the debtors who may opportunistically use these exceptional rules.

This approach is akin to what Singapore has implemented. Instead of the courts, Singapore has decided that a body of assessors will determine whether the inability to perform the contractual obligations for which the relief is being sought by a party, has been caused due to the pandemic. Similarly, in India, this power could be given to the regulatory tribunals. Such an approach will ensure that relief is provided only to the party in need without having to prove its inability to perform its obligation.

Relief of Moratorium Taken Away

Section 14 of the IBC obligates the adjudicatory authority to declare a moratorium on the date of commencement of insolvency proceedings. As per section 5 of the IBC, insolvency starts at the date of admission of an application. This implies, that the moratorium can be declared by the Adjudicating Authority only after the admission of such an application is made. The protection of section 14 of IBC cannot be given effect under the current circumstances as this provision cannot be triggered without the filing of CIRP under the IBC.

Alternative Route under Companies Act, 2013

The government banks upon the idea that suspension of sections 7, 9 and 10 will not lead to loss of assets as neither the debtor nor the creditor will actually be in control of them. However, suspension of the IBC provisions during these testing times will lead the parties to opt for an alternative and a more inefficient route.

The parties might take recourse to section 230 of Companies Act, 2013 to enforce their claims. This section provides for a compromise, composition or an arrangement between the company and any class of its creditors and members. Therefore, this suspension brings us back to the old regime of section 230 under the Companies Act, which is far more strenuous, complex and costly.


What is needed is a framework that caters to the creditors and corporate debtor on the same footing. This can be done by categorising the businesses and having different provisions for each of the categories in relevance to their specific needs. It is proposed that an early engagement between the debtors and the creditors to negotiate the debtor’s financial restructuring should be promoted. A moratorium should be enforced and the twilight period should be reduced from the current 2 years to 6 months. Such strategies will help the business grow and at the same time not harm the creditors. 

Conclusion

The directives of the Central Government to tide over these trying times are laudable. However, many of these changes are short-sighted and will create problems for the stakeholders in the long run. The current amendment is still ambiguous on several issues, one of them being whether an extension is required for cases where a consensual restructuring has already been decided and is only pending implementation. There is a need to remove a blanket ban on CIRP to ensure that the principle of ubi jus ibi remedium is sustained. The legislation is not prepared for the rise in cases post the lifting of suspension. Until a viable mechanism is introduced to tackle the surge of cases, the entire purpose of the IBC will be infructuous. It is expected that legislature and regulators will eventually come out with more clarity on the concerned issues so as to enable the stakeholders to plan their course of action.

– Megha Khandelwal & Ananya Ghosh

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