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IBC ORDINANCE 2020: A Blunder of Epidemic Proportions?

Article by Satwik Sengupta

(Student at Amity Law School, Delhi)


The players in the corporate sector of the economy got a major respite in the form of the Insolvency and Bankruptcy Code (Ordinance) announced on 5th June 2020. The result of the Ordinance was the insertion of Section 10A into the Insolvency and Bankruptcy Code, which reads:

10A: Notwithstanding anything contained in sections 7,9 and 10, no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25th March, 2020 for a period of six months or such further period, not exceeding one year from such date, as may be notified in this behalf:

Provided that no application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the said default occurring during the said period.[1]

The ordinance suspends the sections 7, 9 and 10 of the Insolvency and Bankruptcy code to safeguard institutions and commercial enterprises from falling into the abyss of insolvency. This ordinance, on one hand comes as a major relief to corporate enterprises who might authentically suffer major losses due to the ongoing pandemic, but on the other, might end up becoming a weapon for wilful defaulters looking to exploit their creditors and lenders. The proviso in the aforementioned section contains the lines “no application shall ever be filed….”. This expresses the fact that there can be no application filed for initiation of a resolution process for the corporate insolvency by a corporate debtor. This clause can become a shield for some and a sword for others.[2]

Alternatives and Resolutions

All though there are problems in the draft, there are always solutions one can look forward to. In this scenario there can be two types of solutions: 1. Alteration in the drafting of ordinance 2. Relying upon prevalent provisions Alteration can be a solution for this sketchy provision included into the Insolvency and Bankruptcy Code. In my personal opinion, there can be either an inclusion in the provision in discussion or the incorporation of a new provision into the Insolvency and Bankruptcy Code which would lean in favour of the creditors and lenders. It could be along the lines of: “Any such default arising within the aforementioned period, shall fall under scrutiny after the said period at the request of the aggrieved creditor which may include inquiry as to the books of account of the defaulting company by the relevant authority and if it is found that such company has intentionally refrained from repaying the creditors inspite of their capacity to do so, further action shall be taken”. Inclusion of such provision, or any provision among the similar lines as discussed above can prove to be beneficial for the creditors and lenders and might significantly reduce the number of fraudulent promoters and wilful defaulters, if not curb them completely.

Another resolution can come in the form of prevalent clauses and provisions present in the various other acts of similar nature. The primary aim of the amendment inducing ordinance is to provide relief from the stress arising because of the pandemic, but the suspension of right to initiate CIRP under 7, 9 and 10 of the IBC does not hinder the legal right of recovery which is provided to the creditors under alternate laws of recovery of debts. Financial Creditors can utilise the recovery process given through section 19 of Recovery of Debts Due to Bank and Financial Institution Act or under section 13 and 14 of the SARFAESI Act. Similarly, Operational Creditors can use the remedies provided under the Commercial Courts Act for recovery. SMEs can fall back to the recoveries under Samadhan Scheme and other safeguards announced and introduced by the Government.[5]

Conclusion

In conclusion it can be said that even though the draft at hand is flawed, there can be some respite still for the creditors and lenders who are aggrieved by the alternatives and resolutions discussed above. However, in my opinion, the most beneficial method would be the alteration of the draft of the ordinance as that would rectify the root of the issue and might curb the negative aspects and maintain the positive aspects.


Endnotes

[1] Insolvency and Bankruptcy Code (Amendment) Ordinance 2020, No. 9 of 2020, Section 10A, 2020

[2] Sakal Bhushan, ‘IBC (Amendment) Ordinance, 2020: A Pandemic of Bad Drafting’, The Leaflet (12 June 2020) <https://theleaflet.in/ibc-amendment-ordinance-2020-a-pandemic-of-bad-drafting/>

[3] Radhika Merwin, ‘Why the IBC ordinance to suspend insolvency pleas for six months, spells trouble’, BusinessLine, (06 June 2020) <https://www.thehindubusinessline.com/money-and-banking/why-the-ibc- ordinance-to-suspend-insolvency-pleas-for-six-months-spells-trouble/article31768005.ece>

[4] Ibid

[5] Khushnuma Khan, IBC Amendment Ordinance 2020 – A Protection for All? LawstreetIndia, (16 June 2020) <http://www.lawstreetindia.com/experts/column?sid=407>


Image Source: https://img.theweek.in/content/dam/week/news/biz-tech/images/2018/5/24/insolvency-bankruptcy.jpg

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