The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020

Introduction:

The year 2020 brought a new pandemic to the human history the COVID- 19. It can be transmitted through touch. Therefore has spread in a lot faster way because of the globalized world that we live in. The lockdowns that are in place to reduce the spread has led to losses for many. Many companies are removing their employees as they are suffering huge losses. Because of a lack of demand and availability of supplies.

The scenario after the opening of lockdown would be tense. Because the Indian economy has been hit hard and many small shops and businesses might have to close their shop. Many companies may have taken loans which they may not be able to pay off. So there is always a threat of bankruptcy. Keeping in mind the economic situation the government has decided to bring some amendments to the Insolvency and Bankruptcy Code 2016.

About the Code

The Insolvency and Bankruptcy Code is form to make the cumbersome procedure of debt resolution in this country more streamline. There was already a pile-up of non- performing assets and loans of banks. Insolvency resolution used to take around 4.3 years on average in India as compared to around 1 year in the USA and UK.[1] The code applies to companies, partnerships, and individuals. It provides for a time-bound process to resolve the insolvency issue. A financial creditor, operational creditor, or the corporate itself can apply before NCLT to initiate the Insolvency Resolution Procedure. In this code, a homebuyer can also approach the NCLT for the resolution procedure if a developer fails to provide the house or refunding of the money.[2]   

The Insolvency and Bankruptcy Board of India has been appoint to act as the regulator of all the proceedings. It will have 10 members which will be select from the Finance Ministry, Law Ministry, and The Reserve Bank of India. It also has give the task of regulating the insolvency professionals and insolvency professional agencies. The Insolvency Professionals are appoint by the National Company Law Tribunal which also acts. As the adjudicator of the resolution proceedings. NCLT initiates the resolution process and gives the final decision on the creditors’ decision.

The main task of the insolvency professional is to administer the process. The professional provides the financial information of the debtor to the creditor and also manages the debtor’s assets. The entire procedure for companies should be complete within 180 days. That for smaller companies the deadline is 90 days with 45 days extension. If the debt resolution doesn’t happen then the company goes for liquidation. A creditors committee is create by the professional who may choose to revive the debt owe to them by rescheduling or by selling the debtors assets. A legal action cannot be take on the debtor during the resolution process.

New Provision

A new provision has been brought in the IBC amendment ordinance. After Section 10 a new section is insert Section 10 A which states that. “ 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 25^th March 2020 for a period of 6 months. Or such further period, not exceeding one year from such date, as may be notified on this behalf ”. The reason for suspending the sections for a year is that

1. the pandemic has created uncertainty and stress for the business
2. the nationwide lockdown has added to  disruption of normal business operations
3. in such circumstances, it will be difficult to find an adequate number of resolution applicants for a distressed business.

The changes to IBC in this way were first announced by Finance Minister Nirmala Sitharaman as part of the Atma Nirbhar Bharat Abhiyan reforms.[3] While this is seen as a welcome move by many as companies would be saved from the additional stress of insolvency and can get their business working in 1 year some say that the amendment may have some unintended consequences like Ajay Shaw a partner in DSK Legal says that “ While the ordinance is intended to provide respite to the corporate debtor, taking away recourse under IBC will only mean ballooning of the liabilities without resolution”[4]. Some say that the amendment may stop a company from going to insolvency even if it thinks that the best option for it in these challenging times is to bring the insolvency proceedings.

Conclusion

The amendment is bring keeping in mind the plight of thousands of small businesses around the country. As many would-be under deep debt; as the demand had drop to drastic low levels during the lockdown. Even the supply was erratic. Therefore many companies had to fire their staff to save their money. The Amendment does bring fresh air for struggling businesses. As now they can go through different measures to see if they can revive their company.

The Code has been instrumental in bringing many non-performing assets to resolution proceedings and so a uniform law was needed. The amendment has some flaws as many economic scholars say that it will just delay the inevitable. Only time can tell if the amendment was a big success or turned out to be another disappointment in an already badly hit economy.  

References:

[1] What is Insolvency and Bankruptcy Code (IBC) 2016, BFSI.com, (Feb 21, 2020), https://bfsi.economictimes.indiatimes.com/news/banking/what-is-insolvency-and-bankruptcy-code-ibc-2016/74235436

[2] Ashwini Kumar Sinha, How does the insolvency resolution process work ?, (July 2, 2019), https://www.livemint.com/money/personal-finance/how-does-the-insolvency-resolution-process-work-1562084179866.html

[3] Ritu Singh, Govt. brings IBC amendment ordinance; experts term some changes “excessive”, CNBC TV18, (June 06, 2020), https://www.cnbctv18.com/economy/covid-19-impact-government-promulgates-ordinance-to-amend-insolvency-and-bankruptcy-code-6080661.htm

[4] Rohit Jain, IBC: Ordinance issued to suspend Insolvency and Bankruptcy Code for 6 months, Bloomberg Quint, (June 5, 2020), https://www.bloombergquint.com/law-and-policy/ibc-ordinance-issued-to-suspend-insolvency-and-bankruptcy-code-for-six-months#:~:text=The%20ordinance%2C%20issued%20today%20and,or%20after%20March%2025%2C%202020.&text=This%20effectively%20shuts%20down%20all,on%20a%20debt%20or%20payment.