Introduction:
Insolvency is when an individual or an organisation owes more debt than the assets they have and is not able to pay back its creditors. A bankruptcy, on the other hand, is when an individual or an organisation is insolvent and seeks help from the government to resolve its financial situation or pay its debt or liabilities.
Insolvency and Bankruptcy Code, 2016 is the bankruptcy law of India. It was made to combine the legal framework of insolvency and make a separate specific law for Insolvency and Bankruptcy. Due to Insolvency and Bankruptcy Code 2016, debtors and creditors can start recovery proceedings against each other. It is also made so that the time taken usually in bankruptcy and insolvency case proceedings can be limited and decreased.
(Law, n.d.)
Main Sections of the Insolvency and Bankruptcy Code are explained below:
Section 8. Insolvency Resolution by Operational Creditor
Subsection 1 of section 8 states that a creditor can ask his debtor to clear the default if any by sending a demand notice of the default invoice to the debtor in the form and manner agreed.
Subsection 2 of section 8 says that within 10 days of the demand notice is conveyed to the debtor, the debtor must let know the creditor:
a) if there is any reason or dispute involving the invoice, or
b) about the payment of the debt to the creditor by
i) sending the copy of the transaction of the payment or by
ii) sending a copy of the transaction letter of the encashed cheque which has been given by the debtor to the creditor
Section 9. Application for Initiation of Corporate Insolvency Resolution Process by Operational Creditor
Section 9 of the IBC 2016 states that after 10 days of the demand notice which has been delivered to the debtor by the creditor if the debtor doesn’t clear the default or send a notice for dispute, the creditor can file an application before adjudicating authority for a corporate insolvency resolution process. It also lays down the procedure for how to file an application and what documents are required. A creditor can initiate a resolution process regarding insolvency discussion. A creditor can hire a professional for resolution as an interim professional. After 14 days of the application received by the Adjudicating Authority, the authority can admit the application and should converse with the creditors about all details and decisions to be made about the application or reject the application and talk to the creditor about why the application was rejected and what can be done about the application and the creditor’s situation.
(IBBI, n.d.)
Amendments
Because it is a young and new act, there haven’t been many major amendments, but because of COVID-19 pandemic, some changes are made in the code which is mentioned and explained below:
New and fresh bankruptcy proceedings against insolvent persons impacted by COVID-19 are not to be done and suspended for six months which can be extended to one year. These are done by adding section 10A in the code which states that section 7, 9 and 10 should be suspended for 6 months, no application for insolvency resolution process to be filed for any defaults from 25th March 2020 for six months, which can be extended to one year, not more than that.
(Mondaq, n.d.)
Another amendment which came into force was to increase the minimum amount of default owed by debtors to initiating insolvency from one lakh to one crore. It was done so that proceedings are limited against enterprises which are on the verge of bankruptcy.
(CNBC TV, n.d.)
Pros of the Amendments
Suspension of sec. 7, sec. 9 gives debtors time to pay or diminish their defaults with their creditors. Without the executive’s responsibility in the middle, there is an option of direct contact between the debtor and creditor, so that a solution can come up. The debtor and creditor can come into a mutual understanding of situations which might result in the creation of a deal between the parties so that the default is cleared. This interim suspension can help the debtors so that they can revive their business without dealing with any proceeding. Another amendment which got enacted was increasing the threshold of initiation for the insolvency process. Increasing the threshold is beneficial for both the enterprises and the NCLT, increasing the threshold for insolvency would result in a decrease in the number of insolvency proceedings and would help the struggling enterprises which are severely affected by the pandemic.
Cons of the Amendments
If the sections are suspended, the creditors would be facing the difficulties, as there is no way to take the money back by proceedings, they will have to wait until the period of the interim suspension ends. Also, by suspending section 10, the enterprises that are wilfully trying to initiate insolvency and clearing the defaults will not be able to raise proceedings for that and the debtor and creditor both will be in injury. While talking about the threshold amendment, it is beneficial for the organisations, is damaging for the creditors as increasing the threshold would not allow the small creditors who give loans which are less than the threshold amount. They would not be able to send demand notice under section 9 if the threshold is higher than the amount of loan the debtor owes. This might motivate companies to maliciously take defaults that are less than the threshold from creditors.
Conclusion
In cynical times like these, when the economy is sinking severely during the time when everyone is suffering economically, these amendments are necessary and challenging at the same time. Increasing the threshold would also just be beneficial for the debtors, and the small operational creditors will have to suffer the consequences. Suspension of fresh proceedings is refreshing and helpful for the debtors and the companies which are depressing, but at the same time distressing for creditors. This amendment was to benefit the debtors but it should be made sure that the defaulters do not take advantage out of this ordinance. It might inspire creditors to find new ways to collect money from the debtor rather than filing a demand notice, or going to the government for help. Suspending section 10 of the IBC doesn’t make a whole lot of sense as it would be damaging for both the debtor who wants to initiate insolvency itself and the creditor. There aren’t any fresh proceedings going on so that time is not wasted in Urgent matters during the COVID-19 situation.
References:
CNBC TV. (n.d.). Retrieved from https://www.cnbctv18.com/economy/covid-19-impact-government-promulgates-ordinance-to-amend-insolvency-and-bankruptcy-code-6080661.htm
IBBI. (n.d.). Retrieved from https://www.ibbi.gov.in/
Law, G. C. (n.d.). Retrieved from https://gamechangerlaw.com/ibc-2016-overview-of-the-insolvency-and-bankruptcy-code-2016/
Mondaq. (n.d.). Retrieved from https://www.mondaq.com/india/insolvencybankruptcy/952672/decoding-ibc-amendment-ordinance-2020-for-creditors-and-corporate-debtors
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