Suspension of Insolvency and Bankruptcy Code

Introduction:

The world is facing a huge loss of lives. During amid coronavirus or COVID-19 people are facing huge levels of anxiety, stress and fear. Millions of people lost their jobs, millions are getting their pay cut. So many people lost their homes. So many could not able to feed themselves, their families neither their children. The COVID-19 left everyone shaken. People or we can say, labour that was living away from their families in different states to earn faced extreme poverty, lost their jobs, they didn’t get their wages. Many could not reach their home and spend months on roads here and there suffering through hunger.

The world is facing a dynamic loss of economy. India faces a downfall in Gross Domestic Product (GDP). GDP is the monetary value of all finished products and service that are prepared within the country during a specific time interval. Gross Domestic Product provides us with an economic picture of a country, used to predict the size of an economy and growth rate. It is mainly calculated as expenditure, production, and income.

Middle-class people failed to pay their child’s fees or copping up with day to day basic need. They lost their jobs. Many people wonder how they will pay their bank’s debts and interests.

The government made so many decisions to provide a little relief to the people of India. The government launched so many schemes to make the survival easy during amid lockdown because of coronavirus pandemic.

Few of the schemes that the government had started during lockdown to relief people are:

1. Company Affirmation of Readiness towards COVID-19 web form.
2. Compliance & Regulatory Relief Measures.
3. Contribution to PM CARES Fund eligible for tax exemption.
4. Economic package: The government announced another economic package of INR 20. lakh crore including those announced earlier which accounts for 10% of India’s GDP.
5. Government Extended Income Tax deadlines.
6. Government Extended timelines for loan moratorium and working capital.
7. Loans against gold ornaments and jewellery for non-agricultural end-uses.
8. Schemes to support MSMEs: MSMEs that are manufacturing products or providing services related to fighting the Coronavirus can apply for loans at a rate of 5%. There is another scheme to provide financing for the healthcare sector.
9. Tax extensions and reduction in fees.

Government Issued the Suspension of Insolvency and Bankruptcy Code for Six Months Amid COVID 19

It can be defined as, For six months, on account of any payment defaults that occur on or after 25 March 2020 (Suspension Period). The law provides that the suspension time may be extended by Government according to the notification, for a maximum period of up to one year.

Rajya Sabha approved to the amendment of bankruptcy code and insolvency which provide for not initiating any fresh insolvency proceedings against companies which faced damages due to COVID-19 pandemic for at least six months starting March 25 and can be extended up to a year. Our finance minister that is Nirmala Sitharaman said that amendment does not mean that the insolvency proceedings would then be applicable for cases before March 25, 2019, she said this provision will be applicable only for the coronavirus period.

Now, first of all, it is important to know what does these terms, insolvency and bankruptcy mean.

• Bankruptcy: it does not differ much from insolvency. When an organization is unable to maintain its financial obligations or fails to make payments to its creditors, it is the situation of bankruptcy.

In court, a petition can be filed for the same where all the outstanding debts of the company are measured and also paid if not in full from the company’s assets.

Case Law

Lokhandwala Kataria Construction Pvt. Ltd.- Corporate Debtor vs Nisus Finance and Investment Manager LLP

On June 5, 2020, the President publicized the Insolvency and Bankruptcy Code (Amendment) law, 2020 with immediate effect. The objective of making the law is to protect corporate entities that have witnessed a sudden downfall in operations and consequently defaulted on their repayment obligations, from being dragged into insolvency.

The Law introduces Section 10A to the insolvency and bankruptcy code, which suspends:

(a)  Section 7 (insolvency application by a financial creditor);

(b)  Section 9 (insolvency application by an operational creditor) and;

(c)  Section 10 (voluntary insolvency application by the corporate debtor),

for six months, on account of any payment defaults that occur on or after 25 March 2020. The law provides that the Suspension Period may be extended by Government, for a maximum period of up to one year.

The provision to Section 10A bars any insolvency application from ever being filed, for any default happening during the Suspension time interval.

The explanation to Section 10A clarifies that this provision does not apply to any default that occurred before the commencement of the Suspension Period, i.e., before 25 March 2020.

Voluntary Insolvency

Voluntary insolvency is defined as a process where we can say that my company is no longer financially strong and I need support or help. Also, pressure by a forthcoming creditor might take a decision to close all his businesses and liquidate the debt. When a person declares himself as voluntary insolvent, no creditor could ask him for money payments, then the creditors can claim their money by selling their cars, house, jewellery etc.

There are two types of cash flow tests in this:

1. The cash-flow test – a person is unable to pay his bills when they become due or in the future.
2. The balance sheet test– when the companies’ assets are less than the liabilities.

Voluntary Liquidation

Voluntary liquidation is a process in which the directors of a company are willing to enter into to contract to play safe of protecting their creditors’ interests and close their business.

The process of a typical creditors’ voluntary liquidation is as follows:

• The directors contact an insolvency practitioner
• All possible options are considered
• A creditors’ meeting is held and a liquidator is appointed
• The company’s assets are liquidated, the money is distributed to the creditors and the company is closed down

The Government of India Suspended the Proceedings

The government had imposed a shield for companies who will be facing insolvency and bankruptcy during amid COVID-19 for six months.

The government suspended the new proceedings of insolvency and bankruptcy for the period of 6 months affected by the pandemic. It applies to default rising on or after 25, March 2020.

Lockdown disrupted normal business operations. It was difficult to find resolution applicants to rescue the corporate person who may default in the discharge of their debt obligation.

The decision was taken to derive the situation of COVID 19 from increasing pressure against the companies or MNC’S. It clears the fact that no new buyer or investor will buy or invest in those companies and there will be no will to get into it for the successful insolvency resolution of the distressed companies which would lead them into liquidation.

This is being brought in as a one-time measure, initially for the period of only 6 months. The government made sure that it also emphasis if needed. In section 10A, it will further be extended for a period of 6 months time period. The section will not be in force for more than one year of time period from the date of its insertion.

Prohibition on Filing of Insolvency Applications for Defaulting During the Suspension Period

The provision that section 10A provides is that it bars any insolvency application from ever being filed for if any default appears during the suspension period. The explanation to Section 10A clears that this provision does not apply to any default that occurred before the commencement of the Suspension Period.

Impact of Suspension of Insolvency and Bankruptcy Code

Obviously, the major concern was to provide relief to the ones who will get affected through coronavirus and lockdown. The important concern was that the impact will be going to see as the destruction of either small or big companies, businesses going to hit hard due to lockdown.

The companies would have been looking for some sort of help for themselves a plan to keep them as going concern had insolvency court proceedings been started against them.

A lot of companies have been looking for debt reconstruction through the provisions of IBC once the situation gets back to normal after this pandemic get resolved.

Conclusion

In the 21st century, we faced the biggest and most vital challenges related to the environment. Humans try to preserve nature at their level best but always end up with destroying it more. Homosapiens always make earth worst. They only use it totally and never repay it back. But during these past few months, the earth has recovered itself, restored the nature during the lockdown. The consequences of coronavirus had lead towards the healing of the environment. Whatsoever is the cause of this novel coronavirus, it improved the mutually affected relations between humans and nature. The humans faced a huge amount of damage through this in their economy. Since humans themselves are one of the reasons to exploit their lives. At this need of an hour, we just need to be alert and keep our brains open to fight against it.