Piyush Gupta Head of Aviation & Competition
India passes the Insolvency and Bankruptcy Code - Amendment Ordinance
Last week, the Indian government amended the Insolvency and Bankruptcy Code (“IBC”) by passing the Insolvency and Bankruptcy Code Ordinance 2020 (“Ordinance”). The Ordinance was passed on and came into effect on 5 June 2020. The basic tenet of the Ordinance is to suspend fresh bankruptcy proceedings against persons impacted because of COVID-19 for at least six months, up to a maximum of one year.
The Ordinance is premised on the government’s idea to “prevent corporate persons which are experiencing distress on account of unprecedented situation, being pushed into insolvency proceedings under the said Code for some time”.
Under the Ordinance, changes have been made by inserting Section 10A in the Code, which provides that “[N]otwithstanding 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.”
It may be noted that Section 7 of IBC enables financial creditors to file for insolvency against a corporate debtor; Section 9 provides for application of insolvency by an operational creditor and Section 10 relates to initiation of insolvency proceedings by a corporate applicant. The Ordinance temporarily suspends these three sections for defaults arising on or after 25 March, 2020 for a period of six months, up to one year.
In other words, any defaults that occurred before 25 March, 2020 can still be resolved via the bankruptcy code. Additionally, defaulters who are not related to COVID-19, will not be covered under the Ordinance. So not only has it to be proved that the default occurred after 25 March 2020, but that the default occurred as a consequence of the COVID-19 pandemic.
Additionally, as mentioned above, Section 9 of the IBC allows operational creditors to file for insolvency applications against a corporate debtor. The Ordinance suspends this provision for up to one year. Now, an operational creditor is any person to whom an operational debt is owed. This person can be a supplier of goods and/or services to companies. Therefore, if a corporate/entity fails to repay such operational creditors during the period, such operational creditors will have no legal recourse left under IBC, at least for up to a year.
In conclusion, it may be said that while the amendments promulgated by the Ordinance seek to protect the persons / entities who are genuinely adversely impacted because of COVID-19 from being dragged to bankruptcy courts for reasons that were beyond their control, the same may pose some difficulties to those very entities in terms of practical usage.