Future of Insolvency Code in light of recent amendments
Insolvency and Bankruptcy Laws were introduced in May 2016 as an umbrella law for individuals, partnership and companies with a hope that it will speed up the insolvency process in India which the earlier laws spread over different statutes could not achieve. Prior to the introduction of IBC , the insolvency laws were regulated by Sick Industries Companies Act now repealed , Companies Act for liquidation and winding up , special recourse is still available for banks at Debt recovery tribunal but due to backlog of cases these forums are overburdened with cases thus resulting in delays.
Ineffective implementation and the time-consuming procedure in the aforementioned laws, made the Bankruptcy Law Reform Committee to draft and introduce Insolvency and Bankruptcy Law bill. IBC was enacted with the object to simplify and expedite insolvency proceedings in India, to consolidate and amend the laws relating to insolvency in India and most importantly focusing on maximization of assets of corporate persons.
The new law was welcomed as it provided for setting up new forum National Company Law Tribunals which would hear matters under the code. Since the time code has come into effect various amendments have been made as it is said that Law must change with changing times; therefore amendments have to be with in accordance with changing time.
In the above backdrop, the objective of this article is to explain the nature of Insolvency & Bankruptcy Law and analyze the impact of Insolvency law and whether the implementation of new amendments in the existing insolvency regulatory framework would be a success.
- RECENT AMENDMENTS
The Government has time and again tried to fix the loopholes by making important amendments to make the code more effective and time-bound. The impact of the amendments mentioned below in the tabular has been discussed briefly.
How it is Perceived
Increase in the minimum threshold for certain class of financial creditors to initiate CIRP
Imposed restriction on the rights of financial creditor by following the new threshold
The amendment has retrospective effect. For residential real estate projects, this would mean that a considerable number of homebuyers shall have to discuss and agree whether they want to initiate insolvency proceedings or explore other legal options
Triggering Insolvency Under Section 4
Due to covid-19 pandemic government in order to save companies have taken this step and to avoid frivolous filing under the code
Financial Creditors and Operational Creditors cannot initiate proceedings unless they meet the new criteria
Exclusion of Period of Lockdown
Providing ease to Resolution professional who due to covid-19 outbreak were not able to conduct the process
No doubt that it would delay the mandatory timeline set under the code
Suspension of Section 7,9 and 10
To save small companies and MSME’s from being declared insolvent during the pandemic.
For one year remedies available under the code to be suspended and creditors to opt for other remedies available under law.
- Increase in the minimum threshold for certain class of financial creditors to initiate CIRP
Insolvency and Bankruptcy law in India has proved to be a beneficial financial legislation in a period of short span though it had its own set of initial implementation problems which is very common when a new law comes in place. Since the code was implemented filing of frivolous filing of applications has been a prime concern as it was seen that creditors approached the tribunal for subject matters not covered by the code or as a means to pressurize the corporate debtor.
The Insolvency & Bankruptcy (Amendment) Act 2020 has revised the criteria for homebuyers to initiate the CIRP process by including proviso to Section 7 wherein the application shall be filed jointly by 100 or 10% of homebuyers whichever is less. This amendment has retrospective affect thus whereby the applications filed by the creditor have not been admitted have to meet the new criteria within a period of 30 days from the commencement of this act failing which the application shall be deemed to be withdrawn.
It imposes restriction on fresh petitions being filed under section 7 by investors. Having said that for real estate projects this would mean that a considerable number of homebuyers shall have to discuss and agree whether they want to initiate insolvency proceedings or explore other legal options. This amendment had caused a lot of hustle and bustle amongst the lawyers and financial creditors and the same has been challenged before Hon’ble Supreme Court whereby the court has ordered to maintain Status quo on pending applications thereby saving the financial creditors from 30 days window to amend their application & deemed dismissal.
- Minimum threshold raised under Section 4
India is in the third phase of the lockdown as the whole country is facing economic crises. While talks about increasing the threshold limit for initiating insolvency process have for a long been in consideration. The Government of India vide notification dated 24.03.2020 has increased the minimum amount of default from Rs 1 Lakh to Rs 1 Crore to trigger insolvency under the code to help small companies from the threat of defaults during the covid-19 pandemic. As the minimum default now stands increased hundred times seems to be debtor friendly as compared to earlier threshold which was creditor friendly as it involved poultry sum which was too less in view of business transaction and thereby forcing a company into insolvency.
While the notification is silent on its applicability and there being no clarity on the pending applications, it would be safe to assume that it would not affect pending applications other-wise it would open pandoras box. In this light the author believes that the threshold could have been at a lower slab than one crore as the impact of such threshold would practically mean ousting creditors.
- Exclusion of Period of Lockdown
Covid-19 outbreak has posed unprecedented challenges whereby the resolution professionals found it difficult to continue to conduct the process and hold CoC meetings during this lockdown. In order to meet the need of the hour Insolvency and Bankruptcy Board of India has added Regulation 47-A under Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 by excluding the liquidation timeframe for bankrupt companies from the lockdown period.
Under the code IBC resolution proceedings of a company should be completed within 330 days though Supreme Court in the matter of Essar Steels has laid down an exception to the aforesaid timeline and held that it can be extended in exceptional circumstances. This amendment has come as a major relief as it was almost impossible for resolution professionals to complete the process due to restrictions imposed by the government and owing to the present scenario it seems that it will take time for the situation to normalize.
- Suspension of Section 7, 9 & 10-Need of the hour
In light of the ongoing crisis it is evident how the companies and industries are managing to deal with the present situations with the burden of liabilities and managing salaries of current employees/workers. Suspension of the aforesaid provisions is to save the small and medium sized companies from wrath of lenders during this rough patch where there is liquidity crunch and financial distress across nation.
The Finance Minister, while announcing relief packages for covid-19 pandemic had stated that the Government will consider suspending provisions of section 7, 9 and 10 of the Code for a time period ranging from six months extendable up-to one year due to the ongoing economic situation if the lockdown continues post 30th April’2020. While India has entered lockdown 3.0, the lockdown has been extended till 17th May and chances being that it may extend more as metropolitan cities such as Delhi and Mumbai are still in red zone.
Having said that the authors feels that the present dilemma could have been resolved by incorporating necessary reforms to the code to facilitate debt restructuring instead of suspending the provisions of the code such as allow filing of cases under section 10 whereby the corporate debtor facing financial distress could have filed and imposing a temporary moratorium against such corporate debtor for the time-being or incorporate a new chapter to the code enabling the companies to deal with situations during emergency. The Ordinance suspending these sections may be passed anytime soon. Consequently, if these sections are suspended then the creditors will have to wait for six months to one year to take the benefit of law.
Government being well aware of the uncertainties posed by this outbreak is actively taking steps to protect the interest of the stakeholders. A foreseeable problem that may arise in India is where the creditor’s rights are concerned as earlier creditors had an upper hand will not be able to do so unless filed as per the new threshold criteria. Just like a coin has two sides, the impact of amendment too would be helpful to one more than the other. The code since its inception has tried balancing the rights of the stakeholders. Amendment such as exclusion of lockdown period was essential during this time but suspension of the main provisions of IBC could have been incorporated in some other way by keeping the code alive and adding certain reforms. Suspension of IBC is not the end the creditors still have other remedies available such as DRT tribunals and under the Real Estate (Regulation and Development) Act, 2016.
| Associate |
| Mimansa Law Offices, New Delhi
 Writ Petition(Civil)No.26 of 2020
 No. IBBI/2020-21/GN/REG060