Insolvency Code Amendments and its impact on fresh and pending cases
In view of the emerging financial distress due to the covid 19 pandemic, the Indian Economy has been largely affected including the real estate industry which in turn has resulted in a huge cash crunch leading to the construction activities coming to a grinding halt. In order to prevent and absorb the effect of such huge losses and to respond to the dynamics of the business environment, which has been changing every second in the wake of the globally-spread pandemic, the central government seems to be responding in a structured manner by providing various sops, relaxation, extensions and amendments to the existing legal framework in the country.
Anticipating the devastating impact of the same on various business entities, the Insolvency and Bankruptcy Code, 2016 has undergone various amendments to help the functioning of business sector especially of MSMEs to recover from the default of payment due to cash crunch and other related challenges.
Status of the proceedings before the Covid-19 pandemic
- It would be prudent to say that the effects of the present pandemic on the Insolvency and Bankruptcy code,2016 are catastrophic which had turned the situation to the worse by bringing the business entities of the whole country to an halt. However, before the pandemic, the government had introduced certain amendments vide an ordinance dated 28, December, 2019 which had also affected the scenario of the pending as well as fresh cases filed by the homebuyers against the errant developers.
- In December 2019, the Central Government brought an ordinance to amend Section 7 of the Insolvency and Bankruptcy Code,2016. The ordinance mandates that an application to initiate Corporate Insolvency Resolution Process against the corporate debtor/developer shall be filed jointly by 100 individuals or a group of individual investors that represent at least 10 percent of Financial Creditors (Real Estate Allottees) in the same class, whichever is lower, within a period of 30 days of the commencement of the ordinance and subsequently the Insolvency and Bankruptcy Code (Amendment) Bill, 2020 which replaces this Ordinance, was passed in March,2020. The amendment also provided that the changes made were to be applied retrospectively.
- Thereafter, challenging the constitutional validity of the ordinance, various groups of Real Estate Allottees had filed writ petitions before the Hon’ble Supreme Court, citing it to be arbitrary and discriminatory wherein, the apex court had directed the Hon’ble National Company Law Tribunal (NCLT) to maintain status quo with respect to the applications already filed by Real Estate Allottees against the defaulting developers. In simpler terms status quo by the Hon’ble Supreme Court had restrained the NCLT from passing any effective order in any of the cases which are affected by the ordinance till the further orders by the Hon’ble Supreme Court. In addition to it only those fresh cases which fulfill the criteria of the ordinance / amendment made in the code were allowed to be entertained by the adjudicating authority.
- Hence, it can be seen that the order by the Hon’ble Supreme Court provided an interim relief to Real Estate Allottees, however the constitutional validity of the ordinance / amendment is yet to be decided by the apex court.
- However, apart from the abovementioned amendment, the central government had notified various other amendments in the wake of this pandemic in order to control the economic situation of the country. The amendments are as follows
- imitation period
- The Covid 19 pandemic in the country has forced governments across the country to impose restrictions on working and travel conditions as well as human movement. The severity of the situation requires quick and decisive action from the Government and all sections of the economy to prevent deepening of the crisis. In order to fulfill the need of an hour, the courts had decided to adjourn all matters earlier in the month of March,2020 except the very urgent ones. With the subsequent imposition of lockdowns all over the country the, NCLTs have since shut down. Thereafter the Supreme Court suo moto passed an order extending limitation period for all matters with effect from March 15, 2020 till further orders. The same has been done to bring much needed relief to a litigant for whom limitation period was to expire during this shut-down period.
- Hence, it can be inferred from the above amendment that the clock of limitation has stopped ticking over the heads of the litigants and thereafter the litigants don’t need to worry as to the limitation period of their cases.
- Threshold to increase from 1 Lakh to 1 Crore.
- Earlier as the enactment of the code, the Real Estate Allottes, involving a debt of 1 lakh or above were allowed to trigger Corporate Insolvency Resolution Process. However, the present situation of pandemic has bought a lot of vulnerability to the MSME industry. MSMEs are expected to being pushed into insolvency owing to the ongoing downturn — which could worsen with the pandemic — and, subsequently, into liquidation, could be disastrous for the economy, leading to substantial job losses.
- Therefore, in order to maintain the MSME sector in the economy and providing a cushion to the sector the Indian Government vide its notification dated March 24, 2020 have raised the threshold of default for filing of an insolvency petition under the Insolvency and Bankruptcy Code, 2016 (“IBC”) from Rs 1 Lakh to Rs 1 Crore. Earlier Section 4 of the Insolvency and Bankruptcy Code, 2016 specifies Rs 1 Lakh as the minimum default amount basis which a petition under the IBC may be filed whereas now the petitions under the IBC will not be entertained in respect of payment defaults below Rs 1 crore.
- This is a welcome move for the medium and small industries who have been hit the hardest by COVID-19. Therefore, from the date of notification, Insolvency and Bankruptcy Code, 2016 proceedings cannot be initiated for cases where the default amount is less than Rs 1 crore irrespective of the date of default.
- The notification being prospective in nature, will only affect the fresh cases that are yet to be filed in the National Company Law Tribunal and the already pending proceedings will continue as per the earlier default amount Of Rs. 1 Lac.
- The move to increase the default threshold to Rs 1 crore is to prevent companies, especially those within micro small and medium enterprises (MSME) category, from being dragged to the National Company Law Tribunal for settlement of debts.
- However, continuing this amendment for a long time could harm the interests of creditors whose only hope for fast realization of debt is the IBC route. Those creditors might include the MSME sector which deals in the small amount of transactions and includes the debt below one crore.
- SUSPENSION OF SECTION 7, 9 AND 10
- The Indian Government in the notification dated March 24, 2020 also indicated that if this grave situation continues beyond April 30, 2020, India will consider suspending Sections 7 (right of a financial creditor to file an application under IBC), 9 (right of an operational creditor to file an application under IBC) and 10 (right of the company to file an application under IBC) of the IBC for a period of 6 months.
- Thereafter, the same has been passed by the Union cabinet. With the extension of lockdown period beyond 30.04.2020, the government has decided to amend the insolvency law to suspend up to six months which could be extended upto one year based on the economic situation going forward.
- Albeit there is no clarity as to the nature of the amendment as if it will be prospective or retrospective in nature. It can only be clear by the ordinance which has not been promulgated yet. The amendment as to the suspension of the proceedings will come into force only after the promulgation of the ordinance.
- However, keeping in view the suspension ordinance, it can hit really hard to the creditors who look at IBC as their best recourse to extract money from the defaulting companies weather vide the settlement or triggering the CIRP.
Conclusively, it has been clearly understood that the COVID-19 has triggered an economic emergency in the country. In these extraordinary times, the Central Government is doing well to handhold the industrial sector through various policy measures. Continuous efforts to check the COVID-19 spread and announcement of further policy measures for the smooth functioning of the economy are the need of the hour and therefore, it be acceptable to conclude that in current times of severe market downturn and liquidity concerns, it might be prudent to give some space and flexibility to developers for deployment of funds available with them. It needs to be acknowledged that due to the lockdown, developers are shelling out funds from their own reserves for the upkeep of the labour without getting any productive work done and thereafter everyone is welcoming every move of government introduced by the way of amendments. However, keeping in view that no other forum in the country has given the right over the insolvency laws, suspending the same for an year or six months can become destructive for the economy. The defaulting companies might take advantage of the situation and would willfully restrain themselves from paying the dues to the innocent creditors which in turn would result in hindering the operations of the righteous business entities from operating.
| SOMYA JAITLY |
| Advocate |
| Mimansa Law Offices |