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IMPACT OF COVID-19 ON IBC

Updated: Nov 10, 2020

BY

Palani Selvi M, B.Sc.,


Introduction

The Insolvency and Bankruptcy Code (IBC) 2016 applies to companies, partnerships and individuals. IBC provides for a time-bound process to resolve insolvency. When a default in repayment occurs, the debtor’s assets come under the control of the creditor. Under IBC debtor and creditor both can start recovery proceedings against each other. Due to the COVID-19, the consequent lockdown was implemented; as a result, the economy was severely affected. Many of the business activities were stopped during the lockdown. Many companies and individuals are unable to repay the interest and assets for the creditor. To safeguard the business entities the government has taken several steps. Thus, the Hon’ble President promulgated an ordinance, according to this ordinance, the Section 7, 9 and 10 of the Insolvency and Bankruptcy Code was suspended for one year to protect the business entities defaulting on payment obligations during the COVID-19 pandemic.

IBC (Amendment) Ordinance, 2020

On June 5, 2020, the Hon’ble President promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 with sudden consequences.

According to this ordinance, Section 10A was introduced to the IBC which suspends Section 7, 9 and 10.

1. Section 7 (insolvency application by a financial creditor)

2. Section 9 (insolvency application by an operational creditor)

3. Section 10 (voluntary insolvency application by the corporate debtor)

So these three sections were suspended for six months. According to the Section 10A of the Insolvency and Bankruptcy Code, no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed for any default arising on or after March 25, 2020, for a period of six months. The ordinance has not prohibited insolvency/bankruptcy proceedings of personal guarantors under the IBC. While the ability of companies to file the insolvency was prohibited but if a partner in a company felt that the company should be liquidated, the winding-up procedure under the Company Act and Voluntary Liquidation is still available under the IBC.

No difference between non-COVID-19 related defaults and COVID-19

The ordinance of the IBC was implemented due to the impact of COVID-19 on business houses, financial markets and the economy. The Section-10a of the IBC did not only apply for COVID-19 defaults. It is also applied for non-COVID—19 related defaults.

Prohibition of Section 66(2) of IBC

Under the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020, Section 66(2) of the IBC was also prohibited. Section 66(2) provides the registration of the insolvency by the partner or director of a corporate.


Voluntary insolvency of the corporate debtor

Section 10 of the IBC provides the voluntary insolvency application by the corporate debtor from creditors. The ordinance suspended Section 10 of IBC so now the corporate entities cannot file an insolvency certificate.

Conclusion

Due to the outbreak of COVID-19 the consequent lockdowns was implemented as a result, the economy has started to fall. The ordinance amends the Insolvency and Bankruptcy Code, 2016, until the ordinance is in implementation no one is allowed to file an insolvency application. But the winding-up procedure under the Company Act and Voluntary Liquidation is still available under the IBC. The amendment suspends Section 7, 9 and 10, bringing some changes in Section 66(2). The suspension was extended from six months to one year. Though the implementation of the amendment is disproportionate in a few circumstances, many scholars held that the amendment will be a safeguard to the business entities.