LATEST AMENDMENTS IN INSOLVENCY AND BANKRUPTCY CODE AND ITS REPERCUSSIONS
Md Maaz Alam, IV year of B.A.,LL.B.(Hons.) from Faculty of Law, Jamia Millia Islamia, New Delhi
The Insolvency and the Bankruptcy Code were enacted in the year 2016. Before the enactment of this act, there was a very complex Insolvency procedure which was governed by multiple legislations such as Companies Act and Industrial laws but it did not provide a complete solution. To make the process better IBC was enacted to make Insolvency a time-bound process. So far the Code has been amended five times, the latest being the IBC (Amendment) Ordinance, 2020 on June 5, 2020, because of the situation that arose because of the COVID-19 pandemic.
Section 8 of the Insolvency and Bankruptcy Code talks about Insolvency resolution by operational creditor.[i] There have been three amendments in this section since the day this code came into effect on 1.12.2016. First was for the word if any, and were substituted in clause (a) of section 8(2) by the IBC (Second Amendment) Act, 2018. By this same amendment act, the word repayment was substituted in clause (b) of section 8(2) and also in the explanation of section 8.
Section 9 of the Insolvency and Bankruptcy Code talks the Application for initiation of corporate insolvency process by operational creditor.[ii] The initial 4 amendments in this section were done by the IBC (Second Amendment) Act, 2018. First was the word by the corporate debtor, and was substituted in clause (c) of section 9(3). Second in clause (d) of section 9(3) such other information as may be specified. Then word repayment in clause (i)(b) and (ii)(b) of section 9(5).
The latest amendment was done 5.06.2020 by the ordinance to suspend the operation of sections 7, 9 and 10 of the IBC for any default arising on or after 25.03.2020 for six months, or such further period not exceeding than 1 year. To bring this suspension into effect a new section 10A was inserted in the code.
Section 10A[iii]- “Notwithstanding 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 six months or such further period, not exceeding one year from such date, as may be notified in this behalf:
Provided that no application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the said default occurring during the said period.”
Explanation– For the removal of doubts, it is hereby clarified that the provisions of this section shall not apply to any default committed under the said sections before 25th March 2020.
Repercussions of the Amendment
There are companies which were in default even before COVID-19 hit India. If the relevant sections are suspended the legitimate interest of creditors would also be suspended for the time frame as they would not be able to raise or initiate any proceeding. Suspension of section 7, 9 and 10 lacks much rationale as there is no point in stopping a company which itself want to go for liquidation due to any reason or even because of the situation of the pandemic if it believes it cannot recover.[iv]
The MSMEs that the government is trying to protect will be the most affected due to this amendment. Section 9 of IBC, which allows operational creditors to file for insolvency applications against a corporate debtor, has now been suspended for up to one year. An operational creditor is normally a person to whom an operational debt is owed. The person can be a supplier of goods or services to companies and is most likely to fall into the MSME category. Therefore, if any of the entity is unable to repay such operational creditors during the period, they will have no legal recourse or backing left under IBC.
Suspension of section 7 and 9 for the time being together with the response of RBI to suspend circular of June 7 would have been a better way to address the issue. Increasing threshold limit is a debated topic and shouldn’t be used to harm the interest of creditors.
In September of 2020, the Parliament replaced the IBC Ordinance that was brought by the government on 5th June 2020 by passing the Insolvency and Bankruptcy Amendment Bill.[v] Since the ordinance has now been made and added in the act now no insolvency proceedings can be initiated by the corporate debtor or any other creditors. The changes made will give its result in the future as to whether the changes brought by the government benefitted the MSMEs or not. There has been a lot of discussion about the pros and cons of the amendments and changes. IBC is one of the most critical parts of businesses nowadays. Finance Minister when the ordinance was brought gave detailed reasons as to how it is beneficial for the MSMEs and the overall businesses. But the actual gain or loss of the changes will be seen in the coming years.