The global pandemic COVID-19 has brought the world to a halt and similar to the other countries, the nationwide lockdown imposed in India has impacted the business environment due to the suspension of markets and unavailability of workers leading to the no or fewer earnings for business communities. To recuperate with the surging financial implications, distress and to lessen the impact of the crisis, the Central Government made several changes in various statutes, thereby posing complex consequences in the coming future.
The finance minister, Nirmala Sitharaman recognizing the financial distress faced by the business announced certain relaxations in the tax and corporate statutory compliances such as increasing the gap between the two Board meetings by 60 days, not penalizing for not fulfilling Corporate Social responsibility, etc. Besides, these relaxations certain measures were also announced concerning the Insolvency and Bankruptcy Code, 2016 to enable the businesses trading as opposed to the immediate insolvency and closure. The relaxing measures announced in the Insolvency and Bankruptcy Code, 2016 are as follows:
1. Increasing Threshold to Rupess 1 Crore
As per the notification issued by the Ministry of Corporate Affairs, the monetary threshold for default of Rs. 100,000 as provided under section 4 of IBC, 2016 for initiation of insolvency proceedings is increased to Rs. 1 crore. The said move of increasing the threshold could be to prevent the prevent companies, especially the MSMEs from being dragged to the National Company Law Tribunal for settlement of debts.
Undoubtedly, the measure would provide relief to the MSMEs who have financial large operational debts. However, the measure adopted do not align with the object to be achieved by the Code and also the measure because firstly, it fails to recognize that MSMEs do occupy the position of operational creditors in the economy which have trade debts and claims below Rs. 1 crore and also is not in harmony with the amendment in MSME act to resolve the delayed payment dispute and secondly, the extension of this arrangement for a longer period would decrease the value of assets and by the time the 1 lakh ambit default would be recovered, a lot of precious time would be lost and thus, hamper the interest of all stakeholders.
The apex court while interpreting the Code in the case of Pioneer Urban Land and Infrastructure Ltd. v, Union of India[i] cleared that the default threshold to trigger insolvency was intentionally kept low so that the interests of small creditors, banks, financial institutions and MSME should not be kept at stake to whom the corporate debtors have large sums due. Therefore, it is dubious whether the threshold increase would serve the purpose and benefit align as the measure prima facie does not seem to align with the intent of the Code.
Whether the Limit is Prospective or Retrospective?
It is a well-established rule of law that any statute or any piece of legislation that tends to affect the substantive rights vested in individuals is presumed to be prospective unless it is explicitly made retrospective in nature by necessary intent.[ii] Further, the NCLT of various jurisdictions has various times reflected their intention not to apply the law retrospectively when substantive rights of individuals or entities are affected.
Thus, the ambiguity regarding the application of retrospectively looms around. Further, the effective possible alternative would be specifically notifying that the measure is for MSMEs so that the big elephants cannot escape the liability and secondly the ministry should clarify that the provision would be in force till the prescribed time of crisis.
2. Suspnesion of Insolvency Resolution Process
The ministry has also announced the suspension of the Corporate Insolvency Resolution Process (CIRP) for one year under Section 7, 9 and 10 of the IBC, 2016 to avoid the undue disruptions in functioning caused by the initiation of the Insolvency Resolution process through financial creditors, operational creditor and the corporate debtor itself. The proposed move of suspension of laws and the insolvency process is detrimental to the business environment and will only retard the progress in the crisis.
The suspension of CIRP under section 7 will leave the financial creditors to search for the limited remedies and the lack of clarity on the suspension of contractual obligations; timelines etc. which are integral to the CIRP would affect investor confidence to invest. The suspension of process under section 9 coupled with the increased threshold would leave the operational debtors into a difficult situation and force them to approach the already burdened civil courts. Thus, a blanket ban on the suspension of the insolvency process is a wrong move rather the government could have accommodated the cases, subject to the approval of the tribunal which would have enabled the creditor to proceed in a genuine case. This would have solved the problem of unnecessarily dragging the corporate debtor to the NCLT and at the same time protecting the interests of stakeholders.
Further, the suspension of the insolvency process under section 10 by the Ministry with the flawed optimistic view that if the corporate debtor would be given a longer time, i
t would emerge successfully from the crisis. Moreover, the distressed debtor would find it more difficult to operate due to the diminished business during the lockdown.
Thus, it is guided to the Ministry to bring the necessary notifications and regulations with an immediate effect to streamline the entire process and should try to adopt the new technologies to provide the regulators a conducive environment.
3. Covid 19 Debt Excluded from Definition of ‘Default’
The term ‘default’ is defined under section 3 (12) of the IBC code. According to it, “default is the non-payment of debt in whole or any part of the installment amount which has become due and payable but is not paid by the debtor or corporate debtor”
The Central Government to prevent the triggering of insolvency proceedings has decided to exclude the COVID-19 related debt from the definition of ‘default’. This measure is also in favor of the defaulting corporation, with no redressal mechanism for the creditors. Further, the ministry has not issued any guidelines to determine whether the default was caused due to COVID-19 or not and thereby, would burden the NCLTs with lots of cases to adjudicate upon.
Moreover, for the computation of period for completion of various activities related to CIRP as mentioned under section 12 (i.e. 180 days extendable to 90 days), the lockdown period would be excluded.
The IBC, 2020 amendment act was promulgated by the government to streamline the CIRP and protect the financially distressed sectors. But a close look on the provisions reflects that the government while framing the provisions did not give any heed to the interests of the stakeholders. Thus, it is directed to the government to redefine the provisions without any ambiguity and in a manner that would protect the interests of both the corporate debtor and creditors.
[i] Pioneer Urban Land and Infrastructure Ltd. v, Union of India, 2019 SCC OnLine SC 1005 (India).
[ii] S.k. Srinivasa Jute Twine Mills (p) Ltd. v. Union of India & Ors., (2006) 2 SCC 740 (India).
He is a third year student, currently pursuing his B.A. LL.B(Hons.) from the Rajiv Gandhi National University of Law, Patiala.