THE INSOLVENCY AND BANKRUPTCY CODE IN THE WAKE OF COVID-19: ADAPTING TO CHANGING LANDSCAPE
Mehvish Kazi,
M.K.E.S. College of Law
Introduction
India has seen huge changes in every area, along with the healthcare sector as a result of the Covid-19 pandemic. Prime Minister Shri Narendra Modi announced the closure of the entire country on March 24th, 2020, due to which a certain rise in the cases revolving around Insolvency & bankruptcy was seen. In India, the Insolvency & Bankruptcy Board of India (IBBI) is responsible for overseeing insolvency & bankruptcy proceedings (under Insolvency & Bankruptcy Code, 2016), along with the important agencies and intermediates mentioned in the Code. It comes under the Ministry of Corporate Affairs and acts as a regulator to ensure the protection of the interests and trust of creditors and other stakeholders in the business.
Objectives of Insolvency & Bankruptcy Code
The Insolvency & Bankruptcy Code was enacted in the year 2016 which consists of 255 sections, 11 schedules, 5 parts and 21 chapters. The main objectives of IBC are as follows:-
To gives a single framework for Insolvency and Bankruptcy affairs in India.
To enhance entrepreneurship
To authorize an Insolvency and Bankruptcy Board of India
To simplify ordinances dealing with Insolvency and Bankruptcy in India
To state the process of insolvency and bankruptcy and protect the interest of creditors
To expand the value of capital of debtors
To support people start business and take implicit imminences, etc.
Impact of Covid-19 Pandemic on Insolvency & Bankruptcy Code
The lockdown in India, imposed by the government due to Covid-19, has led to the closure of most government and private offices, causing a significant threat to Micro, Small and Medium Enterprises (MSME). Let us now discuss changes and amendments made in code.
On March 24th , 2020 the government announced various measures including increasing the threshold for invoking insolvency to Rs 1,00,00,000 (under section 4 of Insolvency &
Bankruptcy Code, 2016) and excluding the lockdown period from the 330-day timeline under the Insolvency and Bankruptcy Code, 2016.
Micro, Small and Medium Enterprises (MSME) are essential components of the Indian economy. During the pandemic several companies were undergoing financial crisis due to lack of funds. This caused a major problem in the IBC regulation. The Finance Minister Ms. Nirmala Sitharaman on March 24th , 2020 announced for suspension of section 7, section 9 and section 10 of the Insolvency & Bankruptcy Code (IBC) which deals with the financial creditor, operational creditor, and debtor (voluntary insolvency) initiating the insolvency process, respectively.
Furthermore, on May 17th, 2020 Prime Minister Narendra Modi announced the exclusion of Covid-19 related debts from the definition of ‘default’ under Insolvency & Bankruptcy Code, 2016 as a part of Atmanirbhar Bharat Package. The ordinance, to be notified, is expected to amend the IBC and may define Covid-19-related debts through an enabling provision.
On June 5th 2020, the Ministry of Law and Justice stated an amendment since Covid- 19 epidemic which has led to increased query and stress for businesses, making it delicate to find resolution applicants to bail out corporate debtors. The Ordinance has suspended fresh bankruptcy proceedings, introducing a new Section 10A in the IBC. This provision suspends Sections 7, 9 and 10 of IBC for defaults arising on or after March 25th, 2020, for a six- month suspense period. The contingency prohibits inauguration of bankruptcy proceedings for a dereliction committed during this period, and no operation for a corporate insolvency resolution process (CIRP) against a corporate debtor is allowed. The suspense period raises questions about whether an operation can be made after the suspense period, anyhow of the debtor's financial stability.
In addition, the government announced on May 17, 2020 that in due course it will communicate to MSMEs and other small businesses regarding a special regime of insolvency resolution under section 240A of IBC.
It can be argued that some long-term transformations may appear necessary as India’s economy navigates the post-pandemic environment within the IBC framework. The governmental structure for pre-packaged insolvency judgments may enhance, the current agenda and time constraints to complete insolvency proceedings may change, the role of ADR mechanisms might enhance, and interconnectivity between the distinct stakeholders
may enhance. In responding to this profitable situation change, the IBC will need to incorporate a more flexible approach.
Case Laws under Insolvency & Bankruptcy Code, 2016
Judiciary is one of the most important organs under Indian constitution along with the legislature and executive. The Indian Judicial System has seen pivotal changes during the pandemic as discussed earlier and has been efficient in solving disputes arising out of insolvency & bankruptcy affairs. One of the prominent cases was filed on 15 May, 2017 before the Mumbai Bench of National Company Law Appellate Tribunal which is known as “M/S. Innovative Industries Ltd vs. Icici Bank & Anr”. The case arose when an application was filed by ICICI Bank (financial Creditor) before the Mumbai Bench of National Company Law Tribunal against Innovative Industries Ltd that an insolvency Resolution process should be set in since innovative was stated to be a defaulter under the IBC. However, Innovative argued that Maharashtra Relief Undertaking (Special Provisions) Act, 1958, based on Section 238 of the IBC, would prevail over the Maharashtra Act, as the Parliamentary statute would prevail over the State statute. The NCLT granted Innoventive's application, resulting in a moratorium and subsequent appeals.
Once an insolvency professional has been appointed for a business, the Supreme Court held that the appeal filed by the former directors of Innovative was not sustainable. Thus, the Supreme Court, in order to determine whether the Maharashtra Act and the IBC were operating in violation of each other, analyzed case laws as well as the constitutional principles. To ascertain whether there exists any repugnancy with the IBC and the Maharashtra Act under the Constitution of India, the Supreme Court studies the IBC along with the other ICI and constitutional provisions with the aid of analyzing case laws. The Maharashtra Act enacted before the current state law was regarded subordinated to the IBC due to the fact that it allowed the State Government to oversee the operations of relief works; thus, Section 4 provided for a temporary stay. The Supreme Court concurring with the Tribunal’s opinion that there is possibility of clash between the provisions of the aforesaid two enactments. In this regard, the Appellate Tribunal’s decision in this matter was erroneous because repugnancy is a real concept. Because of this, the Supreme Court held as to the correctness of the decision of the Tribunal and the Appellate Tribunal in accepting the application filed by the financial creditor, ICICI Bank Ltd.
Another crucial judgment was passed in the amidst of Covid-19 in the year 2021 was “Lalit Kumar Jain vs. Union of India”. The case revolves around the issue of validity of the Notification by the central government which was announced on 15 November 2019 that according to section 1( 3) of IBC, it's stated ‘It being understood that different dates may be appointed for different provisions of this law and any reference in any similar provision to the inception of this law shall be demonstrated as a reference to the inception of that provision’.
The petitioner in the case also argued the validity of insolvency and bankruptcy rule, 2019 and its regulation. The main issue of the case is the validity of the notification by government issued on 15.11.2019, outlining the liability of personal guarantor’s post-approval of a resolution plan and the extent of their liability to corporate debtors. The Supreme Court stated that the central government had acted within their legislative powers and the announcement as per section 1(3) of IBC was not ultra vires.
The Hon’ble Supreme Court ruled that a personal guarantor cannot be absolved of liability if a corporate debtor's security loss is due to an involuntary act. The discharge of liability occurs through law, not the agreement between the borrower and guarantor. The court emphasized the importance of a common forum for adjudication of insolvency-related matters, such as the NCLT, to acknowledge the entire issue and assist in resolution plans and debt realization.
Conclusion
Comparisons with the IBC during the Covid-19 pandemic can be made and draw lessons from other countries insolvency frameworks, for example, the United States, the United Kingdom, and the European Union. Some of the learning’s and experiences of these jurisdictions that could be applied to Indians include the adoption of the pre-insolvency restructuring toolbox, the reinvention of debtor-in-possession financing, and the international community on the insolvency regime.
The new disease coronavirus has emerged as a major challenge not only to the private and public organizational structure of India but to the IBC as well. To sum up, continuous improvement of the IBC framework, a greater reliance on technology and digital solutions, better organization of actors’ cooperation and communication, targeted support and relief for troubled sectors and MSMEs, and identification of the most efficient international practices
and cooperation are critical steps for the future development of the insolvency ecosystem. Thus, it will be possible for India to adapt to this new environment and guarantee the efficiency of the Insolvency and Bankruptcy Code in dealing with the economic consequences of the pandemic and building a sustainable business climate.
REFERENCES
1)Utkarsh Mittal, IBC, 2016 – Objective, Insolvency Resolution Process, Challenges & Way Forward, Taxguru ( July 5, 2024, 4:14 PM), https://taxguru.in/corporate-law/ibc- 2016-objective-insolvency-resolution-process-challenges-way-forward.html
2) Ashima Obhan and Vrinda Patodia, The IBC Pandemic: Suspension Of IBC And Other Changes, LiveLaw ( July 5, 2024, 4:20 PM), https://www.livelaw.in/law- firms/articles/the-ibc-pandemic-suspension-of-ibc-and-other-changes- 158159#amp_tf=From%20%251%24s&aoh=17200836928817&referrer=https%3A% 2F%2Fwww.google.com&share=https%3A%2F%2Fwww.livelaw.in%2Flaw- firms%2Farticles%2Fthe-ibc-pandemic-suspension-of-ibc-and-other-changes-158159
3) Insolvency and Bankruptcy Code, No. 31, § 4, Acts of Parliament, 2016 (India).
4) Insolvency and Bankruptcy Code, No. 31, § 7, Acts of Parliament, 2016 (India)
5) Insolvency and Bankruptcy Code, No. 31, § 9, Acts of Parliament, 2016 (India).
6) Insolvency and Bankruptcy Code, No. 31, § 10, Acts of Parliament, 2016 (India).
7) Insolvency and Bankruptcy Code, No. 31, § 10A, Acts of Parliament, 2016 (India).
8) Insolvency and Bankruptcy Code, No. 31, § 240A, Acts of Parliament, 2016 (India).
9) Innoventive Industries Ltd. v. ICICI Bank & Anr., MANU/SC/1063/2017 (India).
10) Lalit Kumar Jain v. Union of India, AIRONLINE 2021 SC 402.
11) Insolvency and Bankruptcy Code, No. 31, § 238, Acts of Parliament, 2016 (India).
12) Maharashtra Relief Undertaking (Special Provisions) Act, 1958, No. 96, Acts of Maharashtra State Legislature, 1958 (India).
13) Insolvency and Bankruptcy Code, No. 31, § 1(3), Acts of Parliament, 2016 (India).