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Insertion of section 10A in Insolvency & Bankruptcy Code: A hope for Economic Recovery

May 4, 2021
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Background

To stop the spread of Coronavirus Indian Prime Minister announced nationwide lockdown which lasted for six months in 2020. The entire economy came to a standstill amid the crisis.  Businesses were badly affected by this and they were not able to pay back their debt also some wanted more loans. To tackle this problem and with a view to provide relaxation for businesses, the government announced to exempt all debt which is related to this lockdown period shall be out of the ambit of insolvency and a case can be initiated for this debt.

Steps for granting the benefit

For assuring the benefits as said by the government, on 5 June 2020 the President of India proclaimed an ordinance which inserts sec. 10A by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2020 dated 05.06.2020 w.e.f 05.06.2020 to the insolvency and bankruptcy code,2016(IBC).

Section 10A creates a bar on the initiation of corporate insolvency resolution process. Section 10A says no application for corporate insolvency resolution process shall be for default arising on or after 25th March 2020 for a fix period of six month or such further period not exceeding one years from at notified.

The period was extended for three months on 25 September 2020 vide Notification No. S.O. 3265(E) dated 24.09.2020 issued by MCA and further extended for three months on 25 December 2020 vide Notification No. S.O. 4638(E) dated 22.12.2020 issued by MCA.

Judicial interpretation of Section 10A of the IBC

Supreme court in case of Ramesh Kymal vs Siemens Gamesa Renewable Power Pvt Ltd (Civil Appeal No. 4050 of 2020) ruled that Section 10A of the Insolvency and Bankruptcy Code (IBC) bars initiation of Corporate Insolvency Resolution Process (CIRP) with respect to a default which occurred on or after March 25, 2020, even if the application for CIRP was filed before June 5, 2020, when Section 10A was inserted in the statute book. The court further observes that “The date of March 25, 2020, has consciously been provided by the legislature in the recitals to the Ordinance and Section 10A since it coincides with the date on which the national lockdown was declared in India due to the onset of the Covid-19 pandemic”.

Effect of Ordinance

  • The sharp decline in CIRP cases in Q1 and Q2 due to temporary suspension:

Only 161 cases were admitted for the Corporate Insolvency Resolution Process in the first half of this fiscal year due to the temporary suspension of the process after the Covid-19 pandemic broke out.

  • As per the reports available on Governance Now website, the pandemic pushed 283 firms into the insolvency process :
    1. 283 firms were admitted into the corporate insolvency resolution process (CIRP).
    2. 76 CIRPs ended in resolution, 128 CIRPs were closed due to withdrawal/appeal or settlement and 189 CIRPs ended in liquidation.
    3. 30 corporate persons were dissolved/ sold as a going concern/undergone compromise or arrangement under section 230 of Companies Act, 2013 under the liquidation process.
    4. Further, 59 corporate persons were dissolved under the voluntary liquidation process.

Present status of Ordinance

In the ordinance itself, it was mentioned that the ordinance can have validity till one year from the date notified. The date notified was 25 march 2020 and the limitation period ends on 25 March 2021 and it cannot be extended further.

On 23 March 2021, the Supreme Court turned down pleas from various trade associations and corporate bodies seeking an extension of the six-month loan moratorium offered by the Reserve Bank of India in view of the pandemic. The apex court, however, ruled that there will not be any interest on interest or penal interest on any amount during the moratorium.

For tackling the post COVID situation government announced Pre-pack insolvency scheme which allows only debtors to file for their own bankruptcy with the approval of financial creditors having 66% of voting power, will yield much faster resolution than the extant corporate insolvency resolution process (CIRP) and cut cost

Present Benefit under Pre-pack insolvency for MSME

A pre-pack is the resolution of the debt of a distressed company through an agreement between secured creditors and investors instead of a public bidding process. This system of insolvency proceedings has become an increasingly popular mechanism for insolvency resolution in the UK and Europe over the past decade. Under the pre-pack system, financial creditors will agree to terms with a potential investor and seek approval of the resolution plan from the National Company Law Tribunal (NCLT).

The insolvency regulator notified regulations for the so-called pre-pack scheme for micro, small and medium enterprises (MSMEs), enable its operationalisation. The regulations are based on an amendment to the Insolvency and Bankruptcy Code (IBC), effected through the promulgation of an ordinance on April 4, 2021.

 
ABOUT THE AUTHOR 
CHIRAYU SHARMA
B.A LL.B III Semester
Ideal Institution of management and Technology and School of Law Karkardooma Delhi(GGSIPU)
Received Honourable Mention Award in URJAA”THE BATTLE OF WORDS” in IIMT and School of Law (18th and 19th October, 2019)

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