Unsettled Points in Suspension Provision of IBC: Section 10A
By CS Santosh Pandey - On June 9, 2020 2:15 pm
The Ministry of Law and Justice on 05th June 2020 has promulgated with the assent of Hon’ble President of India an ordinance for the introduction of Section 10A under the Insolvency and Bankruptcy Code, 2016 (IBC) for suspension of initiation of Corporate Insolvency Resolution Process (CIRP) under Section 7, 9 and 10 of the IBC. This amendment has been introduced keeping in mind the outbreak of the Covid-19 pandemic all over the world including India, which has drastically affected the business, financial markets, and economy of the country. The prevailing unprecedented situation has created uncertainty and stress for the business beyond their control, therefore to prevent the corporate persons from getting pushed into CIRP on account of any default in discharging of their debt obligations amidst this uncontrollable situation and also, considering the fact of difficulty in finding an adequate number of Resolution Applicants, the significant step is taken by introducing Section 10A for suspension of filing any application for initiation of CIRP for the prescribed time period.
“10A. 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 a period of 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.”
By plain reading of the above newly introduced section, it means that if any default has been made by Corporate Debtor and it has happened on or after 25th March 2020 then no application can be filed against such corporate debtor for a period of six months from such date.
Unclear things in the Ordinance
Effective date- By the plain reading of the ordinance, it does not provide an effective date of its implementation but it prescribes the date i.e. 25th March 2020, on or after which if a default has occurred, any application for CIRP w.r.t to such default will not be allowed to be filed for a period of six months which may extend to one year, as may be notified, in this behalf. Now, this brings questions on the computation of six months,i.e. whether it is to be considered from 25th March 2020 as given in the ordinance or from the date of Ordinance i.e. 05th June 2020. As per my view, it must be from 25th March 2020 only, because if it is taken as 05th June 2020 the actual suspension for default occurred between 25th March 2020 and 05th June 2020 will be more than 6 months. Therefore, this ordinance seems to be retrospective in nature.
Usage of the word ‘filed’- Filing is the initial process through which the applicant submits its application with the Registry of Adjudicating Authority. Now the question is whether it is in the power of Registry to decide the actual date of default before allowing filing of any particular application. Practically it will be difficult to ferret out the actual date of default at filing level and only Adjudicating Authority will be the absolute authority to decide any case after ascertaining the actual date of default. It will also be tricky for all the cases which were filed but not listed before the bench.
Different dates of default- It can be the possibility that partial amount in default has happened prior to the date of 25th March 2020 and the remaining default has taken place after it. Going by the explanation to Section 10A, filing of an application for CIRP against a corporate debtor is possible in the cases where default has been committed prior to 25th March 2020. In this scenario, the applicant can make an application stating such date as the date of default and proceed with the argument. It will be interesting to argue such a case and have a view of the Adjudicating Authority on such an issue. Precisely, whether the Applicant can legally claim for a whole or clubbed amount in its application or not will be the point of argument.
Point of ‘distress’- If we refer to the phrase ‘corporate persons which are experiencing distress on account of the unprecedented situation’ used in the preamble of the said ordinance, the suspension of Section 7, 9 and 10 is to prevent only corporate persons which have slipped into distress position due to unprecedented situation i.e. COVID-19. Now, it is an accepted fact that there are many industries which have actually prospered during this Pandemic situation also, say pharma sector companies, medical devices companies, companies providing video conference facility, etc. Since preamble generally conveys the intention behind the law, it will be interesting to see if the argument can happen on ascertain and confirming the reason for distress. Though constitutionally, it will be challenging to bring the difference on such ground, the intention behind this ordinance is not to give the option to do the default either.
Connotation of the word ‘ever’ used in proviso- If we refer to the language of proviso of Section 10A, the usage of the word ‘ever’ creates a lot of confusion. If we go by a plain reading of the proviso taking into account the word ‘ever’ used, it simply means that if any default has happened after 25th March 2020 then filing of an application for CIRP in respect to such default will not be allowed at any point of time i.e. even after expiration of 6 months. This interpretation will be interesting to conclude upon by the Adjudicating Authority and if it is taken similarly by the Adjudicating Authority, then actually Section 10A will not be a suspension provision rather freeing provision and it will also bring grave injustice to the applicant’s post-expiration of this ordinance.
Under Section 10 of IBC, a corporate applicant Suo-moto moves an application before the Adjudicating Authority for the initiation of CIRP against it. Usually, it happens in cases where such corporate debtor is facing difficulties in business and is running into defaults naturally not fraudulently, and instead of getting into other prosecution or trials, it opts to approach the Adjudicating Authority to get declared as ‘Bankrupt’. The Adjudicating Authority before admitting application under Section 10 of IBC satisfies itself that the application has not been made to take undue advantage of it. By the suspension of Section 10 of IBC, it has actually restrained such distressed corporate debtors to knock the doors of Adjudicating Authority and rather left them with no other option other than running into more defaults and maybe litigation, as the recovery of business during this period for many industries will be challenging.
With the above issues in interpretation in the newly inserted Section 10A in IBC, it will be interesting to know the views of Adjudicating Authority on the same, as the above are some untouched points on which discussion or some clarification is much required and matter can be argued at length.
CS Santosh Pandey is a Company Secretary Practising in New Delhi. He can be reached at firstname.lastname@example.org