Regulatory Alert: Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 issued
06 June 2020
The nationwide lockdown disrupted the normal operations, created uncertainty and stress for businesses for reasons beyond their control. This led the Government to come up with an ordinance which was originally announced by the finance minister along with other economic relief measures.
Key highlights of the Ordinance issued under IBC on 05 June 2020 and made effective immediately are as under:
- No Fresh initiation of insolvency under sections 7, 9 and 10 under IBC stand suspended for a period of six months for any defaults arising on or after 25 March 2020 for a period of six months, or such further period not exceeding a period of one year
- After section 10 of the principle Act, a new section 10A has been inserted to incorporate the amendments
- No application shall ever be filed for initiation of insolvency proceedings against a Corporate Debtor for default occurring during this period of suspension of IBC.
- The provisions of this section shall not apply to any default committed before 25 March 2020
- Under section 66 of the principal Act, a sub-section 3 has been inserted prohibiting a resolution professional from filing an application under Section 66 (sub-section 2) in respect of default against which initiation of insolvency proceedings are suspended under section 10A
The much-awaited wordings of this Ordinance are finally released. It appears to be abundantly clear that the section 10A prohibits the admission to insolvency proceedings for default arising on or after 25 March 2020 till a period of six months or up to one year. The Ordinance also disallows any Corporate that is financially stressed and may have defaulted during this period from self-filing for insolvency proceedings.
Also, default could have been committed to operational creditors, funds and financial institutions, bond holders, etc. who are essentially outside the loan moratorium framework enabled by RBI, and that these entities will never have recourse of filing for insolvency proceedings for default during the IBC suspension period. The liabilities of a corporate debtor who has defaulted during this period will continue to increase and balloon and the corporate along with its lenders and creditors may have to explore options such as debt restructuring or Scheme under section 230 of Companies Act to pay and settle the obligations. It is also to be seen how sectors like hospitality, travel and tourism, entertainment, Aviation to name a few and MSME sector react as for them filing below the threshold of INR 1 crore would also impact. Recovery of debt defaulted in the suspended period may involve lot of litigations leading to erosion of asset quality in due process outside IBC. It is also amply clear that any transaction falling under the ambit of section 66 (sub-section 2) and related to the defaults in this period also cannot be filed by the resolution professional for ever.
We at BDO in India, can provide expert assistance to Corporates to carry out a financial health check, analyse the impact of the Covid-19 pandemic on business, conduct risk analysis, management of cash-flow and optimising working capital, assist in formulation of a restructuring package and help devise strategy against the potential risk of insolvency.