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Suspension of Insolvency and Bankruptcy Code Due To COVID-19

With the outbreak of the COVID-19 also known as the coronavirus in India, the economy has confronted significant damage. The lockdown has resulted in a sharp drop in the profit of the businesses. Consequently, Myriad companies are struggling to repay their debts to their financial and operational creditors. The Government of India on 24th March 2020 issued a notification that the minimum threshold limit provided under Section 4 of the Insolvency and Bankruptcy code, 2016 for the initiation of the Corporate Insolvency and Resolution Process (CIRP) shall be extended from Rs. 1 lakh to Rs. 1 crore. This step was taken to prevent the triggering insolvency proceedings against the companies that are facing losses, to protect the small businesses that are battling against the lockdown, and to discharge the corporate debtor from the threat of non-remittance. The increase in the minimum threshold limit has decreased the scope of creditors to approach the NCLT to initiate the insolvency proceedings against the corporate debtor. The Finance Minister of India also stated that in case the situation of Covid-19 does not come into control until 30th April, then the insolvency mechanism provided under Section 7, 9, and 10 of the IBC shall be suspended. Section 7 and Section 9 provides for the initiation of insolvency proceedings by a financial creditor and operational creditor respectively. While Section 10 provides for voluntary insolvency.


Therefore, Considering the present financial distress, on 17th May, the Finance Minister declared the suspension of fresh initiation of insolvency proceedings against any company and “debt” will be excluded from the definition of default under IBC. An ordinance shall be passed to introduce a new Section, Section 10A in IBC to suspends the above-mentioned provisions for the period of at least 6 months but not exceeding 1 year. This step will lead to lessen the stress of the companies and provide them adequate time to get back in the market and duly fulfill their financial obligations. However, on the contrary, this decision has hampered the interest of creditors majorly due to two reasons. Firstly, the creditors themselves are also facing financial crunch at this point, the resolution process of the corporate debtor will require more time resulting in more delay in their repayments. And secondly, the wilful defaulters will increase i.e. using the shield of coronavirus, various companies may purposely delay their payment of debts even though they are in a position to settle it. In the case of Swiss Ribbons v. Union of India, the Supreme Court while discussing the intent of IBC stated that IBC aims for early identification and resolution of stressed assents. In other words, acquire the maximum value of the assets of the company and repayment of debts to the creditors. Moreover, the interest of the Corporate debtor shall not override the interest of the creditors.


Nevertheless, in the absence of the CIRP process, the alternative remedy that is available to the creditors can approach the Civil Court by instituting a summary commercial suit under Order 37 of Civil Procedure Code,1908 or filing an application for summary judgment under Order 13A or file an application of judgment on admission under Order 12 Rule 6 of CPC. This may not provide an option to the creditors for the resolution of the company but ensure their payment of debts. Therefore, approaching the Civil Court for recovery of debts is a viable option on the suspension of IBC during the pandemic.

ABOUT THE AUTHOR:

Aaksha Sajnani is currently a Legal Executive at Karnavati University.

You can contact them at- https://www.linkedin.com/in/aaksha-sajnani-983926133/

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