The Pandemic outburst of Covid-19 has not left India untouched in any manner. This Pandemic has not only affected the human beings but has also led the economy to doldrums.
The journey of stalling of businesses in India prominently started with the onset of lockdowns in India.
The lockdown was justified in the sense that it was aimed to curb the spread of Covid-19 as citizen comes first before anything else since a nation is by its citizen and they in turn run the economy.
A dire need to maintain the status quo was so emergent that series of decisions were taken and this led IBC to work as one of the pillars to save the companies from going insolvent especially when the businesses were going through Pandemic business cycles.
We, in this 59th white paper, released during Covid-19 times, have tried to deal with few why, what, when and whether with respect to Ordinance under Insolvency & Bankruptcy Code (IBC) due to various aspects as below:
1.enhancement of limit of CIRP
2.suspension of CIRP for 6 months subject to conditions
3.exclusion of default from 25th March, 2020 till 6 months (can be extended to 1 year)
We hope that these FAQs will resolve the queries in the mind of the professionals.
Q1. Why the limit of Corporate Insolvency Resolution Process (CIRP) was enhanced?
R.The Government was already exploring to enhance the threshold to Rs 5 lakhs for MSME and Rs 50 lakhs for others whereas due to Covid-19, entire Indian business operations were impacted.
Therefore, for time being they have instead enhanced it to Rs 1 Crore and that made them to suspend the CIRP and it was enhanced to prevent companies which were already experiencing distress on account of this unprecedented situation, being pushed into insolvency proceedings under the said Code for some time.
Q2. Why the provisions of Section 7, 9 & 10 of IBC have been suspended?
R. The reply to the same is already inbuilt and provided in the ordinance dated 05th June, 2020. The same is reproduced here-in under for better appreciation and understanding;
AND WHEREAS COVID-19 pandemic has impacted business, financial markets and economy all over the world, including India, and created uncertainty and stress for business for reasons beyond their control;
AND WHEREAS a nationwide kickdown is in force since 25th March, 2020 to combat the spread of COVID-19 which has added to disruption of normal business operations;
AND WHEREAS it is difficult to find adequate number of resolution applicants to rescue the corporate person who may default in discharge of their debt obligation;
AND WHEREAS it is considered expedient to suspend under sections 7, 9 and 10 of the Insolvency and Bankruptcy Code, 2016 to prevent corporate persons which are experiencing distress on account of unprecedented situation, being pushed into insolvency proceedings under the said Code for some time;
AND WHEREAS it is considered expedient to exclude the defaults arising on account of unprecedented situation for the purposes of insolvency proceeding under this code;
Q3. Why default occurring from 25th March, 2020 till 6 months, or as the time period to be extended not more than one year, has been excluded as default?
R.The reason is to prevent companies from facing further financial hardship since lockdowns also started from 25th March, 2020 and by such time lot of companies were already in bad shape.
Had it not being done, there would have been a big financial crisis as entire business cycle of any business entity is dependent upon the business cycle of their respective buyers and sellers.
The business cycle of such buyers and sellers were also stalled and liquidity had dried up in the economy for the time being till things get to normal demand and supply. Besides, the upcoming 2-3 quarters will be also difficult time for business entities coupled with the fact that GDP has been badly hit as well.
Hence, in totality, it was a conscious decision while factoring the global cues as well.
Q1. What is the effective date of enhancement of limit of Rs 1 Crore for CIRP? Is it retrospective or prospective in nature?
R.The effective date of enhancement of limit of Rs 1 crore would be 25th March, 2020. It gets its footing on three counts as below:
First Count – There is a background of enhancement of threshold of limit of CIRP (as discussed under a question under why) and excluding default period from 25th March, 2020 through an ordinance dated 5th June, 2020. The intention is to provide a special protection from 25th march, 2020 and thus enhancement of threshold and exclusion of default period have the same date in place i.e. 25th March, 2020.
Second Count – The jurisprudence is well established that a notification has to be read in a plain and literal manner and there cannot be any room for presumption.
It is also the trite law that every legislation would be always considered to be as prospective in nature as legislation never looks back unless specifically required and it is expressed categorically for its retrospective applicability.
Third Count – The National Company Law Tribunal, Kolkata Bench in the matter of Foseca India Limited v. Om Boseco Rail Products Limited [CP(IB) No. 1735/KB/2019], dated 22.05.2020, held that the increased minimum threshold of the default from Rs. 1 Lakh to Rs. 1 crore under Section 4 of the Insolvency and Bankruptcy Code, 2016 will not apply to the cases retrospectively.
The Government of India had increased the minimum threshold limit of default for safeguarding the interests of the MSMEs and other financially burdened companies due to the Pandemic.
The Adjudicating Authority in the present case held with respect to the Section 4 amendment that,
When the amendment to section 4 of IBC was, inserted a proviso enhancing the pecuniary jurisdiction for filing applications as against small and medium scale industries nowhere in the notification mentioned that its application will be retrospective. Therefore, it appears to me that the amendment shall be considered as prospective and not retrospective.
The analysis of the amendment by NCLT Kolkata has cleared a doubt amongst the stakeholders with respect to the increased threshold limit that it will be applicable prospectively i.e. on the cases filed after 25th March, 2020.
Q2. What will be the impact on the applications already filed and pending admission in NCLT on or before the date of the ordinance dated 5th June, 2020?
R.If such an application is related to a pre Covid-19 default i.e. before 25th March, 2020 and it meets the threshold as was prevailing on the date of filing an application, then it will have zero impact of such an ordinance.
Q3. What will be the fate of notice issued prior to the date of the ordinance?
R.The deciding factor is an application and not the notice. Hence, there won’t be an impact whether you have served a notice or not before the date of such an ordinance.
At the same time, it must be noted that a notice is mandatory for the initiation of CIRP for operational creditor under Section 9 of IBC.
Q4. What is the criteria for filing of a new application under IBC after the ordinance?
R.The criteria of filing of an application under IBC would be as below:
1.the default of a debt should be upto 24th March, 2020 and
2.the amount of debt should be Rs 1 Crore and above.
Q1. When post Covid-19, a new application can be filed?
R.A new application can be filed for the periods enumerated as under:
1.Period prior to 24th March, 2020 subject to threshold limits as prevailing for the relevant period.
2.Period after default exclusion date:
i) if 6 month is excluded, then it can be filed for the default occurred on or after 26th September, 2020.
ii) if it is extended upto 1 year, it can be filed for the default occurred on after 26th March, 2021.
Q1. Whether an application against a default occurring during Covid-19 period from 25th March, 2020 onwards can be filed after the suspension of the Sections are withdrawn?
R.No, it can never be filed in future as well. There is a categorical restriction which is very well reflected under the proviso to Section 10A as below:
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.
Q2. Whether an operational creditor or financial creditor can file an application for a default till 24th March, 2020?
R.Yes, it can be filed for a default that has occurred till 24th March, 2020.
The restriction is against filing of an application for a default which has occurred from 25th March, 2020 till 6 months or time limit as may be extended not more than one year thereafter.
Q3. Whether an application filed for period prior to 25th March, 2020 in NCLT but with default can be considered to be valid filing and will be maintainable?
R.Yes, if the application is with respect to a default prior to 25th March, 2020 and meets the criteria of threshold as prevailed at the time of filing an application, it shall be considered to be a valid filing subject to removal of defects.
Mere existence of a defect in an already filed application cannot be considered at par non filing of an application at all.
Q4. Whether an application in NCLT will be maintainable where for a default of less than Rs 1 Crore when a notice was served prior to the enhancement of threshold to Rs 1 Crore but the application remained to be filed?
R.No, the application will not be maintainable in as much as the date of filing an application is the relevant factor and not the date of serving of notice.
Q5. Whether the enhancement of threshold of the limit from Rs 1 lakh to Rs 1 Crore will be permanent or for time being?
R.It must be noted that in late February, 2020, there were reports in public domain that a high level committee led by senior Government officials after an in-depth study were to recommend the Government for an enhancement of threshold limit for CIRP.
It was quoted for MSME as Rs 5 lakhs and for others it could be Rs 50 lakhs. Hence, this announcement by the Finance Minister can be considered as a temporary workout to check insolvency amongst MSMEs and especially due to the financial hardships created by Covid-19.
At the same time, it should be also known that on a very conservative side approx. 45% of the applications filed for CIRP, since the implementation of IBC, were below Rs 1 Crore.