Under the IBC, an entity can seek insolvency proceedings against a company even if the repayment is delayed by just one day. This is subject to the minimum threshold of Rs 1 crore.  Earlier, the threshold was Rs 1 lakh.  Finance Minister announced relief on May 17 the suspension of fresh initiation of insolvency proceedings up to one year and exclusion of COVID-19 related debt with an aim on further development of comfort of doing business in India and on June 05, As per section 10A of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 that no fresh corporate insolvency resolution process shall be initiated against any company for a period of 6 months which can be extended up to a period of 1 year as may be notified for the default arising on or after March 25, 2020.

The ordinance suspends section 7, 9 and 10 on the ground that the pandemic has generated insecurity and pressure for business for reasons beyond their control. The nationwide lockdown from March 25, 2020 has added to the interruption of regular commercial operations and in such circumstances, it would be difficult to find adequate number of resolution applicants for a distressed/defaulting business.

While this is a welcome step for a lot of businesses across India which are stressed due to the ongoing pandemic and the need of the hour is for the government to save such businesses, the ordinance is ambiguous on the part that the explanation of section 10 A states that, “….no application shall never be filed for initiation of CIRP of a corporate debtor for the said default occurring during the said period”. Now the literal interpretation of the aforementioned sentence is that at no point of time, present or in future, an application under section 7, 9 and or 10 can be filed by or against any corporate debtor, the reason for which is untenable because if this is the intent of the ordinance then this exception would eventually lead the corporate debtors taking advantage of this exception and in turn misuse the said exception. From this it is clear that promoters of companies that have the capacity to repay dues could force a default during this period and never be held accountable under the IBC as per ordinance.

The said ambiguity should be removed and there should be a clarification released stating that the definition of default will exclude covid- 19 related debt for a specific period as if this is left open ended and no application shall ever be filed for a default occurred during this time, then this would be less beneficial but will eventually cause humungous loss to the creditors and a large amount of public money will be stuck with corporate debtors as they would not be able to initiate for CIRP so that a successful resolution plan is received for the corporate debtor and it is managed by a new management who will work for the benefit of the corporate debtor.

There should be clarity on the exact period in which the definition of default will exclude covid related debt exactly the way there is clarity right now that no fresh CIRP proceedings can be initiated against any corporate debtor after March 25, 2020.  

The ordinance suspends section 10 which deals with initiation of CIRP proceeding by the Corporate Debtor himself which means suspension of voluntary initiation of insolvency proceedings by companies themselves isn’t necessary. If a company based on the prevailing conditions believes that the best option for it is to go through insolvency, it should be allowed to use the route of section 10.

The ordinance also states that the resolution professionals will be barred from initiating fraudulent trading or wrongful trading application against directors of companies where the IBC process is suspended.

By, CA RD Chaudhary, Insolvency Professional & Founder, Sun Resolution Professional Pvt. Ltd.

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