COVID-19 outbreak has caused confusion and industry stress for reasons beyond their control. India was closed on 25 March 2020 to battle COVID-19, leading to the chaos of daily business activities. It is difficult to find an adequate number of resolution applicants for the rescue of corporate persons who may default on their debt obligations. Distress is about because of an extraordinary situation and business entities are being forced into insolvency proceedings under the Legislation. Defaults arising from an unprecedented event to be excluded for the reasons of insolvency proceedings under the Code. Following Below is an impact low down on the IBC Ordinance, 2020.
- The aim of the new IBC Reform Regulation is to make it easier for companies with breathing space to recalibrate their operations and industry to an all-new standard and keep businesses from dying prematurely. The key points are:
- No claim shall ever be made for the commencement of corporate insolvency proceedings against a corporate debtor for defaults arising within the time of suspension under sections 7, 9, and 10 of IBC. Section 10 A for COVID Period Defaults has been inserted in the Code suspending the initiation of CIRP under sections 7, 9, and 10. No complaint under sections 7, 9, and 10 can be filed for defaults occurring on or after 25 March 2020 for a period of 6 months (COVID Time), i.e. until 24 September 2020 (‘COVID Time Defaults’).
- Applications already filed under IBC for the commencement of insolvency proceedings and even on-going insolvency court cases will keep going to be dealt with in line with the appropriate.
- The gov’t has retained the power to extend the COVID period to one year, i.e. 24 March 2021. The Order provides permanent protection to corporate debtors for COVID period defaults. No claim for approval of CIRP can ever be lodged by any borrower for such defaults.
- The introduction of CIRP on the grounds of defaults that happened prior to 25 March 2020 is permitted. By the same token, defaults arising after the COVID period will entitle creditors and corporate debtors to initiate CIRP. Defaults not related to COVID-19 will, however, proceed to be dealt with under the Code. Insolvency proceedings may be initiated in respect of defaults that occurred prior to 25 March 2020 or that occurred after the period of COVID-19.
- Default occurring within the period COVID-19 shall not be the grounds for the commencement of insolvency proceedings at any time. This will prevent companies from being forced into insolvency due to their inability to comply with the repayment obligations due to the business disruptions on the basis of COVID.
- Does a question need to be asked that application can be submitted for initiation of CIRP if the COVID Duration Default extends past COVID Time? Conjunct interpretation of Section 10A, a proviso to Section 10A, and Clarification show the COVID Time Default needs to be expunged. Such a default can not cause CIRP to be triggered at any time. Logically, therefore, the quantum of the COVID Default period must be excluded as it is not in the eyes of the law. Put it simply, COVID Period Default = No Default. New default of the minimum amount of Rs. 1 Crore should be used to initiate CIRP after the COVID period. However, the default amount after the COVID duration may be compared with the default amount before March 25, 2020.
- The creditors and corporate debtors will have to spend all their time proving the exact date of default as the Adjudicating Authority will be bound to determine the timeline for default.
- A further amendment to Section 66 helps protect the parties engaged in the business of the corporate debtor from the order of contribution, as the default period of COVID does not fall within the bracket of fraudulent trading or unfair trading.