impact of COVID-19 on Insolvency and bankruptcy code 2016

Impact of COVID-19 on Insolvency and Bankruptcy Code 2016

INTRODUCTION:

The legal environment of a country is the main aspect in development of the economic condition for that country. After the introduction of the GST in India, the Insolvency and Bankruptcy Code, 2016 (IBC) is one of the most crucial and important legal development which will ultimately help for the better economic development of the country. Before the enactment of this Code, the debt default recovery in India was governed by various laws. Mainly, the Presidential Towns Insolvency Act, 1909 (for presidential towns like Bombay, Madras, Calcutta) and the Provincial Insolvency Act, 1920 (for the rest of the country) were used for the insolvency related issues. But these acts were age old and had not been amended in accordance with the changed time. Also, the recovery of debts due to Banks and Financial Institutions Act, 1993, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and the Companies Act, 1956/2013 are not able to resolve the matters related to the insolvency and bankruptcy. So, there is a need of a single law which will govern the issues related to insolvency. So, in 2016, the Insolvency and Bankruptcy Code (IBC) was introduced. All the matters related to the insolvency and bankruptcy are filed before the National Company Law tribunal (NCLT)[1]. The Companies Act, 2013 gives power to the NCLT to hear the matters related to insolvency. Whereas, an appeal against the order of the NCLT will be filed before the National Company Law Appellate Tribunal (NCLAT)[2]. Under Section 421 of the Companies Act, 2013, an appeal can be filed against the order of the NCLT before the NCLAT.

WHAT IS COVID-19 PANDEMIC:

Coronavirus disease 2019 (COVID-19) is defined as illness caused by a novel coronavirus, now called severe acute respiratory syndrome coronavirus (SARS-CoV-2; formerly called 2019-nCoV), which was first identified amid an outbreak of respiratory illness cases in Wuhan City, Hubei Province, China.It was initially reported to WHO on December 31, 2019. On January 30, 2020, WHO declared COVID-19 outbreak a global health emergency.On March 11, 2020, WHO declared COVID-19 a global pandemic, its first such designation since declaring H1N1 influenza a pandemic in 2009[3].

THE IMPACT OF COVID-19 ON THE INDIAN ECONOMY:

The Indian economy was suffering from significant slowdown from the past few quarters. In the third quarter of the current fiscal, the economy showed the increase lowest with the 4.7%.[4] There was a strong possibility of recovery but the country suddenly got affected by the COVID-19 pandemic due to which this recovery is next to impossible whereas, the condition is going to worsen than before the last two quarters in the fiscal. The current challenge in front of the Indian economy is to maintain the economy in better condition. The outbreak has presented fresh challenges for the Indian economy now, causing severe disruptive impact on both demand and supply side elements which has the potential to derail India’s growth story.[5] The UN ‘Economic and Social Survey of Asia and the Pacific (ESCAP) 2020: Towards sustainable economies’ said that the COVID-19 has the long lasting economic as well as social effects.[6] The India’s GDP for 2019-20 fiscal was 5% whereas, it shows a little slowdown for current fiscal which is estimated to be 4.8% and will be increase up to 5.1% in 2021-2022 fiscal, said the report.[7] The 21 days lockdown was declared by our honourable Prime Minister Narendra Modi from 25/03/2020 midnight till 14/04/2020, which is now increased till 3/5/2020. During this lockdown, all the factories, working units will be closed. The micro, small and medium enterprises[8] (MSME) exporters will be impacted more by the current lockdown on account of Covid-19 pandemic as the sector accounts for over 45 per cent in the country’s total outbound shipments, according to trade experts[9]. The global trade in goods is going to decrease by almost 13-32 percent as the world is fighting against the COVID-19 Pandemic, said by the World Trade Organisation (WTO)[10].

As the MSMEs sector is going to affect many of the small and medium businesses and they may have to face the insolvency and bankruptcy process. So, some majors were taken by the government in favour of the MSMEs to avoid the insolvency process.

CURRENT STEP TAKEN BY THE GOVERNMENT IN RELATION TO THE IBC WITH EFFECT OF COVID-19 PANDEMIC:

As mentioned above, the MSMEs sector will be the mostly affected sector, so on 24/03/2020, our honourable Finance Minister Nirmala Sitaraman had made an announcement that the minimum threshold amount is increased from Rs. One lakh to Rs. One Crore. This means that the Corporate Insolvency Resolution Process (CIRP) can be commenced against the company only if the default amount is exceeding the amount of Rs. One Crore.[11]

This step was taken by the central government under Section 4 of the Insolvency and Bankruptcy Code, 2016.The Section 4 of the Code states that: “(1) This Part shall apply to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of the default is one lakh rupees: Provided that the Central Government may, by notification, specify the minimum amount of default of higher value which shall not be more than one crore rupees”[12]

A special provision, namely, Regulation 40-C has also been inserted in the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 to exclude the lockdown period from the timelines prescribed under the IBC vide Notification dated 29.03.2020 [13] which reads as follows:

“40-C. Special provision relating to time-line.— Notwithstanding the time-lines contained in these regulations, but subject to the provisions in the Code, the period of lockdown imposed by the Central Government in the wake of COVID19 outbreak shall not be counted for the purposes of the time-line for any activity that could not be completed due to such lockdown, in relation to a corporate insolvency resolution process.”

WHAT ARE THE LOOPHOLES IN THE GOVERNMENT’S DECISION?

The minimum threshold limit of the corporate insolvency (companies and LLPs) was Rs. One Lakh before 24/03/2020 which is now extended to Rs. One Crore. But Section 7 of the Code says that: “A financial creditor either by itself or jointly with other financial creditors may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred”[14]. So as mentioned, the financial creditors are able to file an insolvency application jointly, so the raise in the threshold up to 1 crore rupees is rarely going to affect the financial creditors claim under the Code. This point can be explained further with an example: Let us assume that a company named PQR Pvt. Ltd. has committed a default of Rs. Sixty-Five Lakhs to A and Rs. Forty-Eight Lakhs to B. So here, A or B alone can’t file an insolvency application but by jointly they can file an application.

Now referring this increase threshold from the operational creditors point of views, the code says that: “An operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor in such form and manner as may be prescribe”.[15]

The Section 8 of the Code talks about the insolvency application by the operational creditors. The code does not allow the operational creditor to file an application jointly against the combined default caused to the different individual operational creditors. The operational creditors do not include only the supply of goods and services but also the employees fall under the same category for filing an application. Practically thinking, the default of Rs. One Crore to an employee is not possible but to many employees it is possible. So, the employees can file an application against default combinedly if it is more than Rs. One Crore even if they are operational creditors. As the NCLAT had already made it clear in Suresh Narayan Singh v. Toyo Limited Company[16] that the employees can file combined application to initiate the insolvency process: “Section 5(20) read with Section 5(21) of the ‘I&B Code’ makes it clear that the workmen of a Company come within the meaning of ‘Operational Creditor’. If Sections 8 & 9 are read with Form-5, it will be clear that the person authorized to act on behalf of the ‘Operational Creditor’ is entitled to file an application under Section 9. Therefore, where workmen/employees are ‘Operational Creditors’, the application may be made either by an ‘Operational Creditor’ in an individual capacity or as a joint capacity by one of them who is duly authorized for such purpose.”

So, from this we can understand that the increase in threshold limit is not going to affect the financial creditor but can affect the operational creditor and even increase in default threshold is not sufficient to minimize the insolvency application. For the corporate insolvency application, the minimum threshold limit is increased but for the insolvency process against individual or the firm is same as to rupees One Thousand. The Section 78 of the Code says that: “This Part shall apply to matters relating to fresh start, insolvency and bankruptcy of individuals and partnership firms where the amount of the default is not less than one thousand rupees: Provided that the Central Government may, by notification, specify the minimum amount of default of higher value which shall not be more than one lakh rupees.”[17] As this limit is not currently exceeded by the central government of India so there is a possibility of shift of insolvency application from companies to individual and firms.

CONCLUSION:

The exclusion of lockdown period and the increased threshold limit are welcome steps taken by the legislature to ensure that the Micro, Small and Medium Enterprises have enough cushion to recover from the financial distress caused by the COVID-19 pandemic and would also declutter the cases under IBC by filtering out the frivolous ones. Currently, the whole world is suffering from Covid-19 pandemic which has affected the world’s economy badly. The economy could contract by 0.9% according to DESA[18]. India is not an exception for this. The Indian economy is also suffering a lot in this. Almost more than for a month due to lockdown all the trades are closed. Factories, companies were not working due to which NPA of the companies has increased which led to the insolvency resolution against the company. The increase threshold for corporate insolvency there will increase the CIRP application against individual as the threshold ratio for same is not being increased. Keeping in mind the situation going to be occur after the pandemic there are some changes which are needed in Insolvency and Bankruptcy code 2016. Such as, position of financial creditor to file CIRP application, judicial infrastructure etc. with the help of government and little bit changes in Code will help to overcome this crisis.

By:

Amey Jadhav

Maharashtra National Law University, Aurangabad.

[1] Section 408 of the Companies Act, 2013.

[2] Section 421 of the Companies Act, 2013.

[3] https://emedicine.medscape.com/article/2500114-overview (lastly accessed on 10/05/2020 at 18.06PM).

[4]http://ficci.in/spdocument/23195/Impact-of-COVID-19-on-Indian-Economy-FICCI-2003.pdf (lastly accessed on 10/05/2020 at 19:15 PM).

[5] Ibid.

[6]https://economictimes.indiatimes.com/news/economy/indicators/indias-gdp-for-fy21-projected-at-4-8-covid-19-to-have-adverse-economic-impact-globally-un-report/articleshow/75060555.cms (lastly accessed on 11/05/2020 at 13:45 PM).

[7] Ibid.

[8] Here in after MSME

[9] https://economictimes.indiatimes.com/small-biz/sme-sector/covid-19-pandemic-to-hit-msme-exporters-more-trade-experts/articleshow/75065434.cms?from=mdr (lastly accessed on 12/05/2020 at 11:15 AM).