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The journey of CIRP till insertion of Section 10A of the I&B Code, 2016

Updated: Sep 4

Aniket Dutta & Meghna Vij, 5th Year B.A. LL. B (Honours), School of Law, CHRIST (Deemed to be University), Bangalore

INTRODUCTION

The Government of India enforced a nationwide total lockdown in March 2020 owing to the upsurging and potential threat of the coronavirus pandemic as a preventive measure. The measures inter alia took a massive toll on India’s economy and instances such as the migrant workers’ catastrophe and various workers’ being laid off by reputed companies such as Uber and Swiggy surfaced. The Government had indeed foreseen the occurrence of such circumstances and that is the reason why Smt. Nirmala Sitaraman, Union Finance Minister of India held a press conference[1] two days immediately after the official announcement of the nationwide lockdown to lay down a path towards preserving the financial health of the Indian economy in such an unprecedented situation. Some of the necessary measures as introduced involved the increment of minimum threshold limit of default for invoking the Corporate Insolvency Resolution Process (CIRP) from one lakh rupees to one crore rupees vide Ordinance dated 4th April 2021.[2] A noteworthy change in this scenario was the insertion of Section 10A into the Code.[3] This provision stipulates that initiation of CIRP be suspended for default arising on or after 25th March 2020 for a minimum period of six years extendable up to one year. The provision in itself is not self-explanatory and requires a judicious examination for what bearing will it have on the Financial and Operational Creditors who are put through grave financial distress by virtue of it.


WHAT DOES THE CIRP ENTAIL?

The state of insolvency is referred to as a state of financial distress. In simpler words, when the existing liabilities of the debtor outweighs the assets and resultantly, the creditors are not being paid the debt in time. The Insolvency & Bankruptcy Code, 2016 (I&B Code, 2016) provides that the financial or operation creditors or the corporate debtors should file an application before the adjudicating authority (NCLT having territorial jurisdiction) for the initiation of the CIRP at the earliest instance of the default. A default is referred to as the situation wherein the Corporate Debtor is unable to repay the debts owed to the Financial or Operational Creditors. It is provided so, to cure the situation of financial distress at the earliest instance possible just like a patient having certain symptoms of a disease is taken to the doctor without delay so that the disease can be cured as soon as possible. The conditions stipulate that a Demand Notice[4] ought to be issued to the Corporate Debtor by the Financial or Operational Creditor and if the Corporate Debtor does not make good of the outstanding amount or disputes the Demand Notice involving a minimum amount of default as Rupees one crore (earlier Rupees one lakh) then an application can be filed before the Adjudicating Authority for the initiation of the CIRP.


WHO CAN FILE THE APPLICATION FOR INITIATION OF CIRP?


i) Financial Creditor: The Financial Creditors can file the application for initiation of CIRP against the Corporate Debtor in an individual capacity or jointly. The amount of default has to be aggregate of defaults of all such financial creditors who file the application together.


ii) Operational Creditor: The Operational Creditor can file for the initiation of CIRP against the Corporate Debtor for default in repayment of the debt. The Operational Creditor cannot file for such application jointly and therefore, the amount of default must be above the threshold limit.


iii) Corporate Debtor: The Corporate Debtor itself can file for the initiation of CIRP while acknowledging the default in repayment of the debt amount and the aggregate default amount shall be considered to see whether it is above the threshold limit or not while admitting the application for CIRP.


iv) Employees: The employees of the corporate entity can file for the initiation of CIRP if there is any default in payment of their remuneration. The application can be filed jointly and the aggregate debt amount shall be considered to see whether it satisfies the minimum threshold limit for initiation of CIRP or not.


THE JURISPRUDENTIAL RATIONALE BEHIND CIRP

The abbreviation of CIRP as it entails is the process by which the state of insolvency of a corporate entity is cured. A default by the Corporate Debtor is the triggering point for the initiation of CIRP subject to the prescribed conditions. The Corporate Debtor can always cure it legally by making good of the debt before the filing of the application or before admission of application of CIRP by the Adjudicating Authority, or by reducing the debt owed from the minimum threshold limit by making part payment. The rationale behind CIRP can be understood through the lens of philosophy of pain and pleasure in Bentham’s theory of Utilitarianism. Nature has put mankind under the governance of two sovereign entities, that is pain and pleasure. Any act of the man is to avoid pain and seek pleasure. Along these lines, the CIRP can be understood as the process of avoiding ‘pain’ of financial distress or insolvency. It is an attempt to revive the corporate entity by restructuring its debt including by way of merger, demerger or amalgamation thereby steering it towards attaining ‘pleasure’. It is done so that the Company remains a going concern and does not go into liquidation. Liquidation is adopted as the last resort because after that the whole existence of the corporate entity comes to an end. The downside to this is jobs being lost by the employees of the company putting them in a situation of ‘pain’.


THE EXTENT OF SECTION 10A TO RESCUE CORPORATE ENTITIES IN DISTRESS DUE TO CORONAVIRUS PANDEMIC

Pursuant to the economic measures announced by the Indian Ministry of Finance, the President of India promulgated an Ordinance[5] on the 5th of June, 2020 amidst the unprecedented Covid-19 pandemic. One of the most essential features of the Ordinance was the introduction and inclusion of Section 10A in the Insolvency and Bankruptcy Code, 2016. The newly incorporated Section states as follows:


Section 10A: Notwithstanding anything contained in sections 7, 9 and 10, no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25th March 2020 for a period of six months or such further period, not exceeding one year from such date, as may be notified in this behalf:

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. Explanation.—For the removal of doubts, it is hereby clarified that the provisions of this section shall not apply to any default committed under the said sections before 25th March 2020”[6]

  • Analysis of Section 10A

Incorporation of Section 10A in the Code ex post facto rescued the businesses mollified their unease towards the insolvency proceedings. Such incorporation was much needed in the unprecedented times wherein the COVID-19 pandemic has severely adversely affected the business and led to a collapse of the economy as a whole. The said section ensures that no fresh proceedings will be initiated against any business unit for any default that arises on or after the 25th of March, 2020 for a period of 6 months. It also further empowers the Government of India to extend the said period of 6 months to a period of One year and considering the COVID-19 ongoing situation, upon expiry of 6 months, there was a further extension of 3 months up to December 2020 enforced by the Government of India. In December 2020, the period was further extended by 3 months up to March 2021 thereby completing one year of such suspension. The basic purpose for implementation of the said section was to protect the interests of the businesses distressed due to the nationwide lockdown imposed by the Government of India and to protect them from succumbing to the ghost of Insolvency proceedings.

However, the Section does have its share of ambiguity. It does not clarify the nature of defaults it covers, that is to say, that it does not entail any clarity as to if the Section takes within its ambit Continuing defaults and the defaults that partially occur before the date said and partially after.

  • Retrospective Application of Section 10A

The Supreme Court in the case of Ramesh Kymal v. Siemens Gamesa Renewable Power Pvt Ltd[7], interpreted Section 10A of the Insolvency and Bankruptcy Code, 2016 to have placed a Retrospective bar against the initiation of CIRP proceedings and held that the same is only to apply to applications filed on or after 25th March 2020. It was clarified by the ways of this judgement that the purpose of the legislation is to discontinue the operation of Sections 7, 9 and 10 concerning the defaults arising on or after 25th March 2020 which was the date when the Nationwide Lockdown was imposed by the Honourable Prime Minister. The lockdown imposed, disrupted normal business operations and had a global impact on the economy and hence the said Section was incorporated in the Code keeping in mind the same. On the basis of the objective of the legislation behind the said Section, the Court explained its decision regarding Retrospective Application. Indeed, the explanation of the Court in the case removed the doubt regarding the retrospective application of the Section by clarifying that such bar shall not operate in respect of any default committed prior to 25th March 2020.


ALTERNATIVES AVAILABLE TO THE CREDITORS


During the period of Discontinuation of the Code, the Creditors are left with no choice but to avail the primitive remedies that existed prior to the enforcement of the Code, like:


1) Recovery of Debts due to Bank and Financial Institution Act, 1993: Section 19 of the Act permits banks and any other Financial Institutions to recover debt from any person by making an application to the Tribunal of the concerned jurisdiction.


2) Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002: Sections 13 and 14 of the Act provide assistance to the Secured Creditors with respect to taking possession of Secured Assets and hence the provisions are available as an alternative to the Creditors during the suspension of proceedings under the Code.


3) Commercial Courts Act, 2015 and the Code of Civil Procedure, 1908: A Creditor may also as an alternative file a Commercial summary or standard suit under Order 37 of the Code of Civil Procedure (CPC), 1908 as amended by the Commercial Courts Act, 2015.


CONCLUSION

Per the ruling in Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors[8], the Insolvency and Bankruptcy Code, 2016 is not a recovery legislation; rather the objective is the resolution of the Corporate Debtor, that is, to cure the financial distress element and to keep the financial health of the Corporate Debtor entity while ensuring that it remains a going concern. The insertion of Section 10A furthers this objective in light of the COVID pandemic situation and allows certain Debtors to sustain the inevitable and adverse effects of the pandemic on the economy.

[1] FM Nirmala Sitharaman Speech, Announcements HIGHLIGHTS: Full text of Speech on Rs 20 Lakh Crore India Economic Package (indianexpress.com). [2] 04af067c22275dd1538ab2b1383b0050.pdf (ibbi.gov.in). [3] Ins. by Act No. 17 of 2020, sec. 2 (w.e.f. 05-06-2020). [4] Section 8, The Insolvency and Bankruptcy Code, 2016. [5] https://www.ibbi.gov.in/uploads/legalframwork/741059f0d8777f311ec76332ced1e9cf.pdf. [6] Section 10A, Insolvency and Bankruptcy Code, 2016. [7] Ramesh Kymal v. Siemens Gamesa Renewable Power Pvt Ltd, 2021 SCC OnLine SC 72. [8] Swiss Ribbons Pvt. Ltd. v. Union of India, Writ Petition (Civil) No. 99 of 2018, decided on January 25, 2019.

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