Introduction
The Managing Director of Siemens Gamesa Renewable Power Ltd., Ramesh Kymal, had quit his position in the company on 30thApril this year. He filed a petition under Section 9 of the Insolvency and Bankruptcy Code, 2016, claiming INR 104.11 crore against the company (corporate debtor), alleging the date of default to be 30th April2020[1].
It was during the pendency of this petition that the Government promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020; introducing a new section, namely Section 10A, which suspended all applications for initiation of Corporate insolvency resolution proceedings under section 7, 8, 9, and 10 of the IBC for any default occurring on or after 25th March for six months (extendable to a year). A proviso was also inserted that excused all corporate debtors from an insolvency proceeding against them for any default incurred by them during the stipulated period.
In this backdrop, an application in the interregnum was moved by Siemens Gamesa (Corporate Debtor), pleading that in the light of the insertion of Section 10A in the IBC, the petition under Section 9 filed by Mr. Kymalmust be disposed of.
In his defense, Mr. Kymal’s counsel relied on Golkuldas Pagaria vs. Parmanand Chaurasia[2] wherein it was stated that a proceeding already instituted is in the nature of a vested right and cannot be taken away except by an explicit provision to that effect. He also mentioned Chandrasingh Manibhai vs. Surjit Lal Ladhamal[3] and Arrowline Organic Products vs. Rockwell[4] industries to substantiate the argument that Section 10A can only have prospective application.
Interestingly, in the Arrowline case[5], an order of admission was passed in the month of May 2020 against the corporate debtor. However, earlier in March, the government released a notification to increase the minimum threshold from INR 1 lakh to INR 1 crore in order to maintain a petition for insolvency before the tribunal. Therefore, the debtor filed an application, claiming that the claim made by the Corporate creditor fell below the INR 1 crore threshold. The bench, however, concluded that the pending proceedings were not to be affected since the case had been filed prior to the government’s notification. Coming back to the Kymal case, the tribunal looked into the decision in the Arrowline case and observed that in the latter, the Notification was issued by the Central Government as a delegated authority, whereas in the Kymal case, an ordinance was promulgated by the executive in the exercise of its power under Article 123 of the Indian Constitution. The Bench observed that the ordinance is to be treated at par with a legislation made by the legislature. Hence, the decision came in favor of Siemens Gamesa, wherein the NCLT accepted the retrospective application of the Ordinance. It went on to state that the word “ever” instituted in the proviso to the ordinance seeks to include all defaults occurring on or after 25th March 2020 irrespective of the date of filing.
The Problem
The cut-off date had been set with the premise that industries suffered since the onset of the lockdown, which does not hold true in its entirety. For instance, exporters faced order cancellations even before the commencement of the lockdown period, and businesses that traded with countries that went into national lockdown before India were facing difficulties even before India’s nationwide lockdown began. Under section 3(12) of the IBC, ‘default’ occurs when the whole or part of debt has become ‘due and payable’ and is not paid by the debtor. There are instances where, as per contracts between parties, debt is payable after a certain point of time or upon the happening of a certain event. The debt becomes ‘due’ only after that point in time or when the specified event has happened. Thus, there may arise situations where a default might occur after the stipulated period, but debts are incurred during the suspension period. This renders these debtors who suffered losses during the suspension period on an unequal footing. In this light, a plea was filed before the Delhi High court claiming the Ordinance to be ultra vires of Article 14 and 19(1)g the Indian Constitution.
Nevertheless, the Ordinance has received applause and apprehensions in equal proportions. Since the beginning of the lockdown, various industries are facing severe financial hardship, with some on the verge of collapse. The financial crisis has even hit the big players, which leads to an obvious scenario where they would be unwilling to infuse money into a debt-ridden company. The Financial Stability report released by the Reserve Bank of India in the month of July, 2020 predicted a whopping 14.7% increase in the gross non-performing asset ratio by March 2021. With decisions such as the suspension of the IBC, an extension of the moratorium period, and increasing the threshold to INR 1 crore, the crippled businesses can expect relief.
However, many uncertainties surround the suspension of the IBC. Even the provision of voluntary initiation of corporate insolvency proceedings by the corporate debtors under Section 10 has been restricted by the Ordinance. This prevents corporate debtors from releasing their investments in order to exit the market, which may cause the value of their assets to diminish. Voluntary initiation of corporate insolvency would have allowed the corporate debtors to take advantage of the moratorium period and restructure their debts.
In addition to this, many do not welcome the insertion of Section 66(3) to the Code, which protects applications from being filed under Section 66(1) or (2), which stood to hold the Director or Corporate debtors liable for fraudulent and wrongful trading. Under Section66(2) of the Code, the Director(s) and Partner(s) were required to make contributions to the assets of Corporate Debtors according to the direction of the adjudicating authority if the business was carried out negligently or with an intent to defraud the creditors. Therefore, the insertion of Section 66(3) in the IBC , paves way for exploitative advantages that can be taken by the Corporate debtors and the Directors or Partners. Furthermore, the Ordinance is silent on the liability of personal guarantors, and lenders holding immovable property can initiate the sale of the property with minimal court intervention. Since the SARFAESI Act, 2002 is not suspended, the lenders may also begin to take over the management of the assets of the debtor.
Moving Forward
Under the Stressed Assets Resolution Framework released on 7th June 2019 by the RBI, the early stresses in loan books are recognized, and a principle-based resolution framework is provisioned. When concessions are granted to the borrower owing to their financial difficulty, the asset classification downgrades except in cases where it is accompanied by a change in ownership, allowing the asset classification to be retained or upgraded to ‘standard’ under the prescribed conditions.
Furthermore, on 6th August 2020, the RBI Released its Monetary Policy statement, where it announced a window under the existing Stressed Asset Resolution Framework which would allow lenders to execute a Resolution Plan in respect of exposures without a change in ownership while classifying the exposures as ‘standard’. This is expected to alleviate the stresses of the borrowers due to the Covid-19 Pandemic. The Government also plans on providing a pre-packaged resolution framework where a company prepares a restructuring plan along with lenders’ cooperation before initiating insolvency proceedings, which in turn saves costs.
From a comparative perspective, the suspension of the IBC in India can be compared against the changes made by the Australian government in its bankruptcy law in view of the ongoing pandemic. The Australian government temporarily increased the threshold (from $2000 to $20,000) to apply for bankruptcy notice against the debtor. Also, instead of suspending the provisions of insolvency, the government chose to increase the time frame within which debtors react to the notice to six months from the earlier stipulated time of 21 days. Meanwhile, in the USA, several safety-nets are being provided to tackle the economic crisis brought about by the effect of the pandemic. The Congress passed the CARES Act relief package in order to provide financial relief and introduced changes that affect the ones who are considering filing for bankruptcy. Similar measures could havebeen taken by the Indian government without entirely suspending the bankruptcy law. Moreover, recapitalising the banking system may prove to be beneficial in order to make them better equipped for absorbing losses, as it would be tough for the RBI to target inflation during these times.
Conclusive remarks
The President promulgated the Insolvency and Bankruptcy (Amendment) Ordinance, 2020 in order to bring relief to corporate debtors during the ongoing pandemic, when economic activities in general are facing a major slowdown. As can be observed from the introductory portion of the Ordinance which enumerates its objectives, the need for the amendment was caused by the prevalence of COVID-19, and associated restrictions which has created stress and uncertainty beyond the control of business entities. In such circumstances, it was deemed necessary to curb the likelihood of liquidation of companies which were prone to default.
However, the selected cut-off date of 25th March, 2020 has rendered many similarly placed corporate debtors on unequal footings. Also, the suspension of Section 10 (provisions for initiation of voluntary insolvency proceedings) along with Section 66(1) and (2) (provisions to make Corporate Debtors and Director(s) liable for fraudulent trading) of the Code has invited criticism.
The recent Financial stability report by the RBI predicts a significant rise in the NPAs by 2021. This is exacerbated by the fact that there exists many companies that are technologically unsophisticated and might be on course to downfall, and therefore, the effects caused by the pandemic by itself may not be the reason why such companies are defaulting. Hence, considering various scenarios, it would be ideal to operationalize the Insolvency Code instead of suspending it altogether. The IBC, prior to its suspension, efficiently dealt with the inconsistencies that led to severe delays in civil courts, and suspending it further would amount to taking a step backwards.
[Charu Joshi is a Second-Year Student at RGSOIPL, IIT Kharagpur. She can be reached at charujoshi.1608@gmail.com.]
[1] Siemens Gamesa Renewable Power Ltd. Vs Ramesh Kymal, IA/395/2020 in IBA/215/2020
[2] Gokuldas pargaria vs Parmanand Chaurasia , AIR 1967 MP 265
[3] Chandrasingh Manibhai vs. Surjit Lal Ladhamal AIR 1951 SC 199
[4] Arrowline Organic Products vs. Rockwell, IA/341/2020 in IBA 1031/2019
[5] Ibid.
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