IBC Amendment Ordinance, 2020

BY Realty Plus

The suspension of IBC could prove very burdensome for homebuyers.  

Siddharth Batra & Abhinav Sood, Satram Dass B & Co.

  The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 (‘Ordinance’)  has been  passed as a preventive and protective step, with the objective of enabling and safeguarding the corporate debtors who may default in discharge of their obligations and are experiencing distress on account of unprecedented situation. The Ordinance aims to provide stability to companies experiencing financial difficulties due to the coronavirus by enabling them to take advantage of Atma Nirbhar Bharat Package aid or to make financing or restructuring arrangements with creditors and capital providers. Another rationale for bringing the Ordinance paucity of resolution applicants to rescue the corporate debtors as most of the Corporate Persons (prospective resolution applicants) are under stress in the wake of Covid-19. Therefore, there may not be many resolution applicants who would be interested in infusing capital for revival of the Corporate Debtor. Resultantly, most of the corporate debtors will be pushed into premature liquidation wherein, the assets would have distress sale, realizing abysmally little for creditors. Consequently, the object of IBC of revival of a distressed Corporate Debtor and maximization of the value of the assets would fail.   Amendments The Ordinance inserts two new sections under the principal Act (i) Section 10A and (ii) sub-section 3 to Section 66 of the Principal Act. Section 10 A introduced in the principal act in effect suspends initiation of corporate insolvency resolution process contained under Section 7 which empowers a financial creditors to initiate it, Section 9 initiation by operational creditors and Section 10 initiation by the corporate debtor of IBC for any default arising on or after March 25.03.2020 when lockdown began for six months or such further period as may be notified for this purpose.  However, this period cannot exceed one year that is, upto 24.03.2021. The Ordinance specifically clarifies that CIRP can be initiated for the debt defaults prior to 25.03.2020. Furthermore, the Ordinance by way of a proviso specifies that no Application shall "ever" be filed for initiation of CIRP against a corporate debtor for the said default occurring during the said period (6 months or extendable up to 1 year). In our view, this proviso shall be read in a manner to mean that no suspension shall operate for filing of insolvency proceedings in relation to default occurring beyond the stipulated period of suspension. In all likelihood, the interpretation of the proviso will be tested by the Adjudicating Authority in near future. Understandably, the new sub section (3) to Section 66 of the Principal Act stipulates that a resolution professional cannot initiate an application for fraudulent trading or wrongful trading against directors of companies in respect of defaults against which initiation of CIRP is suspended as per Section 10 A.   Suspension of corporate insolvency resolution IBC is a special legislation which is created to consolidate and amend laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals, in a time bound manner The code has proved to be a game changer till date as it has revolutionized the business scenarios in the country and has provided a specific legislation which focus on time bound and expeditious resolution for financial debts. IBC has reduced the time taken for winding up companies in India from over four years to less than a year.  It is also estimated that IBC through its faster resolution mechanism has a potential to address around Rs 10 trillion of non-performing assets (NPAs) in India’s banking system. Therefore, IBC has been the profuse choice of every creditor when it comes for recovering or restructuring of debts. Though IBC has proved to be one of the most expeditious mode for resolution of the default however, the insertion of the Section 10-A has forced the creditors and the legal fraternity to find suitable alternative which may possess the potential to address the need of creditors without leading to the lengthy time taking litigation.   Real Estate (Regulation and Development) Act, 2016 / Consumer Protection Act 2019 One of the biggest beneficiaries of the IBC were home buyers who were considered as the financial creditors. IBC has been considered as the quickest forum of providing relief to such homebuyers. The suspension of IBC could prove very burdensome for such homebuyers as they have been already stressed by the developer due to default in providing possession despite receiving huge portion of costs. However in amidst of such crisis Homebuyers can approach RERA authorities (Real Estate Regulation Act). The Act provides protection to the homebuyers against the malafide practices followed by the developer. The act prescribes that the complaint under RERA shall be disposed within 60 days from date of filing, hence provides a time bound relief .Similarly Consumer Commission established under Consumer Protection Act 2019 can also be an alternative remedy. These two statues can cater to the need and requirement of homebuyer however there are few major concerns due to which they lack behind IBC, but they can still provide as an alternative to IBC in times of distress.   SARFAESI Act: an alternative to IBC The Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 also known as the SARFAESI Act can be considered as an alternative to IBC.   This Act though relates to many provisions of IBC, however it has a unique mechanism for secured creditors to claim back their invested amount. The whole procedure of recovery under the Act is regulated by RBI. The process of recovery under the Act is undertaken with the assistance of a District Magistrate. This Act provides an elaborative mechanism for the secured creditors to recover the debt owed to the borrowers which may be corporate entities. The mechanism under the SARFAESI Act does not require intervention of courts for enforcement of security interests by a secured creditor. The Act empowers the secured creditor to acquire the possession of the secured Assets, takeover the management of borrower’s business, appoint any person to manage the affairs of the secured assets and to receive the money of any person who owes the borrower an amount who may discharge the secured creditor’s debt within 60 days if any borrower fails to discharge his liability of repayment of any secured debt. Though the Act has very limited application  which is restricted to secured creditors only but SAEFEASI can be considered as an alternative for IBC during the operation of Section 10-A by the secured creditors.

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