Insolvency and Bankruptcy Code Bill (Second Amendment)
Lok Sabha passed the Insolvency and Bankruptcy Code (Second Amendment) Bill, which provides that insolvency proceedings against defaulting companies will not be initiated for at least six months starting from March 25.
• The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2020 was introduced in Rajya Sabha. It amends the Insolvency and Bankruptcy Code, 2016.
• The Code provides a time-bound process for resolving insolvency in companies and among individuals.
• Insolvency is a situation where individuals or companies are unable to repay their outstanding debt.
• The Bill seeks to temporarily suspend initiation of the Corporate Insolvency Resolution Process (CIRP) under the Code.
• It replaces the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 promulgated on June 5, 2020.
• Comparing the performance, the recovery rate under the Code was 42.5%, while under Lok Adalat (2018-19): the figure was 5.3%; DRT proceedings had led to 3.5% recovery and under the SARFAESI Act, 14.5% of the dues were recovered.
Prohibition on the initiation of CIRP for certain defaults
When a default occurs, the Code allows the creditors of the company or the company itself to initiate CIRP by filing an application before the National Company Law Tribunal (NCLT).
The Bill provides that for defaults arising during the six months from March 25, 2020, CIRP can never be initiated by either the company or its creditors.
The central government may extend this period to one year through notification.
The Bill clarifies that during this period, CIRP can still be initiated for any defaults arising before March 25, 2020.
Liabilities for wrongful trading
Under the Code, a director or a partner of the corporate debtor may be held liable to make personal contributions to the assets of the company in certain situations.
This liability can occur if despite knowing that the insolvency proceedings cannot be avoided, the person did not exercise due diligence in minimising the potential loss to the creditors.
The Resolution Professional is appointed to manage the resolution process upon the acceptance of an application for initiation of CIRP.
The legislation prohibits the Resolution Professional from filing such an application in relation to the defaults for which initiation of CIRP has been prohibited.
The amendments had a lot of grey areas, leaving loopholes for large debtors.
The worst casualty would be the MSME sector, which employed 1.2 million people and catered to large corporates.
The amendments would adversely impact the concepts of asset maximisation and entrepreneurship.
The government clarifies that the Code was not a recovery law.
The creditors, including MSMEs, had several other options to recover their claims.
The proposed amendments, brought in the form of an Ordinance on June 5, suspended the application of three provisions to prevent any company, stressed due to the COVID-19 situation, from being pushed into insolvency proceedings.
A proviso for further extension of six months has also been given. The initial six-month period ended on September 24.
A blanket suspension of the provisions of IBC 2016 without exploring alternatives to debt restructuring and debt recovery will further aggravate the economic crisis and increase financial distress. Corporate debtors would take an advantage, accelerate the debt during the time-period of suspension and would try to find a permanent escape out of the incurred debt. Therefore, it is important to look at the existing provisions in law regarding the resolution of debt that strikes a balance between the interests of all the stakeholders and introduce measures to fast-track the resolution process.