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Covid-19 And IBC: Unfolding The Loopholes In The Recent Amendments

In the past four months, Covid-19 is the primary reason for economic instability and uncertainty for business and companies globally, Indian companies are no exception. There is no legislation in India that is left unaffected. The government has taken measures to curb the problems in order to handle the unforeseen problems that every sector of the economy might face. To prevent the community transmission of COVID-19, the government first imposed the nationwide lockdown on 24th March 2020 for 21 days. Later, on 15th April 2020, phase two of lockdown is observed by the country till 3rd May 2020 which is again extended till 17th May 2020. Lockdown has brought India into a standstill and has brought the wheels of the Indian Judiciary almost to a grinding halt. Courts across the country are closed with only important cases being heard. Although it is hard to comment on the overall impact of the lockdown on the economy, one thing which is clear is that almost every business will face financial distress.

The outbreak of COVID-19 has caused hardship for all the sectors globally. The uniqueness of the virus has affected everyday life activities to many businesses at the global level. This outbreak has started an economic meltdown which has directly resulted in the breaking down of many sectors like, MSMEs, tourism, healthcare, automobiles, etc. Whichever business gets affected, one thing is clear that is overwhelming of courts with IBC matters. To curb the problems of overburdening of courts on one hand and yet solving the purpose of IBC as legislation is the need of the hour in today’s era. For this, the government of India has made amendments in the Insolvency and Bankruptcy Code, 2016 (IBC,2016) with the sole intention to have a humanitarian and economic approach. It is important to shift the gravity of the Code from reconstruction to the protection of the stakeholders in the corporate world in this extraordinary condition.

The effect of COVID-19 can be seen from the loss caused by the Indian economy. The All India Association of Industries had estimated a loss of Rs. 2,00,000 crore ($26.35 bn) by March 31, 2020 due to pan India lockdown. Ideally, the series of measures taken by the government of India to add layers of cushions from different viewpoints has been going on. The performance of the contract and the payments made by the party is immensely affected and the economy is disturbed. The valuation of the stock is declining at an alarming rate since the demand has decreased at the global level. Due to numerous such reasons, the financial and operational creditors will ultimately take the remedies available under the IBC and will approach the NCLT. If insolvency proceedings are initiated at a mass scale which is a big possibility, it will have a devastating effect on the economy. This is because the functioning of the companies will come to a standstill since the management of the corporate debtor switches in the hands of resolution professional and then he/she carries on the activities for the going concern of the business and as a result, the value-added mechanism of the corporate to the economy is stunted.

In order to avoid such a situation, the government has taken various measures to prevent the insolvency of the corporate debtors and initiation of insolvency proceedings on a large scale. It is important to protect MSMEs from going into insolvency because this will in turn give rise to unemployment in the nation. The need of the hour is not to continue in the same process but think about the solution afresh. It is time to confine the solution to mainly two perspectives- firstly, adopting such measures so as the situation is stabilized and secondly, provide such means and measures for cost management. There should be high-level scrutiny of cost management with the sole object that no party faces any loss. It is for these reasons that only the Government has amended IBC, 2016 in order to bring desired changes so as to take a pragmatic approach to design more abilities and protection. There are majorly three amendments that are made to curb the effects of COVID-19 in the year 2020. These are –

  • The MCA Notification No. S.O. 1205(E) dated 24.03.2020As a relief to the affected industries, on 24th March 2020, the Finance Minister Announced that the petition under Section 4(1) of IBC, 2016 cannot be filed unless the default is of Rs. 1 crore and beyond. Earlier as per Section 4(1) the minimum amount of default is Rs. 1 lakh. This change has been brought to force with immediate effect vide Notification dated 24 March 2020 by the Ministry of Corporate Affairs. This means that the Applications under Section 7, 9, and 10 can be filed only when the default is Rs. 1 crore or more. The Notification reads as “S.O. 1205(E).— In exercise of the powers conferred by the proviso to Section 4 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), the Central Government hereby specifies one crore rupees as the minimum amount of default for the purposes of the said section.”

  • The Supreme Court on 23rd March 2020 ordered that the lockdown period should be excluded for the purpose of counting the timeline. The NCLAT ordered the same on 30th March 2020. The guidelines state that “the period of lockdown imposed by the central government in the wake of Covid-19 outbreak shall not be counted for the purposes of the timeline for any activity that could not be completed due to such lockdown, in relation to a corporate insolvency resolution process.”

  • The government may consider scrapping the provisions under Section 7, 9, and 10 of the IBC 2016 for triggering the insolvency resolution process by a financial creditor, operational creditor, and promoter respectively if the situation continues beyond 30th April. The suspension will be made for six months.

The intention behind such amendments is to prevent the usage of such tools which lies in the hands of the financial creditor and operational creditor to create hurdles in the functioning of the economy. However, there are few loopholes in the implementation of these amendments. The first amendment that came on 24th March 2020 has affected all the stakeholders differently. While the work on the shoulders of the Insolvency Professional will be reduced for the time being since there will be less number of cases on IBC, on the other hand, the employees and workmen are majorly affected since it will be hard for them to reach the threshold of Rs. 1crore to file a case for unpaid salaries or remuneration. This is likely to lead to controversy because its impact is different on different stakeholders. This means that the increase in the threshold from Rs. 1 Lakh to Rs. 1 crore will somewhere be beneficial for the Corporate Debtor, MSMEs and will provide them a breather but the same will cause hindrance to the creditors, (especially the operational creditors), employees and workmen as they will not be able to utilize this remedy to regain the corporate and operational debt from the corporate debtor.

Operation Creditors are hit even worse. Section 7 of the IBC, 2016 provides for the initiation of corporate insolvency resolution process by the financial creditors and provision 7(1) provides that the financial creditor may by itself or jointly with other financial creditors may file an application for initiation of the corporate insolvency resolution process. However, unlike Section 7 of IBC, 2016, the provision under Section 9 of IBC, 2016 that deals with the initiation of the insolvency resolution process by the operational creditor do not provide for jointly filing of the application. This means that the interest of operational creditors will be at risk as they are not legally entitled to file an application for initiation of corporate insolvency resolution process as they will not be able to reach the threshold of Rs. 1 crore to prove the default. As a result, the operational creditors will now have to use the previous remedies available to resolve the dispute. More than one-third of the cases in IBC deal with the dispute of real estate. Not only this but the latest data suggests that as of 31st December 2019, there is a total of 3,312 cases filed so far, out of which a whopping 49.21% (1,630) cases have been filed by the operational creditors, it only implicates that most of the cases are that of the operational creditors, who naturally have a lower quantum of claims against the corporate debtor as compared to the financial creditors. Moreover, non- receipt of payment dues from corporate debtor would cripple operational creditor’s ability to clear economic burdens from their head and would have a shattering and devastating effect on the economy.

The Finance Minister on announcing the increase in threshold quoted that, “so that we can prevent the triggering of defaults against MSMEs“. Interestingly, on implementation of the amendment, it applies to all the sectors and not only MSMEs. Moreover, the Notification is silent about the condition post-COVID-19. This means that it is unclear if the threshold will again be reduced to Rs. 1 Lakh once this situation gets under control. Precisely, there is a lack of clarity if the notification is permanent or temporary in nature. Further, there has been confusion if the notification dated 24th March 2020 has a retrospective effect or prospective effect. Its effect on those applications that have been filed under Section 7, 9, and 10 but not admitted for initiation of the corporate insolvency resolution process is not clear. However, looking at the situation and agenda of the amendment which was passed to combat the effect of COVID-19 the question remains whether the interest of those applicants who had filled the application before this pandemic should be affected or not? This might lead to people backing off from the process of IBC to settle their dispute.

If we compare the steps taken by other jurisdictions across the globe with respect to IBC, we see that more or less the same precautionary steps have been taken. The threshold limit has been increased in countries like Australia and Singapore. While Germany has put a bar on the initiation of Insolvency proceedings for defaults occurring after March 1, 2020. All these are the precautionary measures adopted by other legislation across the globe.


The ecological and legal impact of COVID-19 is far-fetched. The measures adopted by the lawmakers and other organs of the government is a protective step keeping in mind the shortage of cash supply, ever-increasing rate of employment, constant failure in the functioning of the companies, the decline in the supply of services and resources, all this which leads to financial distress. However, if one critically analyses these amendments, it can be understood that although these amendments came as a savior they need further clarification. Measures should be adopted so that these amendments do not further produce certain counterproductive measures and unintended economic side effects. Like, suspension of Section 7, 9, and 10 of IBC would ensure blockage of creditors from resorting to IBC to recover their monies which would be a contrary movement to the core objective of IBC. Furthermore, it is crucial to protect the interest of all the stakeholders since they cumulatively reflect the economy of the country at the macro level.

According to the author’s view, one suggestion can be to adopt an approach of Intelligible differentia. An amicable ground should be laid down so as to have a balanced approach to ensure creditor rights and MSME business future are equally protected in the repercussion of IBC amendments. There is a need to think afresh and to look at the provisions of insolvency with a view of new jurisprudence. Assistance from banks and other financial institutions can be taken. These organizations can provide loans to distressed MSMEs with priority financing. It is now important that we have an ecological and humanitarian infrastructure so as to give maximum benefits to the parties on one hand and a minimum negative effect on the economy of the country on the other hand. A balanced approach should be welcome.

About the Author: Twinkle Khanna, student of Hidayatullah National Law University, Raipur (Chhattisgarh), an intern at Khurana & Khurana, Advocates and IP Attorneys. In case of any queries please contact/write back to us at [email protected]

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