Suspension of initiation of fresh CIRP for six months for defaults arising on or after 25th March 2020

The nationwide lockdown due to Covid-19 has severely impacted the business, financial markets and economy all over the world, including India and created uncertainty and stress for business for reasons beyond their control. Due to Covid-19 Pandemic the nationwide lockdown has added to disruption of normal business operations and also disrupts the  relationship between debtors and creditors.

The Government of India through an Ordinance named Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 dated 05th June 2020 inserted Section 10A and sub-section (3) to section 66 to the IBC, 2016.

Silent Features of Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 dated 05th June 2020

1. This Ordinance may be called the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020.
2. It shall comes into force at once.

The Ordinance covers two major aspects : default and wrongful trading.

Section 10A: Suspension of initiation of corporate insolvency resolution process.

[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.]

Further, the Ordinance has inserted sub-section (3) to section 66 as under:

(3) Notwithstanding anything contained in this section, no application shall be filed by a resolution professional under sub- section (2), in respect of such default against which initiation of corporate insolvency resolution process is suspended as per section 10A.

To understand the relevance of Section 66(3), we have to know about section 66(2), for this purpose section 66 (1) and 66 (2) is also reproduced here below:

Section 66: Fraudulent trading or wrongful trading

66. (1) If during the corporate insolvency resolution process or a liquidation process, it is found that any business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose, the Adjudicating Authority may on the application of the resolution professional pass an order that any persons who were knowingly parties to the carrying on of the business in such manner shall be liable to make such contributions to the assets of the corporate debtor as it may deem fit.

(2) On an application made by a resolution professional during the corporate insolvency resolution process, the Adjudicating Authority may by an order direct that a director or partner of the corporate debtor, as the case may be, shall be liable to make such contribution to the assets of the corporate debtor as it may deem fit, if—

(a) before the insolvency commencement date, such director or partner knew or ought to have known that the there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process in respect of such corporate debtor; and

(b) such director or partner did not exercise due diligence in minimising the potential loss to the creditors of the corporate debtor.

Conclusion: The ordinance clarifies that the suspension will not apply for defaults committed prior to 25th March 2020. The ordinance shall have no impact in case of CIRP has been initiated prior to 25th March 2020. Further The Ordinance barred the resolution professionals from initiating fraudulent trading or wrongful trading application against directors of companies where the IBC process is suspended due to Covid-19 Pandemic.

Note: The Central Government has amended the minimum amount of default from existing Rs. one lakh to Rs. one crore to be considered for  section 4 of the Insolvency and Bankruptcy Code, 2016 w.e.f. 24th March 2020. 

Compiled by :

CA IP Mukesh Mittal

B.Com., FCA

Insolvency Professional

Independent Director

Certified Concurrent Auditor

9215536951, 9813340495

ca.mukeshmittal@gmail.com

https://camukeshmittal.blogspot.com

DISCLAIMER: The Author have taken utmost care while drafting the article but it may occur that certain error creeps in. This article is for academic purpose and should not be treated as a professional advice. The readers are advised to refer the Bare Acts and Rules before making any judgment.