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Deciphering IBC Ordinance, 2020 – COVID Period Defaults cannot be a Trigger for Corporate Insolvency Resolution Process

Time Stops for COVID Period Defaults

Ashish Makhija, Insolvency Professional
FCA, FCMA, LLM (India), LLM (USA)
Managing Attorney, AMC Law Firm
ashish@amclawfirm.com

Much awaited Ordinance suspending actionable sections of Corporate Insolvency Resolution Process was promulgated on 5th June, 2020. 

Reasons for Promulgation of Ordinance

  1. COVID-19 Pandemic has created uncertainty and stress for business for reasons beyond their control.
  2. India was under lockdown from 25th March, 2020 to combat COVID-19 and this added to disruption of normal business operation
  3. It is difficult to find adequate number of resolution applicants to rescue corporate persons who may default in discharge of their debt obligation.
  4. Distress is around due to unprecedented situation and corporate persons are being pushed into insolvency proceedings under the Code.
  5. Defaults arising on account of unprecedented situation to be excluded for the purposes of insolvency proceedings under the Code.

Here is the low down of the Ordinance:

  1. Section 10 A has been inserted in the Code suspending initiation of CIRP under sections 7, 9 and 10 for COVID Period Defaults.
  2. No application under sections 7, 9 and 10 can be filed for defaults arising on or after 25th March, 2020for a period of 6 months (COVID Period), that is, upto 24th September, 2020 (‘COVID Period Defaults’). 
  3. 3Central Government has retained power to extend COVID Period upto one year i.e. 24th March, 2021.
  4. The Ordinance provides permanent protection to corporate debtors for COVID Period Defaults. For such defaults, no application for initiation of CIRP can ever be filed by any creditor.   
  5. Initiation of CIRP on the basis of defaults that occurred prior to 25th March, 2020 is allowed.
  6. By the same analogy, the defaults arising after the COVID Period will entitle the creditors and corporate debtors to initiate CIRP.
  7. A question arises whether the application can be filed for initiation of CIRP if the COVID Period Default continues beyond COVID Period? Conjunct reading of Section 10A, proviso to Section 10A and Explanation manifests that COVID Period Default has to be expunged. Such a default cannot be a cause to trigger CIRP at any time. Logically, therefore, the quantum of COVID Period default has to be excluded as it is non-est in the eyes of law.  Put Simply, COVID Period Default = No Default. For initiating CIRP after the COVID Period, there should be a fresh default of minimum amount of Rs. 1 Crore. Nonetheless, the amount of default after COVID Period can be combined with default arising before 25th March, 2020.  
  8. The creditors and corporate debtors will have to spend their time in proving the exact date of occurrence of default as Adjudicating Authority will be bound to identify the timeline of occurrence of default.
  9. Another amendment in Section 66 protects the parties carrying on the business of the corporate debtor from order of contribution as COVID period default will not fall under the category fraudulent trading or wrongful trading.