The credibility of IBC turns into a question for creditors, in the onset of COVID19


The IBC structured in the year 2016 can be accurately compared to a newborn with teething problems, it would be wrong to call it substandard but that it is only learning, developing and has miles to go. It was formed with the intention to provide for a time-bound and convenient resolution of corporate bankruptcy. In simpler words, it provides for a procedure by which the creditors have an option to recover their money either by resolution and/or if that fails by the liquidation of assets of the company. This procedure is constructed in a manner that it allows the debtors’ ample time to explain any default caused and resolve the same and thereby encourage entrepreneurship. On the other hand, it also ensures that the creditors have a solution within a time period of 180 days, which can be extended for a maximum of 90 days.[1] This Act was aimed to help encourage foreign direct investment in the Indian economy, to protect the interest of workmen i.e. to exclude the amount payable to workers as provident fund, pension or gratuity from the debtor’s assets during liquidation.

IBC was still sensitive to interpretation when the COVID-19 pandemic emerged. The Government under the Finance Minister Nirmala Sitharaman, with the motive to benefit the companies or debtors and further encourage entrepreneurship suspended section 7, 9, and 10 of IBC for a period of 6 months which may be extended for another 6 months as per any future government instructions.[2] Section 7 was dedicated to the financial creditors, it gave them the power to claim their due amount; essentially these are the creditors who have a financial contract with the debtor. Section 9 delivers a similar power to the Operational Creditors, their contract with the debtor could be related to either any goods, services, employment or Government dues. Section 10 delivers the power to initiate corporate resolution when it is found necessary by the corporate debtor itself.[3] The result of suspending the above stated provisions is that no new proceedings for resolution and/or liquidation can be/ need to be initiated by either the financial creditor, the operational creditor nor the Corporate debtor from 25th March 2020 till the expiry of the suspension period as and when announced by the Government.

Along with this blanket suspension the minimum debt amount for causing a default was increased from 1lakh to 1crore rupees.[4] Also all debts that occurred due to the spread of the virus COVID-19 were removed from the definition of “default” for the purpose of IBC to apply. This was a positive step for the debtors but unfortunate for the creditors as they were left without any provision to get back the loaned amount for quite an extended period of time. This step puts them in a huge puddle of distress and has several repercussions:

1. The creditors might run out of money in the process, it would be a huge obstacle especially if it is a bank.

Chances are that banks would have to shut down if they fail to recover the loaned money. Recently our country has witnessed several banks being shut down or getting merged as they are saddled with bad loans. One big example of such merger would be of the United Bank of India (UBI) with Punjab National Bank. Before the IBC was enacted, in 2013 UBI reported a heavy loss due to bad loans from which it could never recover a result of which is the consequent merger.[5]

Coming back to the present times when provisions for debt recovery under IBC are suspended for a time period, it takes India back to a condition where creditors are left helpless. IBC has assumed a role of a double-edged blade it hurts the honest creditors too. Instead of easing business it slowed down one sector of business as the creditors are bereft of their money and its impact can be seen prominently on the balance sheet of the banks.

2. If an insolvent company is kept running merely because it can legally do so, in the process of it, the company might incur irrecoverable loss and further diminish its asset value.

The Economy of India has slowed down due to the lockdown imposed all over the nation as the outspread of the novel corona virus increased. The recent cyclones, earthquakes, and foreign investors retracting their money are an addition to its downfall. Amidst all of this, if applications under IBC for corporate resolution and/or liquidation are not permitted for an amount below Rs.1 Crore the financial institutions of the country will definitely suffer and it would have a deep impact on the economy of the country. It is impertinent to note that the whole country has adopted the Online mode as the new form of work and that in the latter half of 2020 the process of unlock has also begun however the blanket suspension has not been revoked nor changed as per the changing times. It is principally the creditors who are taking the major hit from all sides.

Furthermore, it is tacit that most cases before the NCLT are for a default under the amount of Rs.1 Crore, also there are several applications already pending before the NCLT. The delay in the approval due to the changes brought to IBC might result into buyers losing interest the reason being that the economy is already slow and the value of the deals and assets due to its non-performance for a long duration is depreciating. Consequently, the liquidation process would turn ineffective without interested buyers.

3. The orders delivered by the respective Company Law Tribunals were a cherry on top of the already existing sufferings of the creditors.

Considering that after a year the blanket suspension is removed, even then the problems with IBC do not die out. The Interpreting problems outlast it.

3.1. Submitting a default record along with a resolution application was made mandatory

By an order dated 12th May 2020 the NCLT made it mandatory to procure a default record from the “Information Utility” (IU) and present it along with any application for “Corporate Insolvency Resolution Process” (CIRP) under Section 7, therefore applicable on all financial creditors. In addition to that this order is also applicable for all the cases which are “pending for admission” under section 7, that is all applications that have been accepted but are not yet resolved completely would also be required to produce a default record from the IU before the next date of hearing. [6]

Section 7(3) enlists the required documents that are to be attached with the application. The requirements include an option to either furnish “record of default recorded with the information utility or such other record or evidence of default as may be specified.”[7]

It is to be noted that the “National e-Governance Services Ltd.” (NESL) is the only information utility in India authorized by the “Insolvency and Bankruptcy Board of India” (IBBI). Therefore, for every application for CIRP the creditors would be required to acquire a report from this one particular body, it would turn very inconvenient and the process would be unnecessarily delayed.

Secondly by denying the option to the financial creditors, NCLT altered the ground established by the Act. It puts a restriction on the scope of Section7. NCLT which receives its power in the form of delegated legislation put a restriction on the Parent Act, which is a fundamental error of law.[8] As a matter of fact the NCLAT itself had pronounced that “the powers to pass ad Interim orders cannot be exercised to pass an order on the administrative side which would have an effect of restricting the scope of a provision contained in the IBC.”[9]

Thirdly the Apex Court of India over several cases had already established the fact that the word ‘shall’ be read as a directory statement and not mandatory,[10] and also that when there is no specified consequence for any deterrence from a procedural provision, it is to be considered that such provision is only directory in nature and not mandatory.[11] Since the option provided under S.7 of the IBC does not come along with expressly stated consequences, it is prominent in the light of the above-cited judgments that S.7 is the only directory in nature and not mandatory. NCLT made a deep perversion from the established law by removing the option and declaring “default record” from IU as a mandatory step.


CONCLUSION

The IBC was formed with the noble intention to ease the process of business, cater to the needs of both creditors and debtors and help in obtaining a resolution and/ or liquidation in a time bound manner. The recent circumstances are hindering it from functioning sincerely and successfully. The economy of India suffered a setback; the Government altered the IBC to benefit the debtors and halted its partial functioning by adding a blanket suspension to it. Though this step was taken with a positive intention, it has a negative impact upon the Financial Creditors especially the banks. They are already incurring a substantial amount of loss every year and this step might serve as a head stone for their grave.

The circumstances are complex as there is no clarity. It is required on the part of the Government to shed some light on the halt imposed on IBC and the alternative procedure for the creditors to survive in such hard times.

IBC being a considerably new Act is tricky to interpret more so due to the lack of precedents. To top it the Company Law Tribunals who were bestowed with the power to act as an Adjudicating Authority, in the recent times erred in interpreting the Law and ventured into the domain which was exclusively shut for a body entrusted with Delegated Legislation. That is, a delegated legislature does not have the power to restrict the Enabling Act. This erroneous order of the Tribunal ignited several loopholes in the Code.

With several sections suspended, altered and violated without providing for any alternative procedure, the IBC 2016 is put at a stand between the devil and the deep sea. The plausibility of the Act is dim due to the difficult circumstances; the authenticity of the Act has reduced. One can only hope that the Honorable Court sees through the dust of the hard times and improve the Act in a manner to restore it to its earlier glory.


[1] s.238A [2] PTI, Govt. to suspend up to one year IBC provisions that trigger fresh insolvency proceedings, THE PRINT, 23 April, 2020. [3] The Insolvency & Bankruptcy Code, 2016, No. 31, Acts of Parliament, 2016 (India). [4] S.S. Rana & Co. Advocates, India: Threshold Limit Under IBC Enhanced To INR 1 Crore Amidst Corona virus Crisis, MONDAQ, 02 Apr., 2020 [5] Anand Adhikari, Gathering Storm, BUSINESS TODAY, (Mar 30, 2014) https://www.businesstoday.in/magazine/features/union-bank-of-india-crisis-rising-npas/story/204011.html [6] File No. 25/02/2020- NCLT, https://ibbi.gov.in/uploads/legalframwork/e3daa98bab56a6098c4e9356b93095bb.pdf [7] IBC, supra note 3 [8] Indian Young Lawyers Association and Ors. vs. The State of Kerala and Ors, (2019) 11 SCC 1 (India) [9] NUI Pulp and Paper Industries Pvt. Ltd. Vs. Ms. Roxcel Trading GMBH. Company Appeal (AT) (Insolvency) No. 664 of 2019 (India) [10] PT Rajan vs TPM Sahir, 2003 (8) SCC 498 (India) [11] Pioneer Urban Land & Infrastructure Ltd. vs Union of India, 2019 (8) SCC 416 (India)



Submitted by,

Kousi Das,

Symbiosis Law School, Hyderabad.