Article Category: Restructuring & Insolvency

What is the implication of the present lockdown) in the wake of Covid-19 outbreak on the timelines prescribed in respect of CIRP under the Code?

The IBBI has vide notification dated March 29, 2020 amended the CIRP Regulations by insertion of regulation 40C.  Pursuant to regulation 40C, the lock down period shall be excluded for the purpose of computation of the time frame for completion of the various activities forming a part of the CIRP. Regulation 40A provides a comprehensive list of the activities required to be undertaken to complete the CIRP along with timelines.

What is the implication of the lockdown on the time limit prescribed for completion of CIRP under Section 12 of the Code?

Section 12 of the Code provides that CIRP is to be completed within 180 days with an outer limit of 330 days (inclusive of litigation). The NCLAT vide its order dated March 30, 2020, extended the time limit for CIRP by excluding the period of lockdown ordered by the CG and the State Governments, including the period as may be extended either in the whole or part of the country, from the CIRP period, for matters where the CIRP has been initiated and is pending before any bench of the NCLT or is pending in appeal before the NCLAT. Thus, the period of lockdown shall not form a part of the period of 180 days contemplated for completion of CIRP. Please note that the extension is applicable only in cases where the CIRP has already been initiated and the timelines provided under the Code in all other cases remains sacrosanct. Further, the NCLAT has also ordered that all interim orders and stay orders passed by NCLAT under the Code shall continue until the next date of hearing.

What is the implication of the lockdown on limitation prescribed for filing of an application under the Code?

The Supreme Court (SC) vide its order dated March 23, 2020, extended the period of limitation until further orders for filing of petitions/applications/suits/appeals/all other proceedings, irrespective of the limitation prescribed under the general law or special laws, whether condonable or not, with effect from March 15, 2020. SC exercised its power under article 142 read with article 141 of the Constitution and declared that the order is a binding within the meaning of article 141 on all courts/tribunals and authorities. Hence, the limitation period stands extended with effect from March 15, 2020. The Registrar, NCLT, Delhi has also issued a notice dated March 24, 2020 clarifying that the order of the SC will be binding on all the NCLTs.

What is the implication of the lockdown on the implementation of a resolution plan which has already been approved by the adjudicating authority (AA)? Has any extension been granted in so far as timelines for implementation of an approved plan is concerned?

The Code mandates the resolution plan to provide for an implementation schedule which inter alia covers timelines for various payment obligations. Regulation 40C extends the timeline for any activity that could not be completed due to the lockdown, in relation to a CIRP subject to the overall time provided under the Code. However, regulation 40C does not extend the timeline for any actions to be taken upon the completion of the CIRP.  Once a plan is approved, the CIRP comes to an end. The actions contemplated above would arise only once the CIRP is completed and, therefore, the benefit of regulation 40C shall not be available in so far as timelines for implementation of an approved plan is concerned. The resolution applicant would therefore be required to adhere to the timelines contemplated in the plan for the various actions contemplated therein. The successful resolution applicant may be required to approach the NCLT for granting relief against strict adherence to the timelines contemplated in the plan.

Since there is no extension granted to the timeline contemplated for implementation of an approved plan, can the resolution applicant invoke Force Majeure? Further can a resolution applicant back out of a plan which has been approved or is pending approval by the CoC or is pending approval of the AA, in view of Covid-19?

Under the Indian laws, Force Majeure cannot be implied in a contract. Therefore, whether or not this relief will be available, will depend on whether the plan approved by the AA contains a specific provision on Force Majeure and also on the scope of the Force Majeure clause. A resolution applicant may be able to invoke rights of suspension or termination under Force Majeure (subject to the force majeure clause allowing such suspension/termination), if the clause specifies disease, epidemics, pandemics, quarantines or government intervention/declaration as force majeure events. In addition, presence of terminology such as ‘extraordinary circumstances beyond control of the applicant’ or similar phrasing in the plan may also be tested to trigger the clause for outbreak of Covid-19. In several landmark judgements, including in Satyabrata Ghose v. Mugneeram Bangur and Co. and Energy Watchdog v. CERC, SC has applied the following test to determine validity of Force Majeure events:

• Whether the event qualifies as force majeure under the contract?
• Whether the risk of non-performance was foreseeable and able to be mitigated?
• Whether performance is truly impossible?

In the absence of a specific provision in the plan, the availability of the relief of Force Majeure  would depend on  the ability of the resolution applicant to satisfy the test laid down under Section 56 of the Indian Contract Act, 1872 i.e. if the resolution applicant is able to factually demonstrate before a court that the purpose and underlying principles of the plan have been eroded/frustrated and the performance under the plan has become impossible. The essential element for a claim of frustration is impossibility of performance of its obligations and the party claiming frustration carries the burden of proof. In this context, it is important to remember that performance of the contract (in this context may be read as plan) becoming onerous or change in circumstances do not lead to frustration of the obligations in terms of the plan (Alopi Parshad and Sons Ltd. v. Union of India) – it will have to be proved on facts that the frustrating event has made implementation of the plan impossible. Similarly, the ability of the resolution applicant to back out from a plan already placed for approval before the CoC/approved by the CoC or pending approval of the AA would depend on the above-mentioned factors. Further, the possibility of invocation of the bid bond guarantee in the absence of a Force Majeure provision in the plan cannot be ruled out.

Resolution plans are usually unconditional and irrevocable and generally do not contain a Force Majeure clause.  In our view, therefore, it would be important to seek an extension of time for implementation of the plan from the NCLT and/or the CoC, as the case may be. In view of the nature of the pandemic, the courts should be lenient in matters relating to extension of time or suspension of performance during the lock down period. However, backing out of an approved plan in the absence of a specific provision of force majeure which clearly absolves the resolution applicant from performance, may be difficult to achieve.

Would the CoC be entitled to invoke the performance bank guarantee in view of non-implementation of the plan during the lockdown period?

This will depend on whether there is a Force Majeure clause in the plan which clearly covers the pandemic. In the absence of such provision, the CoC would, unless restrained by an order of a court of law, be legally entitled to invoke the performance bank guarantee. It is therefore important to enter into negotiations with the CoC for extension of time and/or seek directions from the AA for extension of timelines. Further, it may be advisable to apply to the AA for an order restraining invocation of the performance bank guarantee. The NCLT Principal Bench, New Delhi, Camp at Chennai is hearing urgent matters and an application of this nature should qualify as an urgent matter. In this context it may be stated that courts are usually reluctant to interfere in matters relating to invocation of the performance bank guarantee unless it can be demonstrated that such invocation is fraudulent or would result in irretrievable harm or injustice. In view of the ongoing pandemic, the courts are likely to take a view that invocation of the performance bank guarantee would cause irretrievable harm or injustice. In a situation where the performance bank guarantee has already been invoked, the applicant may approach the AA seeking relief against such invocation. The tribunal should be lenient in granting relief against such invocation in view of the pandemic.

What is the implication of COVID-19 on the threshold requirement for initiating CIRP or liquidation of corporate persons?

In order to prevent triggering of CIRP against the MSME sector, the ministry of corporate affairs has issued a notification dated March 24, 2020 whereby the threshold of default under Section 4 of the Code has been increased to INR 1 crore from the existing threshold of INR 1 lakh.

What are the extensions in timelines that have been provided under the IBBI (Insolvency Professionals) Regulations, 2016 (IP Regulations)?

The IBBI has pursuant to an amendment dated March 28, 2020 to the IP Regulations provided the following reliefs under the IP Regulations: (a) For the financial year 2019-2020, the resolution professional and/or insolvency professional entity (IPE) is allowed pay his/its annual fee for maintaining his/its registration with the IBBI on or before June 20, 2020 instead of April 30, 2020; and (b) If an individual joins or ceases to be a director or partner of an IPE during the period between March 28, 2020 to December 31, 2020, then IPE can intimate IBBI within 30 days instead of 7 days.

Are urgent matters being heard by the AA? Has any procedure been prescribed for hearing urgent matters?

The NCLT, Delhi on March 22, 2020 issued a notice to the effect that in case of unavoidable urgent matters, on application by the aggrieved party, through email to the registry NCLT Chennai, after service of notice to the other side, the Hon’ble Acting President sitting singly at Chennai will examine and pass necessary orders on Wednesday and Friday. Parties/counsels will not be provided an opportunity to make oral submissions. Application shall be verified by the respective counsel through affidavit by mentioning their bar enrolment number and the above process should not be abused. The application/communication shall be sent to the email id of Registrar, NCLT Chennai from the email id of respective counsel. Hearings are being conducted through video conference and issues being decided forthwith. On April 7, 2020, the NCLT Delhi has issued a further notice directing parties to file joint memo of written submissions to avoid delays, avoid filing reply and rejoinder and memo and to arrive at decisions quickly. However, in the event the situation demands grant of ad-interim relief by NCLT even before filing of the memo, non-filing of the memo will not become a hindrance to NCLT in granting such relief.

Have any guidelines been issued on what constitutes urgent matters?

The NCLT has not issued any guidelines on what constitutes urgent matters. However, it has in its notice dated March 22, 2020 stated that in so far as matters under the Code is concerned, extension of time, approval of resolution plan and liquidation will not be construed as urgent matters. These matters will be taken up as soon as regular benches start functioning, until such time such applications shall not be filed.

Authored by Dipti Lavya Swain

Keeping up with the needs of the fast-changing business environment, IBC has been amended for the fourth time since 2016 with multiple amendments under corollary laws in order to ensure a relentless spin of the wheels of the Indian economy

COVID-19 has retarded the momentum of wheels of the Indian economy, the corporates. The All India Association of Industries had estimated a loss of INR 2,00,000 crore (USD 26.35 bn) by March 31, 2020 due to pan India lockdown.

In order to prevent and absorb the effect of such huge losses and to respond to the dynamics of the business environment, which has been changing every second in the wake of the globally-spread WHO-declared pandemic, the central government seems to be responding in a structured manner by providing various sops, relaxation, extensions and amendments to the existing legal framework in the country.

Across the globe, it is observed that the corporates which were in the pink of financial conditions have witnessed a sharp decline due to COVID-19.

Supply chains are disrupted, valuation of the stocks on bourses have substantially decreased amidst global down selling, and the valuation of businesses have fallen steeply.

In such a scenario, it was viewed that insolvency resolution processes under the (Indian) Insolvency and Bankruptcy Code, 2016 (IBC) also needed added layers of cushion from different viewpoints.

Due to the standstill caused by the lockdown in the country, the performance of contracts and payments thereof is manifestly disrupted. This is a trigger event for creditors, both financial and operational, to initiate insolvency against such corporate debtors.

If insolvency proceedings are initiated at a mass scale, then it can have a devastating impact on the economy, because, during the corporate insolvency resolution process (CIRP), the management of the corporate debtor switches hands with the resolution professional and he/she only carries out such activities that are essential for running the businesses as a going concern.

Value addition to the businesses, which is a key driving force behind any economy, is stunted during the CIRP. Also, it has been largely observed that CIRP has become a tool, especially in the hands of the operational creditors, to recover the debt instead of resolving the insolvency of the corporate debtor.

In order to avoid such a situation where corporates are forced into insolvency proceedings, the Finance Minister Nirmala Sitharaman has announced that if the current situation continues beyond April 30, 2020, then it may consider suspending Sections 7, 9 and 10 of the IBC for a period of six months, thereby disabling the financial creditors, operational creditors and promoters from initiating insolvency proceedings against companies.

It will be very interesting to watch out for what happens next, especially if and when the lockdown is lifted, either fully or partially, on April 1, 2020, and these will be questions that will float around for the government to answer and action–How likely is it that there will be a suspension and what will be the criteria for such suspension? What about the large scale and long term impacts such suspension will create? Who all will be most benefitted? Will this end up benefitting only specific sects like the promoters, lenders, or contractors?

Currently, the government has taken certain steps to prevent the initiation of CIRP at a large scale and to avoid any frivolous filings. The Ministry of Corporate Affairs vide a notification dated March 24, 2020, has increased the threshold for initiating the insolvency resolution process from INR 1,00,000 (USD 1,300) to INR 1,00,00,000 (USD 130,000) under Section 4 of the IBC.

This amendment is likely to also help medium and small industries who have been hit the hardest by COVID-19. However, on the flip side, this amendment will adversely impact the ability of operational creditors to initiate CIRP, since the minimum default amount is now ten times higher than the previous minimum default limit. Once the economy sails through the slowdown caused by COVID-19, the government should ponder upon reducing the limit to a lower amount, so that IBC does not merely remain as a toothless tool at the hands of operational creditors.

Amidst the nationwide lockdown on account of COVID-19, the acting president of the National Company Law Tribunal (NCLT) notified that all benches of the NCLT shall hear only inevitable urgent cases with prior notification on email from applicants.

Insofar as matters not construed as urgent, e.g. pertaining to the extension of time, approval of resolution plan and liquidation under IBC, the Insolvency Bankruptcy Board of India (IBBI) has, vide notification dated March 29, 2020, amended the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 granting certain relaxations.

Pursuant to the amendment, Regulation 40C has been inserted, which is a special provision in relation to meeting of the timelines in pursuance of CIRP.

According to Regulation 40C, the period of lockdown shall not be counted for the purposes of calculation of timeline for any activity that could not be completed due to such lockdown, in relation to a CIRP.

Such an amendment was the need of the hour, as the common investor sentiment amidst the lockdown is to protect the liquidity, impacting and stalling the bids under the CIRP, causing delays in the bid process and posing challenges to the CIRP, the insolvent companies and their resolution professionals.

This relaxation also helps avert negative consequences and follow-on actions due to non-compliance which also leads to additional expenditure by the parties involved. However, this amendment is effective from March 29, 2020, thereby looming confusion around the period that shall be excluded for the purpose of calculation of timelines pursuant to CIRP. The intelligible differentia for exclusion of the period of lockdown from March 25, 2020 to March 28, 2020, for calculation of timelines is unclear. It is imperative for IBBI to issue a corrigendum, explicitly affirming that the aforementioned period of three days shall be excluded from the calculation of CIRP timelines.

The Insolvency and Bankruptcy Code (Amendment) Act, 2020 (Amendment Act), (notified on March 13, 2020, by the Ministry of Law & Justice by way of an amendment with retrospective effect from December 28, 2019, due to a prior Ordinance), vide amending Section 5(15) of IBC, authorised the government to notify any debt as interim finance, which means such debts as may be notified by the government shall be considered as priority loans for repayment purposes.

In the wake of COVID-19, various banks have already extended emergency credit lines to ease the liquidity crisis of the borrowers. Once the lockdown is removed and businesses are resumed, if borrowers default in repayment of the emergency credit, the banks may face immense liquidity crisis. In order to keep the banks afloat post resumption of normal economic setup, the government should consider exercising its power under Section 5(15) of IBC and thereby, notifying these emergency credit lines as interim finance, so that any unnecessary defaults in repayment of emergency credit are prevented.

An insight into the 2020 amendment:

Prior to the aforementioned amendments in response to COVID-19, the IBC was revamped vide Amendment Act, to make the resolution process more effective and to promote ease of doing business. Key insights on the Amendment Act have been summarised below:

Section 32A: Liability for offences committed prior to CIRP

Section 32A has been introduced with the aim to protect the successful bidders, the corporate debtor and its assets from any action against offences committed by previous promoters or officers in charge of management or control of the affairs of a corporate debtor, prior to commencement of corporate insolvency resolution process (Management Offences).

This amendment grants immunity to the corporate debtor against the management offences and the corporate debtor shall stand discharged from the date of approval of the resolution plan. This benefit shall be available only if the management or control of the corporate debtor changes, which means that the defaulting management and promoters or the abettors of offence (as identified by the investigating authority) shall no more be in charge of managing or controlling the affairs of the corporate debtor. However, this immunity is not provided to the persons who committed default, hence, the officers of the corporate debtors, such as designated partner of an LLP, officer in default of a company, officer in charge of or responsible for the conduct of the business of the corporate debtor and officer associated with the corporate debtor in any manner, shall continue to be prosecuted and punished.

Subject to the change in management or control of the corporate debtor, the property of the corporate debtor covered under the resolution plan is also protected from any action, such as seizure, attachment, retention or confiscation, that otherwise may be taken against such property in relation to the offence committed prior to the commencement of CIRP. Such immunity shall also be provided to the persons who may acquire the property under the CIRP process or liquidation or liquidation process under IBC.

Section 14: Government authorisations and essential supplies during moratorium

According to amendment in Section 14: (a) if the payments are duly made for the use or continuation of any license, permit, quota, concession, registration, clearances or a similar grant or right during the moratorium period then such license, permit, quota, concession, registration or clearances shall not be suspended or terminated on account of insolvency; (b) moratorium shall not be applicable such transactions, agreements or arrangements as may be notified by the central government in consultation with financial sector regulator or any other authority; and (c) IRP and the resolution professional, if consider supply of any goods or services to be essential for preserving the value of the corporate debtor and managing its operations as a going concern, then supply of such goods and services shall not be interrupted in any manner, subject to IRP or RP making payment towards such essential supply.

The objective of this amendment is to smoothen the CIRP and ensure that the resolution plan or management of the corporate debtor is not hampered for want of government authorisations or essential goods and services.

Section 5(15): Power of central government to notify interim finance

According to amendment in section 5(15), any debt notified by the central government can also be included in the definition of interim finance. In pursuance of this amendment, the central government vide notification dated March 18, 2020, has notified debts raised from the Special window for Affordable and Middle-Income Housing Investment Fund I to be included within the meaning of interim finance.

Interim finance is the debt which is treated as a priority loan for the purposes of repayment. The effect of this amendment is that the central government may notify any debt as interim finance, wherein such debt shall be repaid before all other debts of the corporate debtor.

Section 7: Increase in amount of minimum default for initiating CIRP

In addition to the  criteria of the minimum amount of default being INR 1,00,00,000 (increased from INR 1,00,000, vide notification dated March 24, 2020), certain additional requirements are to be adhered to by the following financial creditors: (a) real estate allottees; and (b) security or deposit holders represented by a trustee or agent, prior to initiating CIRP against a corporate debtor. Applications by these financial creditors should be filed jointly by at least 100 such creditors or 10% of their number, whichever is lower.

The objective behind this amendment is to avoid frivolous litigations against corporate debtors. As of September 2019, of the 10,860 IBC cases pending with NCLT, 1,821 cases (17%) have been filed by homebuyers. However, this amendment may also impede the redressal of grievances of the genuine real estate allottees. The operation of part of the enactment pertaining to the real estate allottees has been stayed by the Supreme Court vide its order dated January 13, 2020.

Conclusion:

Keeping up with the needs of the fast-changing business environment, IBC has been amended for the fourth time since 2016 with multiple amendments under corollary laws in order to ensure a relentless spin of the wheels of the Indian economy.

It will be a great wait and watch if the government eventually relents to industry demands for suspension of key provisions of the IBC for as long as six months. Irrespective, these amendments are likely to smoothen the insolvency resolution process and may prevent the corporates from sailing close to the wind during this period of recession that India Inc. is set to face amidst the lockdown.

Source: Business Today

Author by Faranaaz G Karbhari

Introduction:

On March 13, 2020, the Insolvency and Bankruptcy Code (Amendment) Bill, 2020, which  was passed by both the houses of the Parliament, received the President’s assent to become a law in the form of the Insolvency and Bankruptcy Code (Amendment) Act, 2020 (“Amendment Act”). The Amendment Act aims to streamline the Corporate Insolvency Resolution Process (“CIRP”) and provide protection to new owners of a loan defaulter company against prosecution for misdeeds of previous owners. By way of the Act, The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 was also repealed.

Salient Features:

• Insolvency commencement date:

The proviso to Section 5(12) of the Insolvency and Bankruptcy Code (“Code”) has been deleted thereby making it clear that the insolvency commencement date would be the date of admission of an application for initiating CIRP by the National Company Law Tribunal (“NCLT”) under Sections 7/ 9 or 10, as the case may be.

Earlier, the proviso to Section 5(12) (which was inserted in the Code with effect from 6^th June 2018) states that where the interim resolution professional (“IRP”) is not appointed in the admission order, the insolvency commencement date shall be the date on which such IRP is appointed by the Adjudicating Authority.

• Prescribing a threshold for initiating Resolution Process:

Section 7 of the Code has been amended to the extent that a threshold for initiating Resolution Process for a certain category of financial creditors has been put in place. The Proviso’s 1 and 2 to this section elucidates that the financial creditors who are allottees under a real estate project; and financial creditors falling in the category of creditors referred to in Section 21(6A) (a) and (b), may initiate CIRP against the corporate debtor before the adjudicating authority by filing a joint application comprising of not less than 100 such allottees under the same real estate project or not less than 10% of the total number of such allottees under the same real estate project, whichever is less.

• Corporate debtors allowed to initiate CIRP against other Corporate debtors

By way of the Amendment Act, explanation II has been added to Section 11 of the Code which states  that corporate debtor as referred to in clauses (a) to (d) of Section 11 of the Code will now be permitted to initiate CIRP against other corporate debtor’s, which was not allowed earlier.

• No suspension/ termination of licenses, permits etc. issued by the Government, during moratorium

An explanation to Section 14 of the Code has been inserted in order to clarify that a license, permit, registration, etc. given by the Central Government or any other authority shall not be suspended or terminated on the grounds of insolvency, subject to there being no default in payment of current dues arising for the use or continuation of the license, permit, etc. during the moratorium period.

The changes have been made again for keeping the thrust of going concern and to maximise the value of a corporate debtor.

• Continuance of supply of goods/ serviced critical to Corporate Debtor

It is common knowledge that as per Section 14(2) of the Code, the supply of essential goods or services to the corporate debtor could not be terminated or interrupted during moratorium. With the new amendment, sub-section (2A) has been inserted which states that where the IRP/ IRP considers the supply of goods/ services critical to protect and preserve the value of the corporate debtor and manage the operations of such corporate debtor as a going concern, then the supply of such goods or services shall not be terminated or interrupted during moratorium, except where the corporate debtor has not paid dues arising from supply during moratorium.

• Appointment and tenure of IRP

Earlier, the Adjudicating Authority had to appoint an IRP within 14 days from insolvency commencement date. In light of the amended Section 16(1), the IRP must be appointed on the date which the insolvency has commenced, itself.

• Liability for prior offences

A new section namely, Section 32A has been inserted by way of the Act which provides that the corporate debtor will not be liable for an offence committed prior to the commencement of CIRP from the date the resolution plan is approved by the Adjudicating Authority. However, the approved resolution plan must result in change in the management or control of the corporate debtor as prescribed in Section 32A. The said Section further discharges the corporate debtor from any prosecution that has been instituted against it during the CIRP on the approval of the resolution plan, however, the officer who is default in case of a company and a designated partner in case of an LLP shall continue to be liable for any such offence committed by the corporate debtor. In respect to such scenario, this Section also safeguards the property of the corporate debtor from actions such as attachment, seizure, retention or confiscation of such property.

Conclusion

In the years since the act came into force and with the changing times and scenario there has been a need felt to give priority in repayment to last mile funding  to corporate debtors to prevent insolvency i.e in case the company goes into corporate insolvency resolution process or liquidation. The amendment was necessary in order to prevent potential abuse of the Code by certain classes of financial creditors. The amendment also provides immunity against prosecution of the corporate debtor, action against the property of the corporate debtor and the successful resolution applicant subject to fulfilment of certain conditions. The amended act was needed in order to fill the critical gaps in the corporate insolvency framework. The act seeks to remove bottlenecks and streamline the corporate insolvency resolution process.