Covid-19 and IBC Proceedings – 10 key considerations

Restructuring & Insolvency

Covid-19 and IBC Proceedings – 10 key considerations

By on 02 Apr 2020


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.