Impact Of The IBC Amendment Ordinance, 2020 – The importance of “Default” and alternative remedies

Introduction – Ordinance suspending provisions of IBC

The Insolvency and Bankruptcy Code, 2016 was enacted with the primary object of consolidating, amending laws on reorganisation, insolvency resolution of companies in a time bound manner for maximization of value of assets, availability of credit and balance the interests of all the stakeholders.

The Central Government vide Notification dated March 24, 2020 had increased the pecuniary jurisdiction to rupees one crore. The Nation-Wide Lockdown on account of COVID-19 has severely impacted the economy and has inevitably disrupted creditor-debtor relationships.

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 dated June 5, 2020, has been promulgated suspending the provisions of section 7, 9 & 10 of the Code. The primary object behind the Ordinance is also to protect the interest of debtors who have experienced severe economic distress from being pushed into insolvency and secondly to exclude the defaults arsing on account of these unprecedented circumstances. In light of the Ordinance, what constitutes an event of “default” has gained unparalleled prominence.

The impact of the Ordinance!

1. The introduction of Section 10A imposes a specific bar on initiation of corporate insolvency resolution process under Sections 7, 9 and 10 for a default arising on or after 25^th March 2020 for period of six months (upto one year as may be notified);

2. The creditor cannot ever file an application under the Code for defaults which have occurred during such period. We have to see whether this portion of default can be cut through and pursued through other legal recourses;

3. With regard to cases in which corporate insolvency resolution process has already been initiated prior to 25^th March 2020, the Ordinance shall have no impact;.

4. Regarding cases where corporate insolvency resolution process has been initiated between the 25^th of March 2020 and 5^th June 2020, the application of the Ordinance retrospectively or prospectively;

5. The explanation reads that Section 10 A shall not be applicable to any default prior to 25^th March 2020; For example, where the event of default has occurred prior to 25^th March 2020 and due to the economic impact of the Lock-Down, the debtor has not achieved forecasted revenues in the subsequent six months to settle its liabilities, the debtor would not qualify for an exemption under the Ordinance and insolvency would be inevitable; In essence, the true purpose of the Ordinance may be lost for entities who have committed default prior to Lock Down but cannot take benefit of the suspension of proceedings or the economic duress during the lock down;

6. Is it possible that creditors as per the Purchase Order or Contract of Supply, hold raising of invoices and issue them post the completion of 6 months of the Ordinance to move the date of “default” as per their convenience to overcome the Ordinance;

7. In case a Creditor adopted the arbitration process or a civil proceeding during this period and obtains an award/decree, can this award/decree be used by the creditor to then institute proceedings under the IBC?

8. The date of “default” would be all relevant to determine the application of the Ordinance. In event of a secured loan, the date of default would be clearly attributed to the date when the debtor was declared as a “Non-Performing Asset”. For an unsecured loan, which provides for an instalment based payment, it has to be seen whether any default of instalment beyond the period of six months could be treated as the date of “default” giving the option to the creditor to invoke the provisions of the Code. In this context, it is of grave importance to refer certain judgments on what constitutes “default”. These judgments though are in the context of determining limitation for the purposes of the Code, it is our view that it would be directly applicable to the Ordinance.

Determine of “Default” – Judgments

In the case of Gaurav Hargovindbhai Dave, the Supreme Court held that the date on which the account of the debtor is classified as a “Non-Performing Asset”, the period of limitation starts ticking. Therefore, the classification of the debtor as a “Non-Performing Asset” would be “default” to determine as to whether a creditor can invoke the provisions of the Code and whether the debtor can claim an exemption under the Ordinance.

Further, in the judgement of Abhyudaya Co-Operative Bank Limited (“Abhyudaya Case”), the account of the debtor was classified as a “Non-Performing Asset” on 23^rd December 1999 and the Recovery Certificate was issued on 24^th December 2001. It was argued that pursuant to the issuance of the Recovery Certificate, it is continuous act of default and the bar of limitation would not be applicable. The Supreme Court while allowing the appeal, referred to the judgment of Shree Dnyaneshwar Maharaj Sansthan & Other, wherein it was held that

“...........It is the very essence of a continuing wrong that it is an act which creates a continuing source of injury and renders the doer of the act responsible and liable for the continuance of the said injury. If the wrongful act causes an injury which is complete, there is no continuing wrong even though the damage resulting from the act may continue. If, however, a wrongful act is of such a character that the injury caused by it itself continues then the act constitutes a continuing wrong. In this connection it is necessary to draw a distinction between the injury caused by the wrongful act and what may be described as the effect of the said injury......”.

Drawing reference to this judgment, the Supreme Court concluded that the “Recovery Certificate injured effectively and completely the appellants rights for the purposes of counting limitation”. The application of the Abhyudaya Case to the present Ordinance would be relevant for the purposes of determining “default” and whether continuous cause of action can be argued by creditors to exclude the application of the Ordinance. For example, in case of an unsecured loan wherein installments are defaulted prior, during and subsequent to the exemption provided as provided under the Ordinance, can it be contended by creditors (private financiers / Non-Banking Finance Companies) that there exists a continuing wrong which acquires the character of a continuing injury which is not complete and seek the invocation of the Code for defaults prior to and subsequent to the exclusion period and overcome the proviso to section 10 A?.

The Ordinance, alternate remedies?

The suspension of the Code may pave way for creditors availing alternative means to purely recover and enforce their claims. Parties may end up pursuing these remedies for the amounts exempted under the Ordinance or for the transaction as a whole. Parties may adopt the filing of “Suits” under the Commercial Courts Act, 2016 which provides for a time bound remedy. Normal recovery suits under the CPC, 1908 for claiming amounts under various heads. Summary Suits under Order XXXVII of the CPC, 1908. Summary Suits under the Commercial Courts Act 2016 and Arbitration proceedings would also be available to creditors. In cases of secured liabilities, the party may prefer invoking SARFAESI. In essence, the Ordinance would not in any manner affect the rights of a creditor and neither would the debtor be absolved of any litigation for recovery of monies.

Conclusion

The Ordinance is being introduced to protect the interest of the debtors from becoming insolvent, but, however, it may not end up completely absolving them from being subject to the Code. The financial strain has been so devastative that corporate entities may eventually be out of business and the saving period of the Ordinance may not be good enough to keep such entities alive. The interpretation of the term “default” and the provisions of the Ordinance would be subject to interpretation. To summarize, corporate houses may be protected from insolvency for a limited period, however, liabilities arisen during the pandemic period would be contested and may be payable.

The authors are Advocates practicing in the Madras High Court. The views expressed are personal.