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The IBC (Amendment) Ordinance, 2020: Need & Impact

AUTHOR- Sakshi Kashyap, Faculty of Law, Delhi University.

1. Introduction

The Insolvency & Bankruptcy Code, 2016 is the biggest economic reform after GST. It consolidates, amends and brings harmony between all existing laws governing Insolvency resolution of Companies, Partnership firms & Individuals. It was framed with an intention to simplify the Process of Insolvency & Bankruptcy proceedings in India. However, this concept is no novel, there have been laws prior to the code, but no specific act dealt with all the issues.

The Insolvency and Bankruptcy Code, 2016 repealed various existing laws such as:

  1. Presidency Towns Insolvency Act,1909

  2. Sick Industrial Companies Act,1985

Whereas, apart from Acts stated above, there are various provisions of different acts such as Companies Act, 2013, Sick Industrial Companies Act 1985, Recovery of Debts Due to Banks and Financial Institution Act, 1993, and Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 which had overlapping and contradicting views were also abrogated.

2. Need for IBC, 2016

When lender records a debt as a Non-performing Asset (NPA), it not only affects the financial performance of the bank but also affects the economy. Banks mainly make money from the interest they charge on loans, and when they are unable to collect the owed interest payments from NPLs, it means that they will have less money available to create new loans and pay operating costs. The money represents an income that is potentially lost, and it affects the profitability of the lender. Not only does it affect the lender, but it also leaves potential borrowers with fewer options to get loans from the lender.

In this way it barred the funds to recycle and weaken the bank’s revenue. Whereas, as the NPA of the bank rises it brings scarcity of funds in the Indian markets due to which few banks will be willing to lend if they are not sure of the recovery of their money. This will lead to lack of confidence in the market and the price of loans, i.e. the interest rates will be increased. These rates will directly impact the investors who wish to take loans for setting up infrastructural, industrial projects etc., this will lead to low demand of funds and will impact growth rate, which in the end will result in Inflation.

3. How this global pandemic has affected our economy?

The economic impact of the 2020 coronavirus pandemic in India has been largely disruptive. India's growth in the fourth quarter of the fiscal year 2020 went down to 3.1% according to the Ministry of Statistics. The Chief Economic Adviser to the Government of India said that this drop is mainly due to the coronavirus pandemic effect on the Indian economy. Notably India had also been witnessing a pre-pandemic slowdown, and according to the World Bank, the current pandemic has "magnified pre-existing risks to India's economic outlook". In India there was a complete lockdown for almost 2 months and majority of the nation is still not resumed. Buyers only prefer to buy essentials, which has resulted in demand drop. Travel and Restaurant Industry can be seen most affected. Statistics stated above clearly shows a downfall in overall economy.

4. Need of the hour

Firstly, the increase in the threshold amount for initiating the Corporate Insolvency Resolution Process (CIRP) u/s 4 from one lakh to one crore in order to protect the interests of MSME’s that form the major chunk of our economy. Secondly, The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020

10A. Notwithstanding anything contained in Sections 7, 9 and 10, no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25th March, 2020 for a period of six months or such further period, not exceeding one year from such date, as may be notified in this behalf.[i]

On 5th June 2020, an Ordinance was promulgated by the President of India to further amend the IBC, 2016. This global pandemic has chained down the world and the global economy. Due to this, Indian economy can also be seen harshly affected. The above ordinance has been introduced temporarily to act as a breather for Corporate people affected considering the global crisis. “Amendment is proposed to give a six-month window. Lenders/creditors during these six months, under the current impact due to COVID-19, cannot drag a fresh case of default for bankruptcy. The move will be announced formally later with the comprehensive economic package,” a government official said.

i) Why ordinance is needed?

· Due to ongoing crisis the global economy has been struggling due to uncertainty and stress created by the virus. The Large-scale disruption in business activities can be seen.

· To extricate corporate persons which are experiencing uncertain circumstances and are pushed into insolvency proceedings under IBC.

ii) What this Ordinance consist?

Section 10A has been added to suspend Section 7, 9 and 10 for a period of six months from March 25th to 20th September 2020. Whereas, this period can be extended up to 1 year i.e. March 24, 2020. Also, Sub-section (3) has been added to section 6, that barred the Resolution Professional from filing application u/s 66(2)

Purpose of Section 10A:

a. Breather to companies,

b. Chance to recovery to the debtor,

c. Reduction of cases before Adjudicating Authority, and

d. Speedy disposal of pending cases

iii) Effect

The proviso to section 10A specifies that no application ‘shall ever be filed’ for initiation of CIRP of a Corporate Debtor for the said default occurring in the said period. This section has been introduced to mitigate the distress of the Debtor as the Creditor cannot hold Debtor liable for the default arising during said period. However, the said section is temporary in nature and does not provide the Debtor a waiver for their debt obligations.

REFERENCE- [i] Section 10: Initiation of corporate insolvency resolution process by corporate applicant, IBC Laws, available at https://ibclaw.in/section-10-initiation-of-corporate-insolvency-resolution-process-by-corporate-applicant-chapter-ii-corporate-insolvency-resolution-processcirp-part-ii-insolvency-resolution-and-liquidation-for-corp/.




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