The Government of India in its go after economic reforms introduced the new Insolvency and Bankruptcy Code 2016 (IBC) to assist the manufacturers and other service providers with the recovery of bad debts. The Central Government issued a fresh Notification No. S.O. 3265(E) on 24th September 2020 stating that it is extending suspension of Sections 7, 9, and 10 of the IBC 2016. The suspension ensured that there won’t be fresh insolvency fillings for another three months by corporate creditors. The suspension was previously slated to expire on September 25, 2020.
Earlier, to provide relief from the economic crisis induced by the COVID-19 pandemic, the government had suspended filing of fresh insolvency against corporate debtors for six months. This was to provide relief to debtors whose businesses were hit hard by the lockdown introduced by the government. The suspension was brought by a special ordinance brought by the Central Government in wake of the COVID crisis.
The ordinance also gave the govt. authority to increase the fresh insolvency suspension up to at least one year. It must be noted that later in a parliament session Second amendment to the IBC 2016 was approved through the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2020 to replace the said ordinance.. The IBC Second Amendment Bill, 2020 was introduced on September 15, 2020 in Rajya Sabha which passed the bill on September 19, 2020. The Lok Sabha or lower house of the Indian parliament passed the bill on September 21, 2020 through a voice vote.
It amends the Insolvency and Bankruptcy Code, 2016. The Code ensures a time-bound resolution of insolvency for companies and their owners. Insolvency is defined as a situation where company owners or companies who are unable to pay their outstanding debt let the insolvency resolution professional liquidate their assets for debt payments. The said procedure is called company insolvency resolution process (CIRP) under the IBC Code. The amendment bill ensured that those companies who have become debt ridden due to corona won’t have to worry about insolvency procedures started against them for at least a year.
The norms of the IBC (Second Amendment) Bill, 2020 are listed as follows:—
a) It will insert a replacement section 10A within the Code to ensure temporary suspension of sections 7, 9 and 10 concerning any default arising on or after 25th March 2020 for 6 months or other such period. This period as of now will not exceed one year from the said date. However any further date of extension could be announced.
b) It has inserted a replacement sub-section (3), in section 66 of the Code to ensure that no application shall be filed by a resolution professional (IRP) under sub-section (2) of the Code. Any default related to initiation of the corporate insolvency resolution process against a debtor will remain suspended as per the second amendment 2020.
The Government recently decided to extend the suspension of Codes for additional three months till the last week of December through the newly inserted Section 10A. Concerning this, the Notification No. S.O. 3265(E) released on 24th September 2020 says-
“By exercising its powers conferred by section 10A of the IBC, 2016 (31 of 2016) [as inserted by section 2 of the Insolvency and Bankruptcy Code (Second Amendment) Act, 2020 (17 of 2020)], the Central Government hereby notifies a further period of three months from the 25th September 2020 for the needs of the said section,”
Benefits of the Code
The Insolvency & Bankruptcy Code was revamped in 2016 with new provisions to give immediate relief to small manufacturers, creditors, and micro-business entities that have given loans or provided services. These new codes bought extraordinary reforms in exchange for the previous provisions of the law where only the Debtor could initiate insolvency. The new codes allow a Creditor whose debt exceeds 1 Lakh to apply for initiation of the insolvency process. Here are the primary features of IBC 2016:
- With this code, even the creditor has the power to initiate the insolvency process (CIRP) on the debtor to recover his/her amount.
- The rights given to the creditors within the new code save them from the difficulty of approaching the general Court for recovery of debt.
- Because of this, the entire process of resolving debt issues has become efficient and therefore the cases are now disposed of in a specific period.
- The Limitation Period for filing the claim in NCLT is about 3 Years.
How this Code Works?
- A deadline of 10 days is allowed for the Debtors to settle the disputed amount with their corporate creditors.
- When the debtors are unable to repay the debt amount to the Creditors (Traders, Employees, or Manufacturers), an Insolvency Petition can be filed against them within the NCLT under Section 9 of the new codes.
- The new codes remove the necessity to file demand notice to the debtor before filing the petition for initiating insolvency procedure against them. If the default amount is over Rs. 1 Lakh, then the Creditors are entitled to initiate CIRP on the debtor by getting the order from NCLT.
The IBC Code specifies two stages for this-
1. Insolvency Resolution– The financial/operational creditors assess if there are chances of rescue & resurrection of the debtor’s business using its resources.
2. Liquidation- If the insolvency resolution to recover the debt isn’t working, then the creditors can plan to liquidate the business & distribute the corporate assets among themselves to recover the lost amount.
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