ANALYSIS OF THE INSOLVENCY & BANKRUPTCY (SECOND

AMENDMENT) BILL, 2020

Author: Aditi Kukreja

Introduction

The Insolvency & Bankruptcy (Second Amendment) Bill, 2020 was introduced
in Rajya Sabha and was passed on September 21, 2020. This bill seeks to amend
the Insolvency & Bankruptcy (Amendment) Ordinance, 2020 & Insolvency &
Bankruptcy Code, 2016.

One of the objectives of the Code is to determine the solutions for Non
Performing Assets. This Code provides for the collective mechanism for
resolving the insolvency within the framework of equity and fairness to all the
stakeholders and to preserve economic value in the process. It prescribes for the
process that is time-bound for resolving Insolvency in companies as well as
among the individuals. Insolvency occurs when the companies or the individual
are unable to pay their Outstanding Debts. The Insolvency & Bankruptcy Code
provides for the National Company Law Tribunal, Debt Recovery Tribunals and
creation of Insolvency and Bankruptcy Board of India which will govern the
Insolvency & Bankruptcy Processes in India.

The Insolvency & Bankruptcy (Second Amendment) Bill, 2020 seeks to

suspend the Corporate Insolvency Resolution Process also known as CIRP and
is mentioned under Chapter 4 of Insolvency & Bankruptcy Code, 2016. This
Bill replaces the Insolvency & Bankruptcy (Amendment) Ordinance, 2020
which was passed by the Indian parliament on June 5, 2020.

In light of the COVID-19 pandemic, the World Bank has identified two
challenges for an Insolvency Framework in these difficult times i.e. (i) need to
prevent otherwise viable firms from prematurely being pushed into insolvency
and (ii) increase in the number of firms that will not survive the crisis without
resolution of insolvency. An ordinance that was passed on June 5 th, 2020 forbids
the initiation of the insolvency proceedings for all the defaults arising during the
next six months from March 25, 2020 (extendable up to one year as per the
notification of the Central Government, now extended till December 25 th). The
Ordinance passed earlier, suspends the Section 7, 9 & 10 of the Insolvency &
Bankruptcy Code, 2016 on various grounds, like, the pandemic has created
uncertainty and stress for the businesses for reasons that are beyond their
control; the Nationwide Lockdown also hampered the normal Business
Operations. Section 7, 9 & 10 of the Code provides for the filing of insolvency
matters by the Financial Creditor, Operational Creditor and also by the
Corporate Debtor for restructuring the Debt. This Ordinance does not apply to
the defaults that arise before 25th March 2020. The proceedings initiated before
this date doesn't come under the preview of this Bill. The Finance Minister,
while presenting this Bill said that Insolvency & Bankruptcy Code is not a
recovery Law. As per the Report of Reserve Bank of India’s report on Trend
and Progress of Banking in India 2017-18(Crisil), Exactly three years later, the
code was legislated, it has made material progress in addressing the deadlocks
and it also helped in faster recovery of stressed assets and quicker resolution
timelines. Recovery through the Code was of Rs 70,000 crore in the year 2019,
which is twice of Rs 35,500 crores that were recovered through other resolution
mechanisms such as the Debt Recovery Tribunal, Securitisation and
Reconstruction of Financial Assets and Enforcement of Securities Interest Act,
2002, and Lok Adalats in the year 2018.

The Finance Minister said that the Ordinance passed or the Bill does not
provide any protection to the Frauds so made and section 166 of the Companies
Act, 2013 will not be impacted by this Bill thus, this bill does not protect from
the Fraud. However, the government chose to extend it only by three more
months at the expiry of the first six months and the Suspension was extended till
25th December 2020. This calibrated extension shows a wait-and-watch
approach of the government and the confidence that economic conditions may
improve Slowly.

Key Features of Insolvency & Bankruptcy (Second Amendment)

2020:

● For Firm Disputes no Insolvency Proceedings can be initiated: This

Code allows the Corporate Debtor & Creditors to initiate the Proceedings.
The Bill provides that for defaults arising during the Six Months
extendable up to one year from 25th March 2020, no insolvency
proceeding can ever be initiated by Financial or Operational Creditor and
as well as from Corporate Debtor.
● This Bill provides for the Liability for Wrongful Doing: Under the
Insolvency & Bankruptcy Code, any director or the partner of the
corporate debtor might be held liable to add their contributions to the
assets of the company in certain situations. This liability can occur even
after the known fact that the insolvency proceedings cannot be avoided,
the person did not exercise its due diligence in minimizing the potential
loss to the Financial & Operational creditors. The (RP)Resolution
Professional may apply to the National Company Law Tribunal to hold
such persons liable.  The Resolution Professional is appointed to manage
the resolution process upon the acceptance of an application for initiation
of Corporate Insolvency Resolution Process. This bill prohibits the
Resolution Professional from filing such an application in relation to the
defaults for which initiation of Corporate Insolvency Resolution Process
has been prohibited.
Why was there a need to suspend the Insolvency Bankruptcy
Code? - An analysis

The Insolvency and Bankruptcy code was suspended on the principle that
Covid-19 pandemic does not allow the business to work as usual as they used to
work earlier. Due to the Nationwide Lockdowns and Closing of Businesses will
lead the businesses into greater losses which may lead them to insolvent and it
is suspended in order to protect the businesses. Another concern may be that it
will reduce the burden of the NCLT(National Company Law Tribunal) which
hears all the cases related to the Insolvency.

Though, Insolvency & Bankruptcy Code is considered to be one of the finest

reforms that happened in the Country. But Suspension of the Bankruptcy Code
may not serve the purpose of the Code as it is the reform which promotes the
Ease of Doing Business in India. The main objective of the Code is to simplify
and expedite the Insolvency & Bankruptcy Proceedings in India as well as to
curb down the fraudulent corporate persons who have been defaulting for the
payments for a long time. The Insolvency & Bankruptcy Code proposes the
paradigm shift of ‘Debtor in Possession’ to ‘Creditor in control’ regime.

We must note that the whole Insolvency & Bankruptcy Code is not suspended
but only certain provisions are temporarily Suspended. The suspended
Provisions are Sections 7, 9 & 10 of the Insolvency & Bankruptcy Code, 2016.
Section 7 & 9 of the Code confers powers to the financial & operational
Creditors for applying for the Insolvency Proceedings has been taken away by
the Ordinance, which will trigger the Creditor in Control Regime and these
recent changes will shift again to the Debtor in possession Regime. This will
force the Creditors to follow unnecessary demands of the Corporate Debtors
and the Control will again revert to the Debtor. The term Financial Creditor is a
person to whom the financial debt is owed & Includes a person to whom such
debt legally assigned or transferred. Similarly, the term Operational Creditor
means a person to whom an operational debt is owed and includes any person to
whom such debt has been legally assigned or transferred.

Section 10 of the Code, provides for the Initiation of the Insolvency Process by
the Corporate applicant. The suspension of Section 10 may be used by the
wilful defaulters to escape from the Legal Proceedings/Insolvency Proceedings.
As said earlier, the full Insolvency & Bankruptcy Code is not suspended but
only certain provisions are suspended and we must note here that the
proceedings that can be initiated under the Code against the Personal
Guarantors are not suspended. If the promoter provides personal Guarantee to
someone, then the persons may initiate the insolvency proceedings against the
Company and can file an application for initiation of the Insolvency Resolution
Process. The term Corporate Debtor means a corporate person who owes a debt
to any person.

The Creditor may go for alternative remedies as well till when the suspension of
IBC remains. The Creditors may go for the legal proceedings that will lead to
them an unnecessary delay. The Creditors may file the suit in the Court of Law
under Order XXXVII of Code of Civil Procedure, 1908. The lenders can also go
under the SARFAESI Act, 2002 if they hold a mortgage over the property of the
Corporate Debtor.

Effect of the recent amendment on stakeholders and society

First, the recent second amendment 2020 is destined to have a ‘cascading’ effect
on the economy. This can be understood in simple terms wherein there is a
blockage of money. The creditors by the virtue of this amendment would not be
able to initiate the insolvency proceedings as provided under section 7 of the
Insolvency and Bankruptcy Code which is temporarily suspended. Moreover,
the chain of events continues as the money gets stuck at this particular point
with the firms. The progress of the economy is hampered as there is no flow of
cash from one place to another.The fundamentals of economics dictates an
economy prospers when there is a flow of cash in the market and this
amendment proposes a contrary front. Even in such situations of crisis the
government tries to improve liquidity through liquidity cash injections, there is
a high change that these are proven ineffective as people in such times prefer to
store the money for unforeseen medical expenses or expenses arising out of
sudden unemployment and market unpredictability.

Secondly, there is an imminent danger that the foreign investments will decline.
Foreign investors while investing should be assured safety in their investments
and a display of lack of confidence would make India lose credibility. This
would surely dissatisfy the investors and they would consider alternative
countries to invest their money. The importance of high foreign investment is
such that it can raise both the actual and potential Gross Domestic Product of a
country. The policy framework stability is one of the pillars to attract foreign
investments.

Suggestions:

The Government has also made an amendment to exclude ‘COVID-19’ related

debt from the definition of default under the Insolvency and Bankruptcy Code
and increases the threshold limit from Rs. 1 lakh to Rs. 1 crore which is serving
the purpose of the government to protect the MSMEs and Small Corporate
Debtors from the insolvency proceedings under the Code. But this amendment
seems to be redundant in the light of the Suspension of Code.

The Government can also release a notification regarding the increase in the
Moratorium Period which is of 180 days as per Section 14 of the Code. The
Court in the case of Bhupinder Singh v. Unitech Limited (Supreme Court,
20/01/2020), The Court granted the Two months moratorium period to Unitech
from any legal proceeding against the Company’s Management. Moratorium
Period is a period given after the commencement of the Insolvency Resolution
Process, during which all the suits and legal proceedings etc. pending against
the Corporate Debtor are kept in suspension to give some time to the entity to
resolve its status.

The Court can also take an approach of giving a Moratorium Period to the
Corporate Debtor based on various factors like nature of the default and
economic interest etc. Many countries across the globe have changed their
procedures for the Insolvency Resolutions but did not suspend their Insolvency
& Bankruptcy Laws.

A suggestion can be laid down on the basis of section 10 of the Insolvency and
Bankruptcy code. While the government has taken a progressive step, it has
errored in suspending section 10 of the amended code as a company which is
not in a position to pay its debts and the debt keeps mounting up is not allowed
to initiate insolvency proceedings. This is a huge gap in the bill that must be
addressed and the clarification on the same should be provided. A mechanism
for the same should be developed while maintaining the legality.

Thus, the effects of the suspension of insolvency proceedings there is a need to

revisit the decision, and the government has to draft a policy by balancing the
interest of both creditors and debtors so that the main purpose of paradigm shift
of Debtor in Possession to Creditor in Control should take place.

Objections Raised:

The objections which were made by the various members of parliament should
be given consideration here. First, there was an allegation placed on the
government they discriminate between the common man and corporate as they
favour crony corporates. However, this may be a far-fetched argument as the
bill proposes progressiveness and takes a stride in making the economy better.
The fallacy of comparison must not be applied when one good is compared with
a non-action on a second subject matter. The whole contention is based on the
basis that nothing is done for the small-scale firms which is a fallacy as the
agenda of the discussion is the viability of the second amendment. Secondly, it
was argued that section 10-A of the bill gives immunity from the initiation of
corporate insolvency resolution process to 'all business' and a differentiation is
not created between COVID affected firms. However, the effect of pandemic is
global and every firm is directly or indirectly affected by it, to distinguish and
rule out the possibility of even the slightest impact of the pandemic would not
be possible. To create such a classification and to analyse each and every case
on a fact-based inquiry would be not practical. Third, the objection was made
that the COVID may not end in a year and such suspension of sections 7,9 and
10 is not a permanent solution to the problem. Whenever there is a crisis, short
term plans must be launched immediately to bring stability and the government
through this bill has done the same. However, a valid point is raised here that
there is a need to construct a long-term strategy and to not be contingent on the
assumption that a vaccine would be developed. There are possibilities that
COVID may not end by the year and for such instances the government must be
ready. Fourth, it is argued that Gross NPA of banks went up from Rs 2.63 lakh
crore in March 2014 to Rs 10.3 lakh crore in March 2018, the objective of
Insolvency & Bankruptcy code is to avoid the wilful default by firms and this
Bill destroys the very objective.This argument does not hold much value as in
the time of pandemic, this not a ‘wilful’ default, it is because of the global
world order during this pandemic that these defaults are occurring. Moreover, as
to the increase in NPAs are a subject-matter of ‘normal times’, the current
measures are taken in the time that is specific to pandemic.

Conclusion:
While there was some opposition to this bill there was overwhelming support as
this bill aims at improving the economic condition of the nation. The bill has
been termed as progressive and the two features of the bill provide aid to the
companies in this time of pandemic. As stated by Nirmala Sitaraman, the
priority is to keep the company to be a going concern rather than to liquidate
them at the earliest. From the promulgation of the Insolvency & Bankruptcy
Code, 2016 a total for 258 companies were saved from bankruptcy and 965
firms went in for liquidation. Among these three fourths were provided viable
liquidation solutions and therefore we see a decline in loss of employment. With
these two new amendments the position of Insolvency and Bankruptcy is
temporarily changed.

This Code as said earlier provides for the initiation of the Insolvency Resolution
Process against personal guarantors in the event of their default of payment.
This Amendment only suspends Section 7, 9 & 10 of the Code. The main
intention of the legislature was to give immunity against the Corporate
Insolvency during the COVID period. After analysis it can be said that, this ban
will only be confined to the defaults that may arise in the COVID Period and
will not impact the applications filed before March 25, 2020. It is also to be
noted that IBC is not a recovery law, and the main objective of this amendment
is to save the lives of the Companies and as explained earlier the Insolvency
Proceedings can also be initiated under other Laws and Acts. The Insolvency &
Bankruptcy Code (Second Amendment) Act, 2020, has created some
complexities and has raised certain questions in the mind of the stakeholders
that need to be answered with time. The viability of this amendment as a long
term solution if the pandemic prolongs is one thing that raises ambiguity in the
minds of many. The societal and stakeholders interest must be kept in mind
before re-approaching this topic while even taking into consideration the
interests of minority shareholders.