By - Simran Tandon on April 20, 2020
In a time as tough as today, when the whole world is under the impact of Covid-19 which has forced the country to be under lockdown, the notification dated March 24, 2020, wherein the Ministry of Finance announced several important relief measures on the statutory and regulatory compliance matters related to several sectors has provided a sigh of relief to everyone. The government by exercising its powers under Section 4 of the Insolvency and Bankruptcy Code, 2016 (“Code”), has raised the threshold limit triggering the insolvency from rupees one lakh y hundred times to rupees one crore as the minimum amount of default.
It is pertinent to note here that the Central Government has raised the minimum default threshold to its maximum capacity as rupees one crore is the maximum threshold that the Central Government can prescribe under Section 4. This is a big step for the benefit of the MSME sector companies struggling due to the lockdown.
“The said amendments are in sync with the time and also adhere to a Supreme Court order in letter and spirit.” This was replied by the Finance Minister, Nirmala Sitharaman in a debate carried on a bill before the house of the Parliament. The bill was passed by Lok Sabha on March 6, 2020, and by Rajya Sabha on March 12, 2020. It received the Presidential assent and was published in the Official Gazette on March 13, 2020.
The Insolvency and Bankruptcy Code (Amendment) Act, 2020 (“Act”) seeks to remove bottlenecks and streamline the corporate insolvency resolution process.
Thus, this has removed the earlier gap of 14 days between the date of initiation of CIRP and the appointment of IRP, and now the CIRP will only be initiated on the appointment of IRP. This reduces the uncertainty which used to prevail earlier as the stressed companies had the time of 14 days to go under in a delicate situation.
The Act raises the question of whether is it a reasonable classification or not of increasing the threshold for certain creditors for initiating the insolvency proceedings, particularly for the homebuyers. With this wherein, one of the financial creditors can initiate the insolvency proceedings easily but the homebuyers who have been accorded the status of the financial creditors by the Second Amendment Act, 2018 are left with no liberty to initiate the proceedings if they are not complying with the requirement as laid down in the Act.
Although the legislature has tried to bring this provision in order to minimize or avoid the frivolous complaints it does not deal with the practical problem of the homebuyers as they are not aware of how many units have been sold and to whom in order to determine the 10% of the total number of the units or who other 99 buyers are in order to initiate the insolvency proceedings.
This will enhance the maximization of the value of a corporate debtor as the Resolution Professional will have the power to recover the outstanding debts of a corporate debtor against whom CIRP is already in progress in order to manage the affairs of the financially stressed companies.
Thus, this is a very important change as it enables the Corporate Debtor as a going concern and will also maximize the value of assets.
Thus, the insertion of Section 2A under Section 14 of the Code is also a controversial point as on one hand, it is for the benefit of the continuity of the company undergoing the insolvency proceedings in order to preserve and manage the operations of the corporate debtor as a going concern but on the other hand, there is a casualty which will be faced by the MSME sector companies that are now being mandated by law to continue the supply of critical and essential goods and services to the companies undergoing the insolvency proceedings.
With this amendment, the risk of the MSMEs becoming sick has increased as major cash-flow problems faced by MSMEs are due to the delayed payments made by the big companies only. Also, it interferes with the contractual relationships between the suppliers i.e., the MSME and the corporate debtors and it is not made clear whether any additional contract has to be signed during the moratorium period between IRP or RP, the corporate debtor & the company.
This will help the RP to function properly and not seek directions by filing an application to run the management of the company.
Thus, now the prospective resolution applicant or the new promoter will be safeguarded from the legal complications in which the past promoters are embroiled and now the new prospective bidder will not be burdened with the legacy issues faced by the past promoters. However, this provision will be applicable only when the new promoter was nowhere in the management or control of the corporate debtor or was not a related party of such a person. Thus, this will encourage the new promoters to come forward to revive the companies which are into insolvency proceedings to save them from being liquidated.
Code, being the transformational piece of legislation has undergone 4 amendments in a short span of 4 years but it can be seen as the responsiveness of the government in order to balance out the business with the economics and make the Code efficacious in the line of ease of doing business in India and making the objective of the Code to improve the recovery rate. We have come a long way but the recovery rate as seen from the ground reality is far less than the expected rate and the government should bring in the changes by increasing the number of benches of NCLT so that the cases can be resolved quickly.
An increase in the threshold limit to file the insolvency against the companies is a good change brought in by the government under the relief package but still, the safeguards are required to be provided to the MSME companies as they are the backbone of the Indian economy and the interest of the homebuyers should also be protected, keeping a balance between the real estate companies and the homebuyers. It furthermore needs scrutiny to iron out the shortcomings and make the resolution process much more efficient and creditor friendly.