M & A CritiqueINTRODUCTION
The changing market dynamics, from crashing stock markets to restaurants, airlines and businesses shutting down, the Coronavirus (“Covid-19”) has hit almost every sector. The pandemic has not only caused global business disruption by halting the international trade, it has also caused major economic unrest affecting the small companies and organizations that were already struggling with financiers and creditors to repay their debts. Due to the status-quo orders of the state and the central government for lockdowns, the business owners are facing difficulties to meet their expenses and obliging their pre-existing liabilities. The third quarter (i.e., October to December[i]) has almost witnessed around 1961 Corporate Insolvency Resolution Process (“CIRP”) against companies. In the current situation, the number is likely to soar with the economic in the country have come down to standstill.
Amidst the ongoing crisis, effort has made by every regulatory authority (be it Reserve Bank of India, SEBI, Ministry of Corporate Affairs or Courts) to ease the burden on general public by recalibrating their existing regulatory frameworks. In this backdrop, the IBBI has taken certain measures to protect these debt-laden entities and Non-Performing Assets (“NPA”) of the Corporate Debtor that are already facing severe liquidity crunch and provided relaxation to companies facing difficulty to replay their claims.
Amended Legal Provision and Regulations
Deferred Timelines for Completing CIRP:
The IBBI through a notification dated 29th March, 2020 has decided that the 21 days of lockdown period cannot be used within the outer-limit of CIRP time-frame, where the process has been triggered. The companies will get an extension of 17 days (staring from March 29th) as against the due date for completion of the process.
The present timeline requires the CIRP to be completed within a period of 180 extendable up to 270 days, and in exceptional cases within 330 days (as decided in Essar Steel Judgment). This time frame remains unchanged. This means, even after the extension, the outer limit of completing the CIRP remains same. In this light, a 3rd amendment is made in the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 with the insertion of Regulation 40C as a Special provision relating to time-line to defer the payment excluding the period of lockdown.
“Regulation 40C: Notwithstanding the time-lines contained in these regulations, but subject to the provisions in the Code, the period of lockdown imposed by the Central Government in the wake of COVID19 outbreak shall not be counted for the purposes of the time-line for any activity that could not be completed due to such lockdown, in relation to a corporate insolvency resolution process.”
(Emphasis Supplied)
The IBBI further clarified that “the period of lockdown imposed by the Central Government in the wake of COVID-19 outbreak shall not be counted for the purposes of the time-line for any activity that could not be completed due to the lockdown, in relation to a corporate insolvency resolution process. This would, however, be subject to the overall time-limit provided in the Code”.
Revised IBC Threshold Limit
The Union Finance Minister through a press conference and notification[ii] dated 24th March 2020 also decided to raise the threshold for filing an insolvency application about 100% i.e. from Rs 1 lakh to Rs 1 Crore.
Before such notification, the provision under Part II, Insolvency Resolution and Liquidation for Corporate Persons under Section 4 required a minimum default amount of Rs 1 lakh for initiating CIRP; with an additional power to the central government to increase it to Rs 1 crore at its discretion. The government analyzing the need of the hour exercised this right to protect the corporate debtor against the creditors filing Insolvency for meager amounts, given such low threshold amount. This move will allow the corporate debtor a breathability time from multiple recovery cases during this period.
Suspension and extension of timeline for certain filings under limitation laws:
The NCLAT extended any provisions relating to the laws of limitation, or where any timeline such as appearance or filing of affidavit is required within a particular date, such timelines are extended till further notice. The NCLAT took a suo moto cognizance of the matter and passed an order dated 30.03.2020[iii] under Rule 11 of National Company Law Appellate Tribunal Rules, 2016. The same measure has already been taken by the Supreme Court on 23rd March, 2020 in Suo Moto Writ Petition (Civil) No(s).03/2020 for all cases and matters taken before the apex court.
POINTS TO PONDER
Apart from the various measures taken by the IBBI, there are questions that still remain unanswered and require much clarity amidst the pandemic. Some of these are:
Whether the defense of Force Majeure clause is applicable in Insolvency Cases?
In Parvesh Magoo v. IREO Grace Realtech Private Limited,2019[iv], the NCLAT observed the view of Hon’ble Supreme Court as referred in Pioneer Urban Land and Infrastructure Limited v. Union of India, 2019[v] and held that it is upon the Adjudicating Authority (NCLT or NCLAT) to decide whether the default has been caused due to the fault of the Corporate Debtor, or is it a force majeure condition (“FMC”) due to which he has failed to comply with his obligations. And, if the default has not caused due to the Corporate Debtor, but due to any force majeure event, it can be adduced that the Corporate Debtor has not made any default. These two cases, in particular, are related to the real estate sector. It is to be seen whether, these judgments can be used as a precedent to seek an extension of the moratorium period or the outer-limit CIRP timeline.
It would be interesting to note, if such matters come up during this period, whether the NCLT or NCLAT considers the existence of a pre-existing FMC in the contract, or the situation has to be taken from the point of view of the Adjudicating Authority. Therefore, it would be interesting to note, whether the corporate debtor can seek relief by invoking the FMC against insolvency if any disruption is caused due to the outbreak of Covid-19.
Whether the threshold of Rs 1 Crore is applicable to individual creditor or group of creditors?
For Financial Creditor (“FC”): Section 7 (1) of Insolvency and Bankruptcy Code, 2016 (“IBC”) allows the FC to file an application either by himself or other financial creditor for filing CIRP against a default by the corporate debtor. With the default amount being raised, it is still unclear whether the application can be initiated by individual FC or jointly with other financial creditors. Given the present circumstance and analyzing it from the perspective of Section 4 of IBC, which allowed individual financial creditor to trigger CIRP, the same can be applied here. However, since the amount is too high for an individual creditor, there is no bar to include other creditors, if the default amount gets fulfilled as per the notification. Therefore, the default amount stands aggregated sum of Rs 1 crore from all the creditors jointly or individually to fulfil the revised threshold amount.
Further, the Insolvency and Bankruptcy Code (Amendment) Act, 2020 under Section 7 also requires the financial creditors such as allottees, agents/ trustees of deposit holders to file an application jointly by not less than 100 of such creditors in the same class or not less than 10%. Therefore, such proviso will also be applicable to initiate CIRP during this pandemic period to reach the threshold of Rs 1 crore. The above move will not only protect the exiting corporate debtors but also MSMEs and start-ups. The number of applications will be reduced.
For Operation Creditor (“OC”): The IBC does not provide any particular provision for threshold amount to be fulfilled by the OC, individually or conjointly. Therefore, for an application under Section 9, in light of the revised provision, an OC is required to fulfil the threshold amount of Rs 1 crore for triggering CIRP.
Whether the resolution plan can be changed after initiation of CIRP?
In Rahul Jain v. Rave Scans (P) Ltd[vi], the Supreme Court held that once a plan has been approved , the plan has attained finality. Therefore, no modifications and amends can be made by the Adjudicating authority i.e. the NCLT or the NCLAT. The same has been held by the NCLAT in G.G. Vyapaar Pvt. Ltd. v. Arun Kumar Gupta & Anr[vii].
Although, as of now, there have been no precedents or provisions of amending the resolution plan once submitted. Given the current situation, and larger objective of the IBC to protect the corporate debtor as well as the investor by maximum realisation of assets, such a measure should be allowed. The resolution plan submitted to the adjudicating authority by the Committee of Creditors (“CoC”) may not meet the haircut amount due to the affect of Covid-19. Therefore, the CoC should be allowed to reconsider on the previous plan, and submit a revised plan by approval of 90% of the CoC.
Way Forward:
Suspension of Section 7, 9 and 10 i.e. Initiation of CIRP: Apart from the measures taken, the government has additionally proposed to suspend Section 7, 9 and 10 if the present situation continues. Therefore, suspending these provisions may give additional relief from getting dragged into insolvency amidst this crisis.
Raising finance for the Corporate Debtor through Interim Finance measures under Section 5 (15) of IBC: In light of the 2020 amendment[viii] under Section 5 (15) of the IBC, the government has inserted the word “and such other debt as may be notified” in addition to “during the insolvency resolution process period“. This gives a leeway to the IRP/ RP to raise finances as and when the need arises. Therefore, this provision can be applied in the present situation of pandemic, where the IRP/ RP can raise short term finances for the corporate debtor to keep the business as going concern. This can be done by taking bank loans to maintain the liquidity/ cash flow and avoid increasing debts in the wake of such disruption.[ix]
CONCLUSION
With the number of cases increasing and the government taking different measures to tackle the situation by making various reforms, IBC is no such exception. The government recognizing the need of the hour has taken different measures for survival and maximum realisation to protect the NPAs and debt-laden entities. The measures taken by the government such as increasing the threshold of triggering insolvency from 1 lakh to 1 crore, excluding the lockdown period from the CIRP timeline may boost confidence and give some relief to these ailing corporate entities. In this light, the measures taken by the government will give extra time and space to the Corporate Debtors while ensuring best returns to the creditors when this crisis ends.
About the Author(s)
- Mr Karan Sahi
Corporate Lawyer and Company Secretary by profession. Email: [email protected]
- Pranay Bhattacharya,
3rd year student, pursuing BA LLB (Hons.) from Maharashtra National Law University, Aurangabad. E-mail: [email protected]
[i] Quarterly Newsletter For Oct-Dec, 2019, Insolvency and Bankruptcy Board of India at
https://www.ibbi.gov.in/uploads/publication/62a9cc46d6a96690e4c8a3c9ee3ab862.pdf
[ii] [F. No. 30/9/2020-Insolvency] Ministry Of Corporate Affairs Notification New Delhi, the 24th March, 2020 at
https://ibbi.gov.in/uploads/legalframwork/48bf32150f5d6b30477b74f652964edc.pdf
[iii] Suo Moto – Company Appeal (AT) (Insolvency) No. 01 of 2020 at
https://ibbi.gov.in/uploads/order/0fd02d6fd104fcdd63936eb4cb23021b.pdf
[iv] National Company Law Appellate Tribunal, New Delhi Company Appeal (AT) (Insolvency) No. 1141 of 2019.
[v] In the matter of Pioneer Urban Land and Infrastructure limited & Anr. v. Union of India & Ors Writ Petition (Civil) No. 43-2019 and other petitions.
[vi] In the matter of Rahul Jain Vs. Rave Scans Pvt. Ltd. & Ors. Civil Appeal No. 7940-2019.
[vii] National Company Law Appellate Tribunal, New Delhi Company Appeal (At) (Insolvency) No. 509 of 2018.
[viii] The Insolvency And Bankruptcy Code (Amendment) Act, 2020 at
http://egazette.nic.in/WriteReadData/2020/218654.pdf
[ix] Coronavirus impact: These banks are offering credit line with softer terms to retail borrowers at
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