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IMPACT OF COVID-19 ON INDIA’S BANKRUPTCY LAW

By Seema Kumar, TCM India | May 26, 2020

The COVID-19 pandemic has led to an unprecedented global crisis which has pushed several economies close to collapse. The COVID-19 pandemic, coupled with the lockdown imposed by the Government of India, has impacted businesses across the country, making it extremely hard to generate revenues. Keeping in mind the economic slowdown caused by the pandemic, countries across the world are attempting to protect businesses and workers alike. In this context, India, too has adopted a wide range of measures to respond to this economic crisis.

The Insolvency and Bankruptcy Code, 2016 (hereinafter, “the IBC”) envisages re-organisation and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all stakeholders. Having played a crucial role in favour of creditors, IBC helped rescue over 160 companies and recovered 44% of creditors’ claims, which was a huge step forward.

Under the IBC, a creditor could file an insolvency petition in the event of an admitted debt to the tune of Rs 1,00,000. This enabled a range of creditors to file insolvency petitions against debtor companies, which resulted in a settlement between the parties, or a recovery of the creditor’s claim if the debtor company was declared insolvent and subsequently taken over by a Resolution Applicant. Recognizing that a large number of businesses might be pushed into situations where they are compelled to default on their contractual obligations, and the ambiguity around the judicial interpretation that might be accorded to force majeure clauses, the Ministry of Corporate Affairs on 28.03.2020 passed a notification increasing the threshold of default for filing an insolvency petition from Rs 1,00,000 to Rs 1,00,00,000. Needless to say, this move has narrowed the net of creditors who could file insolvency petitions. It is aimed to according time to companies to stabilize their operations and generate revenues, rather than consistently worrying about an impending insolvency petition. This move has been particularly welcomed by medium and small enterprises, that have been hit the hardest by the economic slowdown.

Further, under the IBC, the adjudication authority, i.e. the National Company Law Tribunal (hereinafter, “the NCLT”) initiates a Corporate Insolvency Resolution Process (hereinafter, “the CIRP”) when a company defaults on making payments to the creditors. Under Section 12 of the IBC, the CIRP is normally required to be completed within one hundred and eighty days from the date of admission of the application to initiate such process, however, this period can be extended on an application filed by the Resolution Professional subject to approval by the NCLT. However, in view of the pandemic, and its effect on businesses, an amendment has been made to this timeline.

The Insolvency and Bankruptcy Board of India (hereinafter, “the IBBI”) has introduced an amendment by way of Rule 40C to the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 by virtue of which the lockdown period is not to be included for the purposes of the timeline of any activity in relation to the Code. In a similar vein, the Supreme Court of India, in a suo moto petition, has passed an order directing an extension of limitation period for all petitions/applications from March 15, 2020, until further orders.

The Indian Government is reportedly contemplating suspending Sections 7 (right of a financial creditor to file an application under IBC), 9 (right of an operational creditor to file an application under IBC) and 10 (right of the company to file an application under IBC) of the IBC for a period of six months.

It is also relevant to note that most courts in India are currently functioning as e-courts at limited capacity. Thus, a judicial system that is already overburdened with a severe backlog of cases, is now constrained to only take up urgent cases, with the remaining cases being adjourned. However, the Indian Government is also cognisant of the delays being caused in arriving at bankruptcy resolutions owing to COVID-19, and is thus, contemplating the introduction of pre-packaged deals in IBC. These pre-packaged deals would entail a party offering a settlement plan which would have to be negotiated and approved by a Committee of Creditors for the NCLT’s approval.

Thus, the outbreak of COVID-19, has affected business entities and creditor-debtor relationships in several ways. The legal system is currently trying to balance competing rights of several stakeholders. Given that the pandemic in itself as well as its effect on the economy is a dynamic situation, the exact impact on these stakeholders and the global economy remains to be seen.


TCM Group Global Debt Collection
Seema Kumar
TCM India

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