It used to take around 4 to 5 years to conduct insolvency procedure against any company in India. However, in other countries like United Kingdom and United States of America, the duration of conducting insolvency procedure is approx. 1 year to 1.5 years. The Insolvency and Bankruptcy Code, 2016 was passed to establish a strict and time-bound insolvency procedure in India. The insolvency process lasts for 180 days. Further, any legal action against the debtor is prohibited during this period.
The maximum attention is drawn towards section 7, 9, and 10 of the Act which allows initiating corporate insolvency resolution process against the defaulter. Section 7 empowers the financial creditor to initiate insolvency procedure against corporate debtor in case of any default occurs. Section 9 empowers the operational creditor to file an application against for initiation of CIRP. Lastly, section 10 talks about Initiation of corporate insolvency resolution process by corporate applicant.
Section 10 provides “where a corporate debtor has committed a default, a corporate applicant thereof may file an application for initiating corporate insolvency resolution process with the Adjudicating Authority.” Under section 10 of the Act, the defaulting company itself becomes the applicant to file for insolvency before the Adjudicating Authority.
Due to the outbreak of coronavirus pandemic, an adverse impact is witnessed to the world economy. India, being a developing nation has also been adversely hit by the pandemic. It resulted to collapse of the corporate sector of Indian economy. Certain provisions of IBC, 2016 have been relaxed to grant relief to the corporate sector. The relief is primarily granted under section 10 of the Act.
The Hon’ble President of India has promulgated the IBC Ordinance 2020 on 05.06.2020. The operations under Sections 7, 9 & 10 of the Insolvency and Bankruptcy Code, 2016 are temporarily suspended and extended. The promulgation of this Ordinance has resulted in the insertion of 10A and Section 66(3) in to the Insolvency and Bankruptcy Code, 2016. Section 10A states “no applications seeking to initiate the corporate insolvency resolution process of a corporate debtor can be filed in case the default arose on or after 25.03.2020 until a minimum of 6 months. This period, where there is a bar on the initiation of the CIR Process in case the defaults occur after 25.03.2020, shall be extended to a maximum of 12 months, i.e., 24.03.2021.”
On the other hand, section 66 talks about fraudulent trading or wrongful trading. Section 66(3) states “no application shall be filed by a resolution professional towards the default against which initiation of corporate insolvency resolution process is suspended as per section 10A.” It is highlighted that no application will be filed for fraudulent or wrongful trading.
The IBC, 2020 amendment may affect the aggrieved party in various ways. Section 10A has imposed a specific bar on initiation of corporate insolvency resolution process under Sections 7, 9 and 10 for a default. The creditor is not allowed to file an application for the defaults which occur during the prescribed period. The ordinance will not affect the cases in which corporate insolvency resolution process has already been initiated prior to 25th March 2020. The explanation reads that Section 10 A shall not be applicable to any default prior to 25th March 2020.
Hence, it is analysed that the ordinance is for the betterment of the defaulters of company for a small period of time. The insolvency proceedings have been suspended temporarily. But after the expiration of the prescribed period, the insolvency proceedings will be conducted against the defaulters. There is a possibility that the Hon’ble Tribunal (NCLT) may get congested when it reopens due to uncountable pending cases. Hence, it is further analysed that this step has been initiated to control the congestion and stress of the Hon’ble Tribunal.