May 14,2021 | 8 min read

"Suspension of Section 10 of the Insolvency and Bankruptcy Code, 2016" By Chetna Reddy

Background 

The outbreak of the coronavirus has brought upon us human suffering and significant economic costs. To mitigate the financial impact of the coronavirus pandemic and the subsequent lockdowns on small and medium businesses, the Government of India (“GoI”) introduced mitigating measures. The GoI not only increased the threshold of initiating corporate insolvency resolution proceedings from INR One Lakh to INR One Crore, but it also suspended the initiation of insolvency proceedings pursuant to Sections 7, 9 and 10 of the Insolvency and Bankruptcy Code, 2016 (“IBC”). 

Section 7 permits a financial creditor to file for initiating corporate insolvency resolution process against a corporate debtor. Section 9 provides for the initiation of insolvency proceedings against a corporate debtor by an operational creditor and Section 10 deals with the initiation of insolvency proceedings by a corporate debtor against itself in case of a default. Section 10 provides an exit route to a corporate debtor wherein the prospective resolution applicant can take over the business of a corporate debtor with a proposed resolution plan when the corporate debtor finds himself under the obligation of debts and the business is not incurring profits.

The GoI also incorporated Section 10A into the IBC by way of an ordinance, IBC (Amendment) Ordinance 2020, dated 5 June 2020. Section 10A reads, “Notwithstanding anything contained in sections 7, 9 and 10, no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25th March 2020 for a period of six months or such further period, not exceeding one year from such date, as may be notified in this behalf:

Provided that no application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the said default occurring during the said period. Explanation.—For the removal of doubts, it is hereby clarified that the provisions of this section shall not apply to any default committed under the said sections before 25th March 2020."

Section 10A is a non-obstante clause, which overrides Sections 7, 9 and 10. The effect of Section 10A is to impose a blanket ban on the insolvency proceedings against the corporate debtor for default committed on or after 25 March 2020. The operation of Section 10A was extended for three months upon the expiry of the statutory period of six months in September 2020, till December 2020 and for further three months until March 2021. The Central government’s suspension of the bankruptcy action against corporate defaulters expired after one year on March 24, 2021. 

Criticism of the suspension of Section 10

While the ordinance to suspend Sections 7 and 9 of the IBC was welcomed, the suspension of Section 10 has been heavily criticised. It has been argued that the suspension of Section 10 takes the corporate debtor to the pre-IBC era and defeats the purpose of the IBC by depriving the corporate debtor the right to initiate voluntary insolvency proceedings. Struggling businesses were left with no option but to wait for the conclusion of the statutory period. Further, it is unclear whether an entity can initiate insolvency proceedings against itself after the expiry of the statutory period in March 2021, for the default occurred between the period of March 2020 till March 2021. 

Legal challenge 

In July 2020, a Public Interest Litigation (“PIL”) was filed in the Delhi High Court challenging the validity of the ban on Section 10 of the IBC. The petitioner, Rajiv Suri, submitted that the suspension of Section 10 would deny a corporate candidate the opportunity to resuscitate, reorganise and resolve itself and its obligations in a time-bound manner. It was submitted that consequently, vulnerable companies would be pushed into liquidation and civil cases, overcoming the destinations of IBC. It was also argued that the suspension of Section 10 IBC was ultra vires Articles 19(1)(g) of the Constitution. Article 19(1)(g) of the Constitution guarantees every citizen the right to carry on business and has three facets: (i) the right to start a business; (ii) the right to continue a business; (iii) the right to close a business. The ordinance in question closes the exit route for the corporate debtor by suspending Section 10 IBC is infringing the fundamental right provided to the corporate debtor under Article 19(1)(g). 

However, as the ordinance was transposed into an Act with effect from 23 September the PIL was deemed infructuous and hence withdrawn by the petitioner. 

Conclusion 

Subsequently, the National Company Law Appellate Tribunal (“NCLAT”) in Ramesh Kymal v Siemens Gamesa Renewable Pvt Ltd has clarified that the ordinance suspending the initiation of insolvency proceedings was retrospective in nature and was applicable from March 25, 2020. Therefore, the ban could not operate in applications filed in respect of any default committed before March 25, 2020, though such an application might have been filed later.

The suspension of initiating insolvency action under the IBC appears to be a short-sighted solution as the NCLT is currently carrying the entire burden of backlog cases now that the expiry period is over. Further, if Section 10 would not have been suspended the corporate debtor could have been revived in a timely intervention as early initiation of insolvency may save the corporate debtor from liquidation.

As the second wave of the coronavirus pandemic intensifies across the country, whether the government will introduce the moratorium on trying new cases under the IBC remains to be seen.


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ABOUT THE AUTHOR


Chetna Reddy

Chetna currently works for Legalwin, LLP, a research and strategy driven mid-sized litigation firm with their head office in Hyderabad, Telangana. She has prior experience in dealing with civil and commercial disputes, appearing before various district courts and tribunals in addition to arbitration proceedings. She has previously worked as a solicitor in a corporate law firm in London, UK for two years. She has completed her B.A.LLB (Hons) from O.P. Jindal Global Law School.

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