Article submitted by Rakesh Kaidala
- Introduction:
The COVID-19 pandemic led the Government of India (GoI) to enforce a nationwide lockdown on March 24, 2020, significantly disrupting economic activity. As businesses struggled to stay afloat, the government introduced various measures to mitigate the financial strain. One such measure was the suspension of corporate insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC).
The GoI introduced Section 10A into the IBC through an ordinance on June 5, 2020[1], which effectively barred insolvency proceedings for defaults occurring between March 25, 2020, and the stipulated suspension period. Initially, this period was set for six months but was later extended until March 2021. The intent behind this provision was to protect businesses from an unprecedented wave of insolvency proceedings due to the economic downturn.
However, while Section 10A aimed to provide relief, it also raised several legal ambiguities and concerns, particularly regarding its scope and impact on creditors. This article delves into the implications, shortcomings, and potential legal challenges surrounding this provision.
Understanding the Ordinance and Section 10A
Section 10A suspended the applicability of Sections 7, 9, and 10 of the IBC, which pertain to the initiation of insolvency proceedings by financial creditors, operational creditors, and corporate debtors themselves, respectively. The provision explicitly states that no application for corporate insolvency resolution can be filed for defaults occurring during the suspension period. Furthermore, it ensures that such defaults will never be a basis for initiating insolvency proceedings in the future.
The rationale behind this move was clear—the government sought to prevent a flood of insolvency cases that could have crippled already distressed businesses. However, the provision also brought about unintended consequences, particularly for creditors and financially vulnerable stakeholders.
Analysis of Section 10A
[1] The insolvency and bankruptcy code (Amendment) Ordinance, 2020 5AD 3
The insertion of Section 10A was a significant step in shielding businesses from insolvency amid a global economic crisis. The provision granted temporary relief and ensured companies had breathing space to recover. The Rajya Sabha’s subsequent approval of the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2020[1], reinforced this measure by allowing the government to extend the suspension for up to a year.
Following this, the government extended the suspension in two phases—first until December 2020 and then further until March 2021. As per Section 10A of IBC, 2016, any default which occurred in the period intervening 25.03.2020, till 24.03.2021, cannot form the cause of action on the basis of which an application for initiation of CIRP can be filed. This effectively meant that for a full year, corporate insolvency proceedings under Sections 7, 9, and 10 were barred. While this move was intended to stabilize businesses, it also created uncertainties regarding the future handling of defaults that occurred during this period. Section 10A of IBC is extracted below for a ready reference:
“10A. Suspension of initiation of corporate insolvency resolution process. 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.”
Ambiguities and Shortcomings
1. Blanket Protection for All Defaults
One of the main criticisms of Section 10A is that it assumes every default during the suspension period was caused by the pandemic. However, many defaults could have resulted from other factors unrelated to COVID-19. Ideally, the provision should have been more nuanced, allowing the National Company Law Tribunal (NCLT) to determine whether a default was directly linked to the pandemic before granting protection.
2. Arbitrary Distinction in Default Timelines
[1] The Insolvency and Bankruptcy Code (Second Amendment) Bill, (Introduced in Rajya Sabha) [XXXI Of 2020] The provision creates an arbitrary distinction between defaults that occurred before and after March 25, 2020. For instance, a company that defaulted on March 24, 2020, remains liable for insolvency proceedings, whereas one that defaulted a day later is protected under Section 10A. This lack of a defined “COVID-19 default” further complicates the implementation of the provision.
3. Unclear Treatment of Accumulated Debt
Another major ambiguity is whether defaults that occurred during the suspension period would be included in debt calculations after the expiry of Section 10A. This uncertainty raises concerns for creditors, as it remains unclear whether they can initiate insolvency proceedings once the provision ceases to be in effect.
4. Impact on Continuing Defaults
Section 10A does not clarify the treatment of defaults that began during the suspension period but continued beyond March 2021. If a corporate debtor defaults partially before March 25, 2020, and continues to default after that date, it remains unclear whether the entire debt would be protected under Section 10A or only the portion that arose during the suspension period.
Judicial Interpretations and Legal Challenges
Due to the ambiguities and lack of clarity in Section 10A, several judicial precedents have played a crucial role in interpreting and understanding its provisions. These rulings have, to some extent, helped in reducing the ambiguity surrounding the section. Some of the key judicial precedents are briefly explained below.
The Hon’ble Supreme Court in the case of Ramesh Kymal v Siemens Gamesa Renewable Power Private Limited (2021) 3 SCC 224[1], in the specific context of a petition under Section 9 of IBC, has disallowed an attempt to alter the date of default originally stated in a petition in order to avoid the bar under Section 10A of IBC which decision has been followed by the Hon’ble NCLAT in the case of Yatra Online Limited v Ezeego One Travel and Tours Limited (2023 SCC Online NCLAT 1356)[2]
Meanwhile, Section 10A has faced legal challenges, particularly on constitutional grounds. In Rajeev Suri v. Union of India, Order dated July 28, 2020 in W.P.(C) 4622/2020 a petition before the Delhi High Court argued that the suspension of Section 10 violated Articles 14 and 19(1)(g) of the
[1] Ramesh Kymal v Siemens Gamesa Renewable Power (P) Ltd (2021) 3 SCC 224.
[2] Yatra Online Ltd v Ezeego One Travel and Tours Ltd (2023) SCC Online NCLAT 1356.
Constitution. However, since the ordinance was later enacted into law, the petition was deemed infructuous and withdrawn.
In the matter of Company Appeal (AT) (Ins.) No. 294 of 2023 in Narayan Mangal v. Vatsalya Builders & Developers Pvt. Ltd[1] the Hon’ble NCLAT has answered to the question whether interest payments accrued during the Section 10A period is to be deducted while computing the threshold and it has been held that: –
“If the default is committed prior to Section 10A period and default continues there is no prohibition in initiating proceedings under Section 7 and we are not persuaded to accept the submission of the counsel for the respondent that the liability of interest which accrued during Section 10A period should be ignored or should not be computed in the amount while finding the threshold. Liability to pay interest which default committed prior to Section 10A period continues and is not obliviated by Section 10A.”
The National Company Law Appellate Tribunal (NCLAT), New Delhi, in the case of Beetel Teletech Limited v. Arcelia IT Services Private Limited [Company Appeal (AT)(Insolvency) No. 1459 of 2022],[2]held in its order dated September 11, 2023, that the initiation of the Corporate Insolvency Resolution Process (CIRP) is not barred if the default occurred before the onset of the Covid-19 pandemic and continued during the pandemic period.
[1] Narayan Mangal v Vatsalya Builders & Developers (P) Ltd, Company Appeal (AT) (Ins.) No. 294 of 2023 (NCLAT).
[2] Beetel Teletech Ltd v Arcelia IT Services (P) Ltd [Company Appeal (AT) (Insolvency) No 1459 of 2022, 11 September 2023] (NCLAT New Delhi).
Creditors Perspective: Implications and Alternative Remedies for Creditors
Enacted during COVID- 19, Section 10A of the IBC shielded companies from bankruptcy but severely impacted creditors. As defaults increased, MSMEs had financial flow issues, which led to company closures. NPSs for banks and NBFCs increased and thy were unable to collect debts under CIRP 2. Declared financial creditors, homebuyers were reluctant to stop real estate projects from being recurrent. The suspension, which was crucial for maintaining economic stability, curtailed the rights of creditors and emphasized the need for a more equitable insolvency law in the event of future crises. With insolvency proceedings suspended, creditors have had to rely on alternative legal mechanisms, including:
- The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI Act)
- The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act)
- The Commercial Courts Act, 2015, and the Code of Civil Procedure
[1] Narayan Mangal v Vatsalya Builders & Developers (P) Ltd, Company Appeal (AT) (Ins.) No. 294 of 2023 (NCLAT).
[1] Beetel Teletech Ltd v Arcelia IT Services (P) Ltd [Company Appeal (AT) (Insolvency) No 1459 of 2022, 11 September 2023] (NCLAT New Delhi).
These alternatives, however, are often time-consuming and less effective than the IBC’s streamlined insolvency resolution process. The lack of a clear mechanism for dealing with defaults post-March 2021 has only added to the confusion.
Conclusion
While Section 10A provided much-needed relief to businesses during the COVID-19 crisis, it also created significant challenges for creditors, particularly operational creditors and financial creditors such as homebuyers. The complete bar on insolvency proceedings for defaults during the suspension period has left creditors in a precarious position, with limited avenues for debt recovery.
Furthermore, the ambiguity surrounding the treatment of continuing defaults and accumulated debt has raised serious concerns about the future effectiveness of the IBC. The government must consider amending the provision to strike a balance between protecting distressed businesses and safeguarding creditors’ rights.
As the economic landscape stabilizes, lifting the suspension and clarifying the treatment of defaults will be crucial to maintaining the integrity and robustness of India’s insolvency framework. While Section 10A has served as a temporary safeguard, its long-term implications necessitate careful reconsideration and policy adjustments.
