Suspension Of Insolvency Proceedings In India

In the light of the economic upheaval on account of the Covid-19 pandemic and the resultant restrictions on economic activity, the Indian Government had proposed suspension of the right to initiate insolvency resolution proceedings under the Insolvency and Bankruptcy Code, 2016 (the “Insolvency Code”) for a period of six (6) months. In pursuance, the Indian Government has now introduced the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 (the “Insolvency Ordinance”), which became effective on June 5, 2020.

The Insolvency Ordinance has inserted a new Section 10A (Suspension of Initiation of
 Corporate Insolvency Resolution Process) in the Insolvency Code and modified
 Section 66 (Fraudulent Trading or Wrongful Trading) of the Insolvency Code. 

This note sets out a summary of the changes brought in by the Insolvency Ordinance.

1. SUSPENSION OF INSOLVENCY PROCEEDINGS 

Section 10A of the Insolvency Code prohibits the filing of applications under Sections 7, 9 and 10 of the Insolvency Code (i.e., by financial creditors, operational creditors and corporate debtors themselves) for the initiation of the corporate insolvency resolution process (CIRP) of a corporate debtor in respect of defaults arising during the six (6) month period from and including March 25, 2020 (the date of commencement of the national lockdown) (the six month period may be extended up to one (1) year). Section 10A of the Insolvency Code also prohibits in perpetuity the filing of applications for the initiation of CIRP of a corporate debtor in respect of any such default.

However, Section 10A of the Insolvency Code will not be applicable in respect of
 defaults committed by the corporate debtor prior to March 25, 2020.

2. SUSPENSION OF LIABILITY FOR WRONGFUL TRADING

Under Section 66(2) of the Insolvency Code, during the CIRP of a corporate debtor
 and upon an application filed by the resolution professional with the relevant National
 Company Law Tribunal, the directors or partners (in case of a limited liability
 partnership) of the corporate debtor can be ordered to personally contribute to the
 corporate debtor’s assets if the director or partner knew or ought to have known that
 there was no reasonable prospect of avoiding CIRP and did not exercise due diligence
 to minimize potential losses to creditors. The Insolvency Ordinance now inserts subsection (3) to Section 66 of the Insolvency Code, which prohibits making any
 applications under Section 66(2) in respect of any default for which initiation of CIRP
 has been suspended under Section 10A.

In the light of the suspension of CIRP applications under Section 10A of the Insolvency
 Code, lenders, debt investors, and borrowers can consider alternative out-of-court
 enforcement/ restructuring options, such as under the Reserve Bank of India
 (Prudential Framework for Resolution of Stressed Assets) Directions 2019 and the
 Securitisation and Reconstruction of Financial Assets and Enforcement of Security
 Interest Act, 2002, or in-court restructuring through schemes under Sections 230–232
 of the Companies Act, 2013.