IMPACT OF IBC AMENDMENT ORDINANCE 2020 ON BANKERS

By Khyati Sharma, 4th year student, Institute of Law, Nirma University

As every person engaged in business activities was aiming to expand their horizons of profit-making, the economy of the whole world had to bear the brunt of COVID-19 crisis. The stock exchanges worldwide were hit so hard that the people who invested money had to incur huge losses. Thousands of people in the world died due to this pandemic. Many COVID-19 affected countries had to implement lockdown to protect the remaining population. Hence, all the business activities like factories, industries, shops etc. had to be closed down, all of which led to an irreparable loss. This unimaginable cataclysm was beyond the control of humans. Undoubtedly, the national as well as international business was severely affected.

Therefore, to support the entities doing business, the Indian government had to introduce an IBC Amendment Ordinance 2020 as a relief measure in this urgent situation. There are various aspects in this amendment and their inseparable consequences. The amendment by this ordinance can be found as Section 10A of Insolvency and Bankruptcy Code (hereafter IBC). This amendment in the Insolvency and Bankruptcy Code suspended institution of insolvency proceedings against any corporate debtor, in case the default arises after 25th March 2020. The other end limit is unclear as it is until 6 months which can be extended to one year. Favoring the debtor, the ordinance permanently dispenses with COVID-19 related defaults. The problems raised by the financial and the operational creditors are excluded and they have to bear the losses arising from the defaults.

In addition to that, by a notification dated 24th March 2020, the threshold limit for initiation of insolvency proceedings was increased by the Central Government under the authority of Section 4 of IBC, from Rs 1 Lakh to Rs 1 Crore, but the proceedings can be initiated only after the expiry of 6 months or 1 year time period from when the crisis comes under control. This notification is prospective in nature and allows the matters pending adjudication before the date to be out of purview of this notification.

The ordinance also brought an amendment in definition of default given under IBC. The defaults related to COVID- 19 pandemic will be excluded from the ambit of default. This would ultimately disallow the initiation of insolvency proceedings against the debtor as the debtor will now be default-free. But the controversy and moot will arise on how to distinguish which defaults would classify as “COVID- 19 related defaults” and which would not.

The provision that no insolvency proceedings will be initiated against the debtor for default related to COVID- 19 crisis such that the debtor will be immune from such proceedings forever has also raised concerns. This provision can be misused by corporate debtors as they may not repay the loans and claim unfair but legal immunity.

Consequently, it is also unpredictable as to how, after the termination of the exemption period, the debtor can justify immunity from insolvency proceedings. As in case, when the creditors are banks and NBFCs, the debtor becomes accountable to repay the loan in installments with due interests after the RBI moratorium terminates. On default of repayment, the insolvency proceedings can be initiated against the defaulter by the creditor. Completely violating this concept, the new ordinance provides to dispense with treating the non-repayment as a default on the part of the debtor. The debtor is absolved permanently from the liability. Fearing the misuse of this provision, the banks are anxious about their losses. Therefore, lesser the accounts in the banks and the NBFCs during the moratorium period, lesser will be the cases of insolvency and the loss of these creditors.    

This ordinance has put a stay on application of certain sections of IBC viz. Section 7, 9 and 10 for the given time period. Section 7 authorizes initiation of insolvency proceedings by a financial creditor, Section 9 provides for initiation of insolvency proceedings by an operational creditor, and Section 10 provides for the right of a defaulting company to approach the adjudicating authority to declare it insolvent by initiating Corporate Insolvency Resolution Process (CIRP) giving protection from creditors.

The reaction of bankers to this ordinance was unwelcoming and critical as it can potentially promote exploitative practices by willful defaulters and fraudulent promoters. Taking advantage of this ordinance, many debtors may not repay the debts to the lenders.      

As the insolvency proceedings cannot be triggered within the given period, it implies that there will be reduction in creditors giving debts. This would adversely affect the fund raising for business activities. Also, the institutions providing credit like the banks, NBFCs etc will have to take recourse against the debtor who makes a default in payment. They cannot initiate insolvency proceedings against the debtor under the authority of IBC. Such creditors would seek remedy from civil courts or may be left remediless.