Insolvency Law’s response to COVID-19

With 42,68,496 confirmed cases and 2,87,463 deaths across the world, the deadly coronavirus has created a turbulence in the social, political and economic environment. India, too, is fighting against the pandemic and has not been pardoned the distress caused by the virus. To prevent further anguish the government has imposed a lockdown all over the country and, as a result, social and economic activity has come to a standstill. As is clearly observable, our country’s economy is adversely affected by the lockdown, with our insolvency laws also taking a hit. Insolvency Law is the legal term describing the situation of a debtor who is unable to repay his/her debts. The Insolvency and Bankruptcy system in India has made some amazing progress from its commencement in 2016. The law has been continually tried and has developed over time. Its outcomes can be observed effortlessly with India earning a spot amongst the World’s Ten Best Improvers[1].

Insolvency is not the same as bankruptcy. Insolvency is a state of economic distress, whereas bankruptcy is a court order that decides how an insolvent debtor will deal with unpaid obligations. An individual or company can be insolvent without being bankrupt — especially if the insolvency is temporary and correctable but not vice-versa.

The government has established two institutions on 1st June 2016, to better control matters related to insolvency and bankruptcy. These are the National Company Law Tribunals (NCLT) and the National Company Law Appellant Tribunal (NCLAT) under section 408 of the Companies Act 2013. The NCLT is the only platform which preserves the responsibility to give judgements to all the disputes with respect to the companies of India. It is the only institution having the jurisdiction of the company law board which is the reconstruction of industrial and financial institutions[2]. The appellate officialdom of Industrial and Financial reconstruction and jurisdictions are winded up and the other provision vested with High Courts are now handed over to the NCLT and NCLAT. Therefore, now the company law board is no longer functioning the same as when it was formed under the Companies Act of 1956.

The tribunals can handle all the company related disputes which do not include criminal prosecution as under the Companies Act. Their powers, however, are limited as given by the Act. As of today, the tribunals deal with issues related to class action suits, investigation of a company’s account, freezing of the assets and company conversions. The appeals are dealt through the medium of NCLAT over other courts. The spread of the coronavirus has not only made our lives miserable from a social perspective but it is also affecting the economy of our country heavily.  For the same reason the government, financial regulators and international organization are responding to the deadly pandemic with a package of legal, financial, and economic measures. The legal changes are basically temporary reforms in the frame work of the insolvency law[3].

Due to the lockdown, corporate debtors presently going through Corporate Insolvency Regulation Process (CIRP) under the code can no longer engage actively in the respective functions efficiently within the time limit as stipulated under the code. In the light of the above situation, a series of amendments were instigated among other things to insolvency law. A code and regulations were framed under the regulations, catching up with the regulatory changes and relaxation introduced through different legislation across different sectors of the economy due to the ongoing deadly pandemic. The changes made by the authority are as follows:

1. Increasing the De Minimus Threshold for Initiating CIRP

Practicing its forces under Section 4 of the Code, the GOI gave a notice on 24 March 2020 expanding the de-minimus sum for recording an application to start CIRP of a corporate account holder from INR 1 lakh to INR 1 Crore. The Ministry of Finance (MoF) additionally gave an official statement on 24 March 2020 (Press Release) expressing that the goal of this revision is to control the recording of CIRP applications against smaller scale little and medium undertakings.

2. Amending the CIRP Management

There is a new regulation thrust in the CIRP regulations that is 40C on 29th March 2020 in the IBBI vide the Insolvency and Bankruptcy Board of India on the same day, providing the exclusion of the period of lockdown imposed by the central government with respect to the COVID-19 pandemic from calculation of the timelines for completion of the activities which fall under CIRP, despite the timelines given by the CIRP regulations. The timeline under 40B of CIRP regulation in respect to the filling various forms by the insolvency interim and others related to it as the case may be has been drawn forth to 30th October 2020. The authorities are also taking steps to comply with the procedural requirements under the code and are taking calculated measures by taking steps such as providing allowance and concession to resolve this procedural issue.

3. Amending the Liquidation Regulation

The Insolvency and Bankruptcy Board of India (IBBI)has introduced 47A regulation which is similar to the 40C of the CIRP regulation. The regulation 47A says that the period of the lockdown due to Covid-19 should not be counted with respect to the completion of any liquidation processes that could not be completed due to such lockdown.

4. Order Issued by NCLAT

The Supreme Court of India (Supreme Court) on 23 March 2020 took suo moto cognizance into the hardships of the people. It requested that the time of constraint in all procedures and councils in the nation independent of the impediment recommended under general law or uncommon law, regardless of whether condonable or not, will be reached out with impact from 15 March 2020 till further requests are passed by the Supreme Court to guarantee that legal advisors/defendants don’t need to be truly present for any procedures. NCLAT also took the same decision as the Supreme court and by practicing powers under Rule 11 of NCLAT rules 2016 gave its judgement in Quinn Logistics India Pvt. Ltd vs Mack Soft Tech Pvt. Ltd. In company appeal[4], issued by NCLAT order[5]

5. Notification by NCLT

The NCLT has released a progression of notifications through the means of a public notice, comparable to the way of working of the seats of NCLT in the wake of COVID-19 pandemic. Despite the fact that these notifications don’t give concessions corresponding to the exercises required to be attempted as far as the Code, they have an immediate bearing on the progressing CIRP/liquidation forms. The notification on 15th March 2020 stated that the benches were only to take up matters that are urgent and hearing will be only done after the request made by the both respective parties. All the matters have been simply adjourned[6].

Legislative Response

The deadly pandemic COVID-19 is a distress to the whole world today and it has given a much-needed discussion on the insolvency law, a pillar of our economy. Practitioners and scholars have considered a lot of changes that might be crucial in saving our economy and our stakeholder rights.

Eliminating the duty of the directors to file for insolvency, providing services to liquidate assets for distressed businesses and protection of the business are some steps that can be a boon for our country’s economy. The Indian Government on Tuesday, 24th March 2020, raised the limit of default for recording of an indebtedness request under the Insolvency and Bankruptcy Code (IBC), 2016 from Rs 1 Lakh to Rs 1 Crore. Area 4 of the IBC determines Rs 1 Lakh as the base default sum premise under which an IBC appeal might be documented. This segment gives the Government of India the capacity to build on this limit and add any higher sum up to Rs 1 crore.

The Central Government has practiced this force vide its warning dated March 24, 2020 and subsequently, petitions under the IBC can’t be documented in regard of instalment defaults underneath Rs 1 crore[7]. This is a welcome move and will help the small and medium businesses who have been hit the hardest by COVID-19. The government had also notified that if the situation is the same and there is no progress and it till the 30th  April 2020 then Section 7, i.e., right of a financial creditor to file application; Section 9, i.e., right of an operational creditor to file an application and Section 10, i.e.., right of the company to file an application under IBC will be suspended. Thus, as of now these three sections are suspended for a period of 6 months[8].

Insolvency Law Reforms Globally  

Many countries like Australia, Switzerland and Spain have responded swiftly to the pandemic. Many countries have suspended insolvent trading norms. Therefore, directors can continue business in spite of the company’s cash flow ineptness situation on account of COVID-19. On the other hand, Germany with similar relaxations, is experiencing the opposite. Business will continue incurring further debts without a careful plan to regenerate once the restrictions are ceased. In addition to this, the company directors will not be protected[9].

The Way Forward

While the progressions presented are increasingly necessary and also welcome, a few aspects, as noted below, may need to be considered to deal with the crisis holistically.  Section 5(15) of the IBC was amended because the power under this section gives the government authority to identify certain debts of any company which maybe super-priority loans in the insolvency of the companies. Through the means of Section 5(15), governments can keep a watch on from where debts are raised for the affordable middle-class housing investment fund. There are several cases of restrictions imposed by the guidelines released by the Reserve Bank of India (RBI) which is dated 7th June 2019 and creditors have signed the inter-creditor agreement of RBI to agree on the reconstruction of everything in 180 days. This requires the amount of the company’s debts before the process starts.

By and large, this is an uncommon and extreme period for organizations and the insolvency system needs to demonstrate adaptability while considering such factors. The government has so far put in great effort to try and adapt to this situation with respect to insolvency and bankruptcy but the fight with the deadly pandemic is far from over. The people of India need to encourage the steps undertaken by their government to combat the present situation.


[1] http://www.mca.gov.in/Ministry/pdf/ICLReport_05032020.pdf

[2] https://www.ibbi.gov.in/

[3] ICL Report of February 2020

[4] Company Appeal (AT) (Insolvency) No. 185 of 2018

[5]Order dated March 23, 2020 in Suo Moto Writ Petition (Civil) Nos. 3/2020

[6] https://ibbi.gov.in/uploads/legalframwork/d36301a7973451881e00492419012542.pdf

[7] https://economictimes.indiatimes.com/topic/Insolvency/news

[8] https://ibbi.gov.in/uploads/legalframwork/d36301a7973451881e00492419012542.pdf

[9]https://www.financialexpress.com/money/conona-relief-sbi-to-provide-loan-7-25-p-a-to-covid-19-affected-borrowers/1906112/

Harsh Mangesh Upadhyay from The Maharaja Sayajirao University, Baroda

You can find him here

editor: vatsala sood

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