Chapter 2

Introduction
The Insolvency and Bankruptcy Code, 2016 (IBC) was enacted in India to provide a
comprehensive framework for resolving the insolvency and bankruptcy of companies,
individuals, and partnerships. The IBC was designed to overhaul India’s outdated insolvency and
bankruptcy laws and to provide a more efficient and effective system for resolving insolvency.
Before the enactment of the IBC, India’s insolvency and bankruptcy laws were outdated and
fragmented, making it difficult for creditors to recover their dues and for insolvent companies to
restructure or liquidate their assets. The IBC aimed to create a single, comprehensive framework
that would provide a time-bound and cost-effective process for resolving insolvency and
bankruptcy. The IBC came into force on May 28, 2016, and has since undergone several
amendments to improve its effectiveness and address practical challenges.
Objective of IBC

 Consolidate and amend all existing insolvency laws in India.

 To simplify and expedite the Insolvency and Bankruptcy Proceedings in India.
 To protect the interest of creditors including stakeholders in a company.
 To revive the company in a time-bound manner.
 To promote entrepreneurship.
 To get the necessary relief to the creditors and consequently increase the credit
supply in the economy.
 To work out a new and timely recovery procedure to be adopted by the banks,
financial institutions or individuals.
 To set up an Insolvency and Bankruptcy Board of India.
 Maximization of the value of assets of corporate persons.

The IBC seeks to achieve these objectives through a well-defined process that includes various
stages, including initiation of insolvency, appointment of an insolvency professional, submission
of claims by creditors, resolution plan, and liquidation.
Conclusion
The Insolvency and Bankruptcy Code, 2016 has revolutionized the insolvency and bankruptcy
laws in India. The IBC has provided a more efficient and effective system for resolving
insolvency and bankruptcy cases, leading to faster recovery of dues for creditors and a more
transparent process for resolving insolvency. The IBC has encouraged entrepreneurship by
providing a clearer framework for resolving insolvency, making it easier for entrepreneurs to
start new businesses and take risks. Despite the challenges, the IBC has been a success, and the
government’s continued efforts to address the challenges will ensure that the IBC continues to be
an effective tool for resolving insolvency and bankruptcy cases in India.
 Sick Companies and Recovery of Debt:
Introduction-
In India, the Insolvency and Bankruptcy Code (IBC) was introduced in 2016 to address the issue
of sick companies and debt recovery. The IBC aims to provide a timely and efficient mechanism
for the resolution of corporate insolvency, which maximizes the value of assets, balances the
interests of all stakeholders, and promotes entrepreneurship.

Under the IBC, when a company defaults on its debt, a resolution process is initiated, which
involves the appointment of an insolvency professional to take control of the company's assets
and formulate a resolution plan. The plan can result in either the revival of the company or the
sale of its assets to recover the debt. If the plan is approved by the creditors, it is implemented,
and the company is revived. If the plan is not approved, the company is liquidated, and the
proceeds are used to repay the creditors.

In addition to the IBC, there are other laws and regulations in India that deal with debt recovery,
such as the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (DRT Act) and
the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 (SARFAESI Act). These laws provide banks and financial institutions with the power
to recover their debts without going through the courts.

Overall, the IBC and other debt recovery laws in India aim to provide a transparent, efficient, and
predictable mechanism for the resolution of corporate insolvency and the recovery of debt.
Meaning of Sick company
The Term "Sick Companies" refers to those companies that are unable to meet their financial
obligations and are on the verge of closure. There are various legislations in India that deal with
sick companies, including the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA),
the Insolvency and Bankruptcy Code, 2016 (IBC), and the Companies Act, 2013.

Under the Sick Industrial Companies (Special Provisions) Act, 1985, a company is considered
"sick" if it has accumulated losses equal to or exceeding its entire net worth, and it has been
unable to repay its debts for a period of at least three consecutive quarters.
The Insolvency and Bankruptcy Code, 2016 provides a mechanism for the resolution of
insolvency and bankruptcy cases. Under the Code, a company is considered "sick" if it is unable
to pay its debts when they become due or if it has defaulted on its payments for more than 90
days. The Code provides for the appointment of an Insolvency Resolution Professional (IRP) to
take over the management of the company and suggest a resolution plan. If the resolution plan is
not approved by the creditors, the company may be liquidated.

The Companies Act, 2013 also provides for the revival of sick companies. Under the Act, a
company is considered "sick" if it has defaulted on the repayment of its debts and is unable to
meet its financial obligations. The Act provides for the appointment of a Company Liquidator to
take over the management of the company and sell its assets to repay its creditors. The Act also
provides for the initiation of a scheme of revival and rehabilitation for the company, which may
include the restructuring of its debts, the infusion of fresh capital, and the appointment of new
management. Nature of Sick Company
Under Indian law, sick companies can be classified into two broad categories based on their
nature. These are:
1. Industrial Sick Companies:
These are companies that operate in the manufacturing sector and are unable to operate
profitably due to various reasons, such as outdated technology, inadequate market demand, lack
of funds, etc. Industrial sick companies are mainly dealt with under the Sick Industrial
Companies (Special Provisions) Act, 1985 (SICA), which provides for the identification,
protection, and revival of such companies.

2. Financially Sick Companies:

These are companies that are unable to pay their debts and meet their financial obligations.
Financially sick companies can operate in any sector, including manufacturing, services, and
trading. These companies are mainly dealt with under the Companies Act, 2013 and the
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest
(SARFAESI) Act, 2002.

The nature of sick companies can also be further classified based on the causes of their sickness.
These causes include external factors such as changes in government policies, market
fluctuations, economic slowdown, etc., and internal factors such as mismanagement, fraud,
embezzlement, etc. The identification of the causes of sickness is important for formulating a
revival plan for the company.
Debt Recovery
Debt recovery refers to the process of recovering the unpaid loans or dues from a borrower.
There are several laws in India that govern debt recovery, including the Recovery of Debts Due
to Banks and Financial Institutions Act, 1993 (RDDBFI Act), the Securitization and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI
Act), and the Insolvency and Bankruptcy Code, 2016 (IBC). Debt recovery and restructuring are
crucial processes in the Indian economy, as they help to revive sick companies, reduce the
burden on the banking sector, and promote economic growth.
Process of Recovery of Debts
The process of debt recovery of sick companies in India involves several steps, which are
outlined below:
Identification of sick companies: The first step in the debt recovery process is to identify sick
companies. This can be done through the use of various indicators, such as declining sales, high
debt levels, and negative cash flows.

Financial restructuring: Once a sick company has been identified, the next step is to explore
the possibility of financial restructuring. This can involve the rescheduling of debt, reduction of
interest rates, and conversion of debt into equity.

Corporate debt restructuring: If financial restructuring is not possible, the next step is to
explore the possibility of corporate debt restructuring (CDR). CDR involves the restructuring of
the company's debt in coordination with its creditors.

Asset reconstruction: If financial and corporate debt restructuring are not possible, the next step
is to explore the possibility of asset reconstruction. This involves the transfer of the company's
assets and liabilities to a new entity, which is then responsible for the recovery of the debt.

Insolvency proceedings:
If none of the above measures are successful, the final step is to initiate insolvency proceedings
under the Insolvency and Bankruptcy Code (IBC). This involves the appointment of a resolution
professional, who is responsible for the resolution of the company's debt.
The above steps are not necessarily sequential and can be taken concurrently. The debt recovery
process of sick companies in India is a complex and time-consuming process that requires the
coordination of various stakeholders, including creditors, debtors, and insolvency professionals.
 India’s rising NPA problem
Introduction
 An asset, including a leased asset, becomes non-performing when it ceases to generate income
for the bank.Loan or advances for which the interest and/ or installment of principal has
remained ‘past due’ or remained unpaid for a period of 90 days.It is represented in percentage out
of the total advances in the bank’s balance sheet. It is also referred to as ‘Bad Assets’.

Problem of Rising NPA Ratio

Despite the introduction of prudential norms and a stringent regulatory mechanism, the
Indian banking system is still under continuous stress. According to the data from the Reserve
Bank of India (RBI), Non-Performing Assets (NPAs) for unrated loans has increased to 24%
(2018) from about 6% (2015).

1.Credit Boom: The problem of rising NPAs began since credit boom which the country
witnessed during 2003-04.

 Between 2003-04 and 2007-08, the outstanding non-food credit or the commercial
credit expanded by three times, which during 2007-08 and 2011-12 got doubled.
 It was a period during which the world as well as the Indian economy was
booming. Indian firms borrowed furiously in order to avail the growth opportunities.
 Credit booms are generally succeeded by stress in the banking system which actually
happened in India.
 The substantial flow of credit to infrastructure (power, roads, telecom), mining,
aviation, iron and steel was important for growth but these were also subject to severe
output fluctuations, which raised a huge burden on the banks. Also, large Chinese
imports during that period affected the iron and steel industry.

2.Monetary Policy: The Reserve Bank of India also followed a tightened monetary policy at
that time.

 The Repo rate was increased from 6% (March 2004) to 9% (August 2008). Also,
the Cash Reserve Ratio was raised from 4.75% to 9%.
 But even after tightening the norms, the credit expansion happened which ultimately led
to rising NPAs.
 However, during 2008, the repo rate and CRR were lowered substantially in response to
the global financial crisis. There was a mild reversal of this step as was marked by
a slowdown in real growth (between 2009 and 2012).

3. Role of NBFCs: In addition to that, the assets under management of mutual funds and
credit extended by Non-Banking Financial Company (NBFCs) also expanded
enormously during that period.

4. Stalling Legislative & Judicial Procedure: Court judgments had an adverse impact on
mining, power and steel sectors. There were problems in acquiring land and
getting environmental clearances because of which several projects got stalled and
consequently, the project costs soared.

5. Regulatory Forbearance: Although there were some regulatory steps that were
initiated like Asset Quality Review introduced in 2015 which tightened the situation to
bring out greater transparency led to a doubling of the NPA ratio in one year. But, by that
time, the banks were left with a huge problem with no immediate relief.

6. Other reasons:
 With the onset of the global financial crisis in 2007-08 and the slowdown in growth after
2011-12, revenues fell well short of forecasts. As a result, financing costs rose as policy
rates were tightened in India in response to the crisis.
 Further, the depreciation of the rupee meant higher outflows for companies that had
borrowed in foreign currency.
 This combination of adverse factors made it difficult for companies to maintain and repay
their loans to banks. Higher NPAs meant higher provisions on the part of banks which
rose to a level where banks (especially PSBs) started making losses. Therefore, once
NPAs happen, it is important to resolve them quickly, otherwise, the interest on dues
causes them to rise relentlessly.

Some additional remedial measures are suggested to control the NPAs as follows: -
1) There must be an effective and regular follow-up with the customers and need to watch is
there any diversion of funds. This process can be taken up at regular intervals.
2) Between the Bankers – borrower a healthy relationship should be developed. Many
instances reported that the banks use force in recovery of loans, which is unethical.
3) Banks have to take decisions regarding filing of suits expeditiously and effectively
follow-up the filed and decreed cases.
4) . Frequent discussions with the staff in the branch and taking their suggestions for
recovery of NPAs make them feel responsible.
5) RBI need to take necessary actions against defaulters like, publishing names of defaulters
in Newspapers, broadcasting media, which is helpful to other banks and financial
institutions.
6) Lok Adalats are identified as fast recovery agencies of smaller loans.
7) Good credit appraisal and performance evaluation method should be adopted.
8) Framing reasonably well documented loan policy and rules.
9) While advancing loans, the three principles of bank lending viz., Principle of Safety,
Principle of Liquidity and principle of Profitability must be adhered to.
10) . The recovery process is very slow; as such the Government needs to update the process
which is fast and effective.
 CHAPTER 3

Initiating an application for Resolution

Application by Financial Creditor –Book My Video Xerox

Application by Operational Creditor - Book My Video Xerox

Application by Corporate Debtor- Book My Video Xerox

Information Memorandum
 Resolution plan

SEC 30 & 31- Book My Video Xerox

In Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd., wherein the Apex court held
that “…What is important is that the existence of the dispute and/or the suit or arbitration
proceeding must be pre-existing i.e. it must exist before the receipt of the demand notice or
invoice, as the case may be.”

The Supreme Court has thus held that if the dispute predates the receipt of the notice, the
Adjudicating Authority (AA) can reject the CIRP application of OC. The AA does not need to be
satisfied whether the defense is likely to succeed. So long as a dispute truly exists, the AA has to
merely reject the application.

The Hon’ble Supreme Court in Innoventive Industries Ltd. v. ICICI Bank (2017) observed that
the intention behind the levying moratorium period was to provide the debtors with some
breathing spell in which they could reorganise their business.

Further in the case of Swiss Ribbons v. Union of India, 28 various challenges were raised against
the validity of section 29A. The petitioners argued that a person, cannot be held to be ineligible
merely on the ground that he is a relative of an ineligible person. The Court held that “we are of
the view that persons who act jointly or in concert with others are connected with the business
activity of the resolution applicant. Similarly, all the categories of persons mentioned in Section
5(24A) show that such persons must be “connected” with the resolution applicant within the
meaning of Section 29A(j).” Thus, The SC Upheld the validity of Section 29A.

Section 53: The heart of IBC

Understanding Section 53 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) is crucial to
appreciate the judgement. The said section deals with the mechanism for the distribution of
assets under the liquidation of the company. This mechanism is laid down under the Code and is
termed the “Waterfall Mechanism”, which puts down a sum of stakeholders in a sequential
manner which designates the priority in which the payment will be distributed from liquidation.
The payment priority U/S.53 of Insolvency and Bankruptcy Code, 2016 (‘IBC’) is first given for
Insolvency Resolution Procedure (IRP) and liquidation cost. After the cost payment, workmen
who fall under the first category of the list and secured creditors under second place in the
waterfall mechanism are placed at par with “workmen’s dues for 24 months before the
liquidation commencement date” under section 53 of IBC. [4] It is clear by the provision that there
are categories and according to their place, the priority will be given for example, secured
creditors are on 2nd place whereas government dues are on 5th place. Section 52 of IBC confers
each secured creditor with an option to either relinquish its right to the liquidation estate or
realise its security interest. seperataly, subject to the provisions of IBC. after the relinquishment
of the security interest by the secured creditors, the secured assets become a part of the
liquidation estate of the corporate debtor, and [5] the liquidator can such assets can be sold under
regulation 32 of Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations,
2016. And, if the secured creditors determine to realize their interest in the secured assets of the
corporate debtor, such assets will not become part of the liquidation estate of the corporate
debtor.

The government dues are under the fifth category under the waterfall mechanism, according to
Section 53 of the Code. In a recent case, Technology Development Board v. Anil Goel,[6] the
Appellant tribunal discussed the waterfall mechanism under Section 53 of ‘IBC’. The tribunal
held “that when secured creditors have the option between relinquishing their right in favour of
the liquidation estate and realising their security interests individually, once they choose to
relinquish interest, the repayment will take place strictly as per Section 53 of IBC, which does
not recognise any distinction between different classes of ‘secured creditors'”.
 CHAPTER 4

Moratorium- Book My Video Xerox

Personal Guarantors under Insolvency and Bankruptcy Code, 2016

Introduction

The Insolvency and Bankruptcy Code, 2016 (IBC) has revolutionized the corporate insolvency
resolution process in India. While the focus of the IBC is primarily on corporate debtors, it also
recognizes the importance of personal guarantors in the debt recovery process. Personal
guarantors play a crucial role in securing loans and credit facilities provided to corporate entities.
In this article, we will explore the legal status and implications of personal guarantors under the
Insolvency and Bankruptcy Code, 2016

Understanding Personal Guarantors

A personal guarantor is an individual who provides a guarantee for the repayment of a loan or
credit facility taken by a corporate debtor. Personal guarantors undertake the responsibility of
fulfilling the financial obligations of the corporate entity in case of default. They act as a
secondary source of repayment for the lender and provide an additional layer of security.

Applicability of IBC to Personal Guarantors

The IBC was amended in 2019 to include provisions for the insolvency resolution process of
personal guarantors. Under Section 2(e) of the IBC, the term "personal guarantor" has been
defined as an individual who is the surety in a contract of guarantee to a corporate debtor.

Insolvency Proceedings against Personal Guarantors

The IBC provides for insolvency proceedings against personal guarantors in the same manner as
corporate debtors. The creditor of the corporate debtor can initiate insolvency proceedings
against the personal guarantor if there is a default in repayment. The proceedings are conducted
before the National Company Law Tribunal (NCLT).

Rights and Obligations of Personal Guarantors

Personal guarantors, like corporate debtors, have certain rights and obligations under the IBC.
Some key points to consider are:
1. Right to Contest: Personal guarantors have the right to contest the insolvency proceedings
initiated against them. They can present their case, provide evidence of repayment, or dispute the
default alleged by the creditor.

2. Obligation to Disclose: Personal guarantors have an obligation to disclose their assets,

liabilities, and financial position during the insolvency process. They must provide accurate and
complete information to facilitate the resolution process.

3. Liability for Repayment: Personal guarantors are liable to repay the outstanding debt in case of
default by the corporate debtor. If the insolvency proceedings result in a resolution plan or
liquidation, the personal guarantor's assets may be utilized for repayment.

4. Moratorium: Similar to corporate debtors, personal guarantors also enjoy the benefit of a
moratorium period during the insolvency proceedings. This period provides them with protection
against any recovery actions by the creditors.

Impact on Credit Rating and Future Borrowings

One significant consequence of insolvency proceedings against personal guarantors is the

potential impact on their credit rating and future borrowing capacity. The insolvency process and
the subsequent outcome can have long-term repercussions on the personal guarantor's financial
standing and creditworthiness.

Conclusion

The inclusion of personal guarantors within the ambit of the Insolvency and Bankruptcy Code,
2016 has provided a comprehensive framework for dealing with their insolvency proceedings. It
recognizes the importance of personal guarantors in securing credit for corporate debtors and
aims to strike a balance between creditor rights and the interests of personal guarantors.
Understanding the legal status and implications of personal guarantors under the IBC is crucial
for individuals involved in corporate lending and credit transactions.
 CHAPTER 5

Role of Interim Resolution Professional (Book My Video Xerox) Sec 16

Committee of Creditors: Powers, Duties and Processes (Book My Video Xerox) Sec 21
 CHAPTER 6

Ineligible Applicants- (Book My Video Xerox) Sec 29A

The case of Ruchi Soya & Need for revising MPS norms
The shares of the company ‘Ruchi Soya’ which were acquired by Patanjali Ayurved Ltd. as a
part of the CIRP in December 2019, were relisted in January 2020 at Rs. 17 per share. Within a
period of 5 months post relisting, its share prices hiked to INR 1,535/share on 29 June 2020,
which equals itself to a sharp increase by 8,929%. This happened despite of the additional
preventive surveillance actions taken by the market regulator, including reduction in price band
& moving the scrip into trade for trade segment. As a result, the overall market capitalization of
Ruchi Soya hiked from INR 4,350 crore to INR 45,000 crore in only 5 months. This was even
higher than the market capitalization of giants like Tata Steel, Ambuja Cement, Bharti Infratel &
IndusInd Bank.

Now, it becomes gripping to analyze how this has happened despite the tight regulatory watch.
One of the main reasons behind this was the low level of free float. This means that very few
shares were available for the public to trade for the shares of Ruchi Soya. Post-CIRP, Patanjali
group holds 99.03% of shares of Ruchi Soya, which means that the shares available on the stock
exchange are even less than 1%. This resulted in less supply of the shares, the demand of which
became significantly high & which in turn, resulted in share prices rising exponentially. Also, it
was the speculation over revival or a reverse merger of Patanjali with Ruchi Soya that lead to the
high demand of its shares.
 CHAPTER 7

Undervalued Transactions –

Fraudulent Transactions –

Transactions defrauding Creditors – ‘

Extortionate Credit Transactions

Jaypee Infra Case

In the case of the Jaypee Infratech , Jaiprakash Associates Limited is a public listed company and
Jaypee Infratech Limited is its subsidiary, JAL, the parent company of JIL applied as resolution
applicant while dealing with the eligibility of Jaiprakash Associate Limited (JAL), the Supreme
Court observed that JAL and other promoters are ineligible to submit resolution plan by using
Section-29A of code. Further section 29A, of Code, allows the bidder/applicant if it clears off all
its dues to be eligible as resolution applicant

Nikhil Mehta Case

In this case, the facts were similar to the Nikhil Mehta Case. An MOU was signed by the
Appellants and the Respondents wherein the Respondents promised to pay "committed returns"
till the time possession of the sale properties were handed over to the Appellants. When the
Respondents stopped paying the committed returns amount, the Appellants filed an application
under section 7 of the IBC. The Principal Bench of the NCLT Delhi rejected the application as it
considered this transaction a simple sale transaction.4 On appeal however, the NCLAT revered
this finding. Based on its own pronouncement in the Nikhil Mehta Appeal Judgment, the NCLAT
held that in the present case also, the Appellants were playing the role of investors, the money
given by them to the Respondents was in the nature of a loan, satisfying the condition of amount
"disbursed against the consideration for time value of money" and, the committed returns were in
the nature of "interest". Thus, there was a debt under section 5(8) of the IBC and the Appellants
were Financial Creditors under section 5(8) of the IBC.

Highlights of the Ordinance

 The Insolvency and Bankruptcy Code allows a corporate debtor as well as its creditors to
initiate an insolvency resolution process. The Ordinance prohibits the initiation of
insolvency proceedings for defaults arising during the six months from March 25, 2020
(extendable up to one year).

 A director or a partner may be held liable if despite knowing that insolvency proceedings
cannot be avoided, he did not exercise due diligence in minimising the potential loss to
the creditors. The Ordinance removes this provision for defaults in the above period.

Key Issues and Analysis

 The suspension of the insolvency resolution process raises several issues. First, it
prohibits resolution even in cases where that may be the best way to preserve the value of
assets. Second, it removes the option of a debtor to avail of the insolvency process for
restructuring. Third, it is unclear why insolvency proceedings against specified defaults
have been prohibited forever.
  It may be questioned whether a personal guarantor to a corporate debtor should undergo
insolvency proceedings for defaults for which insolvency proceedings are not allowed
against the debtor

PART A: HIGHLIGHTS OF THE ORDINANCE

Context
The Insolvency and Bankruptcy Code, 2016 provides a time-bound process to resolve insolvency
among companies and individuals. Insolvency is a situation where an individual or company is
unable to repay their outstanding debt. In light of the COVID-19 crisis, the World Bank
identified two key challenges for an insolvency framework: (i) need to prevent otherwise viable
firms from prematurely being pushed into insolvency and (ii). In India, the threshold of default
for initiation of insolvency proceedings was raised from one lakh rupees to one crore rupees.
Further, regulations were amended to provide that the lockdown period will not be counted in the
timeline for ongoing proceedings for certain activities. In this context, the Insolvency and
Bankruptcy Code (Amendment) Ordinance, 2020 was promulgated on June 5, 2020. The
Ordinance notes that COVID-19 has created uncertainty and stress for businesses for reasons
beyond their control and it is difficult to find an adequate number of resolution applicants to
rescue the corporate debtor who may default in discharging their debt.4
Key Features

 Prohibition on the initiation of insolvency proceedings for certain defaults: The

Code allows the corporate debtor as well as its creditors to initiate insolvency resolution
process. The Ordinance provides that for defaults arising during the six months from
March 25, 2020 (extendable up to one year), no insolvency proceedings can ever be
initiated by either the corporate debtor or its creditors.

 Liability for wrongful trading: A director or a partner of the corporate debtor may be
held liable to make personal contributions to the assets of the company in certain
situations. This liability will occur if despite knowing that the insolvency proceedings
cannot be avoided, the person did not exercise due diligence in minimising the potential
loss to the creditors. The resolution professional may apply to the NCLT to hold such
persons liable. The Ordinance prohibits the resolution professional from filing such an
application in relation to the defaults for which insolvency proceedings have been
prohibited.

PART B: KEY ISSUES AND ANALYSIS

Bar on the initiation of insolvency resolution process for certain defaults
The Insolvency and Bankruptcy Code, 2016 (IBC) allows the corporate debtor as well as its
creditors to initiate the insolvency resolution process. The Ordinance provides that for defaults
arising during the six months (extendable up to one year) from March 25, 2020, no insolvency
proceedings can ever be initiated by either the corporate debtor himself or any of its creditors.
We discuss some related issues below.
Need for the complete suspension of the corporate insolvency resolution process
The Ordinance prohibits initiation of insolvency proceedings against defaults arising during the
specified period. This raises the question whether a complete suspension is required. On one
hand, there is a need to safeguard companies, which were viable before the pandemic and whose
insolvency is temporary, from being prematurely pushed into insolvency.1 On the other hand, a
complete suspension of insolvency proceedings may take away a distressed company’s
opportunity to seek recourse under the IBC framework. For certain companies, the deferral of
insolvency proceedings may lead to further deepening of their financial stress and the resultant
loss in value.
The Ordinance also states that it is difficult to find an adequate number of resolution applicants
during this period.4 This may increase the risk of liquidation of a company which could have
been rescued by sale as a going concern in a normal situation. However, another possible
outcome of an insolvency resolution process is debt restructuring where debt obligations are
reorganised to resolve insolvency, but the company is not sold to a third-party buyer. In United
Kingdom, for instance, the insolvency law was amended in June 2020 to provide certain new
types of restructuring options for companies facing financial difficulty.
Further, it raises a question whether all defaults during the specified period need to be treated in
the same manner. There may be defaults which were not induced due to COVID-19 related
disruptions but are a result of distress in companies before the pandemic. That said, whether a
default is induced by COVID-19 or not will be subject to interpretation and may lead to disputes
which can result in increased litigation.
Corporate debtor is prohibited from initiating insolvency proceedings
The Ordinance prohibits the initiation of insolvency proceedings by the corporate debtor. The
question is whether the corporate debtor should be prohibited from initiating insolvency
proceedings. The corporate debtor may be better placed to assess whether the recourse under the
insolvency framework is warranted. A voluntary and timely initiation of insolvency proceedings
by an insolvent debtor could maximise the benefits for the debtor as well as creditors. Note that
in countries such as Spain, Germany, and France, while creditor-initiated insolvency proceedings
were restricted and the duty of the debtor to file for insolvency were relaxed, voluntary
insolvency proceedings by the debtor have been allowed.1,[6]
Insolvency proceedings against the specified defaults are prohibited forever
The Ordinance states that no insolvency proceedings can ever be initiated against defaults
occurring during the specified period. This could result in a scenario where creditors are unable
to hold the company liable for these defaults even after the company’s ability to repay has been
restored. It is unclear why a debtor should be protected from the liability for these defaults even
after its temporary adverse situation has been resolved.
Initiation of insolvency proceedings against the personal guarantor to a corporate debtor
Under the Code, insolvency proceedings can be initiated against the personal guarantor of a
corporate debtor. This is an individual who provides a guarantee for the debt of a corporate
debtor. While the Ordinance prohibits insolvency proceedings against the corporate debtor for
the defaults occurring during the specified period, it does not disallow such action against the
personal guarantor. The question is whether the personal guarantor should be held liable for
defaults for which the original debtor’s liability itself has been relaxed.