NAVIGATING THE PANDEMONIUM : IMPACT OF COVID-19 ON MODEL CHRONOLOGY OF INSOLVENCY RESOLUTION AND LIQUIDATION MANEUVER

1. INTRODUCTION

The Insolvency Resolution And Liquation proceedings are initiated under the Insolvency and Bankruptcy Code, 2016 aimed at the resolving of conflict between creditors and debtors . It ease the process of obtaining debt , settling Insolvency in the corporate sector and setting up the time bound frame for effective way of protecting interest of stakeholders, creditors debtors to solve financial distress but COVID-19 lockdown created restrictions on various economic activity which caused a burden on such proceedings by delaying it to the uncertain time. There is a challenge to deal with legal protocols and economic growth

2. CORPORATE INSOLVENCY

Insolvency is the term used for a person or company who is unable to pay off their debts and if the assets are insufficient to discharge the debts, then collateral is taken to overcome the debt or a certain payment method can be suggested to pay off debt during the proceeding. The methods of repaying debts includes Liquidation, schemes of arrangement and voluntary administration etc.

3. LIQUIDATION

When there is a irrevitable breakdown of the company and the assets of the company is selled to pay for debt due to bankruptcy. Liquidation Proceedings are governed by National Company Law Tribunal under the Insolvency and Bankruptcy Code,2016 . A liquidator is appointed to sell the assets of the bankruptcy company to pay off the debts to the creditors for smooth functioning of the business affairs.

4. IMPACT OF COVID-19 ON INSOLVENCY AND LIQUIDATION PROCEEDINGS

The COVID-19 pandemic was life threatening as well as a bane to the economic activities. The seriousness and danger of COVID-19 pandemic lead to country wide lockdown thereby closing movement of people . In such precarious situation, it was challenging to conduct Insolvency and Liquidation Proceeding and there was no such provision on extension of the time period of such proceedings under the Code. It created financial distress and uncertainty among the creditors for revival of their debts. There was temporary amendments made in the Insolvency and Bankruptcy Code, 2016 by the Government which was supported by National Company Law Tribunal and Insolvency and Bankruptcy Board of India.

5. EXTENSION OF STATUTORY TIMELINE

There was a havoc regarding the inducement about the Insolvency and Bankruptcy proceeding when there was a lockdown . Earlier there was no such provision for such crucial situation . Earlier there was no period mentioned in the code for the completion of the reorganization and insolvency resolution process of a corporate person, due to these difficulties being faced due to lack of clarity. IBBI inserted regulation 40A in Insolvency Resolution Regulation,2016 by notification which provided a model timeline for the corporate insolvency resolution process.

• Regulation 47 was then added in the Code which provided the time required to be devoted by a liquidator on any particular process forming part of the liquidation process of a corporate person.
• Section 12 of the Code provided that the proceeding should be completed within 180 days and can extend maximum to 330 days for giving more time to the legal proceedings but the end of lockdown was so uncertain that there existed a lot of confusion.
• Later Regulation 47A was added to the Code that the period of lockdown should be excluded from the timeline of Insolvency and liquidation proceedings by IBBI.[1]

6. CONTRADICTION BETWEEN IBBI AND NCLT

• The IBBI notified the exclusion of the period of lockdown imposed by the central government due to the COVID 19 outbreak from the corporate insolvency resolution process. In the meantime, the NCLT ordered that the period shall be excluded for the purpose of counting the period of the resolution process if the office of the corporate debtor is in the part of the country where the lockdown is imposed either by the Central Government or by the State Government. There was a confusion regarding the extension of benefit to corporate debtor who resides outside containment zone.
• As per IBBI Notification, the lockdown period can be calculated from 29.03.2020 to 31.05.2020 only whereas as per NCLT order dated 30.03.2020, the entire lockdown period i.e. from 24.03.2020 to 31.05.2020 is liable to be excluded while calculating the number of days taken in completion of any activity in relation to a Corporate Insolvency resolution process.

7. AMPLIFICATION OF FINANCIAL DISTRESS

The economic offshoot created an upheaval and precarious circumstances which lead to stagnation of financial interest . The COVID-19 pandemic caused a challenge to legal professional, regulatory bodies and the corporate debtor, creditor and stakeholders to tackle Insolvency and liquidation proceedings equitably and effectively during lockdown. It also raises question about the feasibility of the present legislation, timeline and schedules to dispose the proceedings to be in accordance with the changing economic climate.

8. COMPUTATION OF PERIOD OF RELAXATION FOR PROCEEDINGS

On the application filed by the Corporate Debtor , National Company Law Tribunal decided that the IBBI defined the entire lockdown period as under the entire lockdown period i.e. from the date of imposition of lockdown by the Government of India till the reopening of National Company Law Tribunal, Chandigarh Bench on regular basis after removal of the lockdown should be excluded. Benches at different places will reopen their normal functioning at different time.

9. APPROPRIATE MEASURES TAKEN UP BY THE GOVERNMENT

• Increase in Payment Default Threshold : The government increased the amount of unpaid debt to the creditor for filling an Insolvency proceedings. This ensured protecting to small scale industries and businesses.
• Increase in Payment Default Threshold : The amount of payment default constituting the threshold for initiating insolvency resolution proceedings under the Insolvency Code was increased from INR 1 lakh to INR 1 crore.
• Exclusion of Lockdown Period from Timelines: Regulations under the Insolvency Code were amended to provide that the period of lockdown would not be counted for any activity/task in the Corporate Insolvency Resolution Process (CIRP) or liquidation process, as applicable, that could not be completed due to such lockdown.
• Suspension of Liability for Wrongful Trading: It is a temporary relief provided to the directors who are trying to figure out their way through Insolvency. The director will not be personally liable for increase in debt due to continuance of trade
• Special Insolvency Framework for MSMEs : It provides relief to the small and medium enterprises by simplifying the proceeding with trained professional well versed in dealing with MSME s Insolvency. It also grant moratorium period when no debt can be incurred by the creditor. It also aim at providing debt restructuring which involves negotiation with the creditor to arrange a manageable plan to repay their debts.[2]

10. CASE LAWS

10.1 Power Grid Corporation India Limited VS Jyoti Structures [3]

It was held that the bar stipulated under Section 14 of the Code is restricted to the debt recovery actions that would diminish the resources of the Corporate Debtor and does not include the proceedings for the enforcement of an arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996 which is in favour of the Corporate Debtor.

10.2 Committee of Creditors of Essar Steel Limited through Authorised Signatory VS Satish Kumar Gupta Ors. [4]

The Court ordered for implementation of Section 29A of the Code which caused the the resolution applicants NuMetal and Arcelor Mittal were held ineligible by the Supreme Court and instead of outrightly rejecting their resolution plans, they were given a time period of 2 weeks to rectify their ineligibilities.

11.CONCLUSION

The COVID 19 possessed a challenge to economic and legal system to change with the situation It caused many changes adopted by the government such as extension of period , adopting Debtor model , setting special framework for MSMEs etc to ensure flexibility and development of economy during the crisis. There is a need to acquire a good balance between effective disposal of proceedings and economic revival for smooth functioning in the corporate world.

DISAPPOINTMENT IS A SORT OF BANKRUPTCY WHICH THE COVID-19 PANDEMIC CAUSED TO THE SOUL OF ECONOMIC SURGE WHICH HAD IMPEDIMENT ON THE MODEL TIMELINE OF INSOLVENCY AND LIQUIDATION PROCEEDINGS

12.CITATIONS

1.RAHUL.LEGAL, " Impact of COVID-19 Pandemic On the Model Timeline of Insolvency Resolution and Liquation Proceedings" available at https://www.legalserviceindia.com/legal/article-3163-impact-of-covid-19-pandemic-on-the-model-timeline-of-insolvency-resolution-and-liquidation-proceedings.html (last visited on January 11, 2024)

2. ADITI BHAWSAR," Suspension of Insolvency Proceedings in India" available at https://signalx.ai/blog/suspension-of-insolvency-proceedings-in-india/ (last visited on January 11,2024)

3. O.M.P. (COMM) 397/2016

4. (2020) 8 SCC 531