Implications of IBC Ordinance, 2020- Quick Round up

Resolution Division, 


The President today signed in the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 [‘Ordinance’] to implement the already-talked-about abatement of IBC filings for the period of the COVID disruption, and accordingly, amend the Insolvency and Bankruptcy Code, 2016 [‘Code’]. We analyse the Ordinance in quick bullet points –

  1. The Ordinance covers two major aspects – ‘default’ and ‘wrongful trading’. The second one is consequential to abatement of insolvency filings (see bullet below).
  2. As regards default, intention is to exclude default arising out of ‘unprecedented situation’. S. 10A inserted.
  3. The suspension on filing application is umbrella suspension. It covers filings by financial creditor’s, operational creditors, as well as self-filings by companies themselves. Accordingly, there shall be no filings under ss. 7, 9, & 10 for defaults taking place during the “disruption period”. There is no relaxation for MSMEs,  either as creditors or as debtors. The distinctive insolvency regime for MSMEs that the Finance Minister talked about is not there in the Ordinance.
  4. What we call as the ‘Disruption Period’ is a period of 6 months from 25th March, 2020. Therefore, it continues upto 24th September, 2020 and may be extended for upto 12 months, that is, upto 24th March, 2021, by notification.
  5. There are two major provisions in sec. 10A – abatement for filing of IBC applications for default during the disruption period, and “filings ever” for default during the disruption period. The concept of “filing ever” is what will create interpretational issues. Hence, we clarify it with 4 specific situations:

a. Default originates before disruption period, and is cured during the disruption period or continues thereafter.

b. Default originates during the disruption period, and is cured during the disruption period.

c. Default originates during the disruption period, and continues beyond the disruption period.

d. Default originates after the disruption period.


i. In case of situation (a), there is no doubt that there will be no abatement of filings;

ii. In case of (b), very clearly, there will be an abatement of filings;

iii. In case of (d), once again clearly, there will be no abatement of filings;

iv. It is (c) where there will be doubt, because of the language of the proviso. However, in our view, there will be no abatement in this case as well. Default continues every day there is a failure to pay. If the default has continued beyond the disruption period, it has actually occurred after the disruption period as well. Intuitively, if the disruption period is admittedly over, there is no reason for the debtor to take succour behind the disruption. Hence, such a debtor will be liable to suffer insovelncy filings.

  1. The expression “no application shall ever be filed’ as used in first proviso to s. 10A cannot be taken to mean that abatement is available even after the Disruption Period. If such an interpretation is taken, the provision becomes counter-intuitive. A blanket and ‘forever’ protection would rather actually incentivize a debtor to accelerate default so as to bring it during Disruption Period and avail a permanent abatement. This cannot be the intent of the law.
  2. Notably, pursuant to RBI moratorium [see our articles here], the Ordinance may not have much use in s. 7 cases, though the abatement might be useful in cases where the borrower has not availed the moratorium [chances are rare that such borrowers will commit default]. However, the abatement would be relevant with respect to s. 9 cases as majority filings would be by operational creditors. In essence, the Ordinance will mostly go to the detriment of the operational creditors, as financial creditors in any case will have extended the 6 months’ moratorium. Operational creditors mostly are MSMEs – so it remains arguable as to whether the Ordinance helps MSMEs or harms them.
  3. Some aspects pertaining to MSMEs –
    • MSME creditors cannot file for defaults lower than Rs. 1 crore (because of recent amendments in s. 4).
    • Now, pursuant to this Ordinance, MSMEs will not be able to invoke s. 9 cases even when the default by their debtors reaches the threshold. Therefore, MSMEs may be prone to willful non-payments by their debtors.
    • However, there is no relaxation of s. 16 of the MSME Act which calls for payment of interest to MSMEs for delay in payments. Therefore, those who owe money to MSMEs would still need to pay interest under the said provisions of the MSME Act. This should act as a deterrent against non-payment to MSMEs.
  4. Insertion of sub-section (3) in s. 66. It provides relaxation from wrongful trading provisions, which is understandable. Note, the sub-section should be read in the context of sub-section (2) and not sub-section (1), as the latter covers ‘fraudulent trading’.
5 replies
  1. Pratham malhotra
    Pratham malhotra says:

    The proviso intends to prohibit the initiation of CIRP forever where default is confined to duration of 6 months or extended time period as may be specified e.g. failure to pay any installment or operational debt due during above specified period. Where It is of continuing nature or related to non specified period, benefits will not be there.


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