Suspension of initiation of corporate insolvency resolution process [Section 10A ] - Insolvency Resolution And Liquidation For Corporate Persons - IBC

Suspension of initiation of corporate insolvency resolution process In addition to increasing the default threshold, the Central Government passed the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020, on June 5, 2020, to exclude defaults arising from the impact of the pandemic and the nationwide lockdown for the purposes of insolvency proceedings. This was subsequently replaced by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2020 which was notified on September 23, 2020 (having effect from June 5, 2020). The ordinance has inserted Section 10A into the IBC, which provides that no application to initiate a CIRP of a CD shall be filed for any default arising on or after March 25, 2020, for a period of six months or such further period, not exceeding one year from such date , as may be notified. The ordinance also provides that no application shall ever be filed to initiate a CIRP for a default occurring during this period. The ordinance clarifies that Section 10A shall not apply to any default committed before March 25, 2020 . Meaning of Default Threshold Limit Default is defined in section 3(12) of the IBC as non-payment of a debt when the whole or any part or installment of the amount of debt has become due and payable, and is not paid by the debtor or the CD, as the case may be. Section 4 of the IBC provides that Part II of the IBC (which deals with the CIRP and liquidations) shall apply to matters relating to the insolvency and liquidation of CDs where the minimum amount of the default is Rs. 100,000/-. The Central Government may, by notification, specify a higher minimum amount, but it shall not be more than Rs. 1 Crore . Recognizing the stress faced by companies as a result of COVID-19 , the Central Government passed a notification on March 24, 2020 increasing the threshold of default to Rs. 1 Crore. Extension of Default time period [ Notification No. S.O. 4638(E), dated 22nd December, 2020 ] The Central Government had notified further period of three months from the 25th December, 2020, for the purposes of the said section. T h i s Section was inserted on account of pandemic situation on account of COVID-19 all over India. The Notification also extended the period form 25th December, 2020 i.e. 25th March, 2021 which has now gone, so the applicability of it has become redundant. Relevant Case Law I n the matter of Ramesh Kymal Vs. Siemens Gamesa Renewable Power Pvt. Ltd . SC dated 09.02.2021], The Supreme Court held that the substantive part of Section 10A is to be construed harmoniously with the first proviso and the explanation. Reading the provisions together, it is evident that Parliament intended to impose a bar on the filing of applications for the commencement of CIRP in respect of a CD for a default occurring on or after March 25, 2020. The retrospective bar on the filing of applications for the commencement of CIRP during the stipulated period does not extinguish the debt owed by the CD or the right of creditors to recover it. The decision of the NCLAT was upheld that the bar on filing application for initiation of CIRP applies to defaults committed after March 25, 2020 though such application was filed after March 25, 2020 but before June 5, 2020.