Almost two months after first announcing the possibility of suspending proceedings under the Insolvency and Bankruptcy Code, 2016 (“Code”), the government has finally promulgated the above Ordinance on June 5, 2020 laying to rest all the suspense and rumours that the premature announcement had created.
B. Salient Features:
(i) No new applications under Section 7, 9 or 10 of the Code can be filed for any ‘default’ arising on or after March 25, 2020 for a period of 6 months (which period can be extended upto one year, if the government so notifies) (“Period”);
(ii) No new application shall ever be filedfor initiation of corporate insolvency resolution process (“CIRP”) of a corporate debtor for such a default occurring during the Period;
(iii) No application under section 66(2) shall be filed by a resolution professional for the defaults referred to in (a) above; and
(iv) This shall not be applicable for a default committed before March 25, 2020.
(i) The intention of the Government clearly is to safeguard the interests of entities who have suffered financial stress solely due to the COVID-19 pandemic and the consequent lockdowns.
(ii) The Ordinance may now lead to a host of new litigations on the issue of – what is the date of default. Also, corporate debtors are almost certainly going to try and contend that a default occurred during the Period.
(iii) Surprisingly, no proceeding under the above provisions can everbe filed for a default that has occurred during the Period. Therefore, the language of the Ordinance seems to suggest that if a corporate debtor does not regularise a default even after the expiry of the Period a creditor will not be able to initiate proceedings under the Code.
(iv) There appears to be a contradiction between the newly inserted Section 66(3) and Section 10A. If a CIRP cannot be initiated for a default arising during the Period then the chances of a proceeding under Section 66(2) being initiated also seems unlikely. A possible interpretation could be that it protects the interest of a director/partner of a corporate debtor that has committed a default in the first instance during the Period and continues to commit defaults thereafter. However, there certainly is an ambiguity.
The Commission being entrusted with the review of the Arbitration and Conciliation Act, 1996 (‘the Act’) considered the aspect of neutrality of arbitrators in detail in its report and acknowledged that balance between procedural fairness and binding nature of unilateral contracts in terms of appointment of arbitrators, appears to have been tilted in favour of the latter by a series of Supreme Court judgments owing to the present inadequacies in the Act. The Commission also noted that the principles of natural justice and the neutrality of arbitrators are integral part of the arbitration process. Therefore, the Commission espoused the incorporation of internal ‘checks and balances’ within the Act to ensure certain minimum levels of independence and impartiality that are expected out of the arbitration process regardless of parties’ agreement. This endeavour of the Commission translated into the Arbitration and Conciliation (Amendment) Act, 2015. Notable amendments under Section 12(1) and Section 12(5) are relevant in this regard, which are selectively reproduced below:
• Section 12 (1) When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstances, —
o such as the existence either direct or indirect, of any past or present relationship with or interest in any of the parties or in relation to the subject-matter in dispute, whether financial, business, professional or other kind, which is likely to give rise to justifiable doubts as to his independence or impartiality; and
• Section 12 (5) Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator
At first brush, the Ordinance seems reasonable and has offered some time to entities to cope with the stress caused to their business due to the lockdown without a looming threat of insolvency. However, it does raise certain issues which have briefly been touched upon above. Also, care must be taken to safeguard the interests of banks and financial institutions at a time when the sentiments of the legislature and judiciary seem to be pro debtors. One can only hope that the Parliament sufficiently addresses all these issues while enacting the amendment Act.
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The material contained in this alert is for informational purposes only. The views expressed are not those of K Law and do not constitute legal advice. K Law disclaims all liability to any person or entity for any loss or damage caused by errors or omissions in this alert. The author is this article is Vishal Bhat (Partner).