Insolvency And Bankruptcy: An Insight Into Ordinance, 2020

Insolvency is a situation where individuals or companies are unable to repay their outstanding debt. Bankruptcy, on the other hand, is a situation whereby a court of competent jurisdiction has declared a person or other entity insolvent, having passed appropriate orders to resolve it and protect the rights of the creditors. It is a legal declaration of one’s inability to pay off debts. The IBC was enacted in 2016, replacing a host of laws, with the aim to streamline and speed up the resolution process of failed businesses. In March this year, the government raised the threshold for invoking insolvency under the IBC to Rs 1 crore from Rs 1 lakh with a view to preventing the triggering of such proceedings against small and medium enterprises that are facing currently the heat of coronavirus pandemic.

Indian economy with an outburst of COVID - 19 pandemic has been severely impacted with restricted cash flows and minimal business operations. The balance sheets of various companies have been negatively affected, leading to a shortage of funds not only for running the business operations but also for payment of debts. However, it must be kept in mind that this shortage of funds is not a sign of failure of the companies, but it is a sign of temporary distress caused by the pandemic. Keeping in mind the current slowdown in the economy, various measures have been taken to mitigate the financial distress caused for companies and businesses. The President of India promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 on 5th June 2020. With this Ordinance, the filing of applications for initiation of the CIRP of corporate debtors under the Code has been suspended for categorized defaults for a certain period of time, so that corporate debtors who are facing financial distress on account of the pandemic may be protected from being pushed into CIRP under the Code, thus giving them some time to regain sustainability of their businesses. The Code was enacted to provide a mechanism for the time-bound resolution of the companies and businesses which are experiencing financial distress. So that the value of the assets of such companies can be maximized and the flow of the credit can be maintained in the economy. It has been designed with a holistic view to balance the interests of all the stakeholders such as creditors including financial institutions and banks, employees, other secured and unsecured creditors of the corporate debtor, and the corporate debtor himself. Moreover, there may not be many prospective resolution applicants who would be interested in infusing capital for the revival of the corporate debtor and accordingly, would provide for resolution plans for such corporate debtor. As a result, the corporate debtors, though financially viable, will be liquidated prematurely with a low rate of return on the sale of the assets, thereby negatively affecting the interests of the creditors, and the objectives of the Code would fail. Hence, the Ordinance has been promulgated to promote the objectives of the Code, i.e. to facilitate the maximization of value of the assets, balancing of interests of all the stakeholders including creditors, and resolution of the distress caused for the corporate debtors by the on-going pandemic in the economy.