An expert committee needs to be set up to identify industries affected by Covid-19. At the outset, airlines, hotels, restaurants, transport firms, automobile companies and toll plaza companies can be included in them.

The Insolvency and Bankruptcy Code (the “Code”) was promulgated with effect from 1 December 2016 and the powers of Adjudicating Authority were conferred on the National Company Law Tribunal in respect of corporate persons. The Code aims at resolution of stressed assets by a comprehensive mechanism, including taking over of assets and management of the corporate debtor by the Interim Resolution Professional. The Corporate Insolvency Resolution Process (the “CIRP”) was, rightly or wrongly, considered onerous by the corporate debtors. The Finance Minister, in a different context, has already hinted on suspending provisions of Sections 7, 9 and 10 of the Code. (Press conference by the Finance Minister on 24 March 2020.) However, during the period of Covid-19, its avoidance has become the need of the day. We make a humble attempt to suggest some measures herein.
AMENDMENT TO ­DEFINITION OF ­DEFAULT UNDER THE CODE
The core issue for triggering Corporate Insolvency Resolution Process is to first determine the occurrence of default under Section 3(12) read with Section 7 of the Code. The Insolvency and Bankruptcy Code, under Section 3(12), defines default as follows:
“non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be.”
The only test for default to occur under the Code is that the debt is due and payable in fact and in law [Innoventive Industries Limited v ICICI, (2018) 1 SCC 407]. Such definition does not require any subjective determination of the default being deliberate. Neither does it require an ascertainment of the event that lead to such default. Thus, the mere non-payment of the debt or a part of it results into occurrence of default under the Code.
However, with the unfortunate pandemic of Covid-19, such ascertainment may become necessary and further amendment is imperative. The Government, by uplifting the limit of initiation of the CIRP by amending Section 4 of the Code, attempted to help a category of corporate persons but this itself does not suffice the need of the situation. A further amendment would be required for obvious reasons. We suggest that the occurrence of default on account of non-payment or the declaration of an account as Non-Performing Asset (“NPA”) during the period of Covid-19, would certainly have to be excluded from the meaning of “default” under the Code. Otherwise, a corporate debtor may be forced into the process of insolvency under the Code because of situation beyond the control of the parties contractually bound as creditor and debtor.
The Reserve Bank of India (“RBI”) acknowledging the stress on assets due to Covid-19 has issued a Regulatory Package along with Statement of Development of Regulatory Policy, dated 27 March 2020. The Statement in Clause 5 permits banks “to allow moratorium of three months on payment of instalments in respect of all term loans outstanding as on March 1, 2020. Accordingly, the repayment schedule and all subsequent due dates, as also the tenure for such loans, may be shifted across the board by three months”
The Ministry of Finance issued Frequently Asked Questions (“FAQs”) uploaded by Press Information Bureau (Question 8) relating to impact of the said relief on reporting of default also has observed that such “overdue payments post 1st March 2020 will not be reported to Credit Bureaus/CRILC for three months. No penal interest or charges will be payable to the banks.”
Recently, the Delhi High Court while passing an interim order on 6 April 2020 in the cases of Anant Raj Limited v Yes Bank, W.P. (C) (URGENT) 5/2020, was posed with the issue whether a borrower’s account could be classified as NPA by Yes Bank on 31 March 2020 in light of the aforementioned Regulatory Package by RBI and FAQs issued by Ministry of Finance uploaded by Press Information Bureau. The Delhi High Court, while holding that prima facie, the borrower’s account could not be classified as NPA on 31 March 2020 by Yes Bank observed that the intention of RBI in times of Covid-19 “is to maintain status-quo as on 01.03.2020 with regard to instalments post 01.03.2020 till 31.05.2020” and “with regard to the classification of accounts of borrowers as they existed on 01.03.2020”.
Such an amendment would provide relief at micro-level in individual cases and the burden to proof of default solely on account of Covid-19 would lie on the corporate debtor.
[The authors clarify that the suggestion of amendment is not necessarily that Covid-19 is a supervening event resulting in the frustration of a contract, under Section 56 of the Contract Act, 1872, discharging the debtor of its liability to pay to the creditors at all. It is certainly a recognition of Covid-19 as an event that makes performance of the contract (like loan agreements) onerous.]
EXCLUSION OF ­SPECIFIC INDUSTRIES FROM PURVIEW OF CORPORATE ­DEBTOR UNDER IBC
For a broad-based amendment, during present time we suggest curtailment of the remedy under Section 7 and Section 9 of the Code. After Covid-19, the impact on our economy is evidently much greater than ever. It is, in fact, historical. As stated above, the Finance Minister in a different context has already hinted at suspending provisions of Section 7, 9 and 10 of the Code.
A Government Expert Committee comprising of eminent and experienced judicial and technical members need to be set up to identify the industries, which have come under financial stress on account of market forces so as to and provide them succour and rescue them from the purview of the Code. Presently, Covid-19 would be most significant and a singular factor. The Expert Committee may invite various associations representing different industries to project before the Committee their cases as to how Covid-19 has economically adversely affected that industry. On the basis of data collected, the Expert Committee may recommend to the Government for exclusion of the industry from the purview of the CIRP for a specified period. In other words, the lenders like banks would be ask to refrain from filing an application under Section 7 or Section 9 of the Code. Then, there can be a declaration in respect of certain industries so well known that no recommendations from Expert Committee are necessary. The obvious example in the present scenario can be those of Airline Companies, Hotel Industries and Restaurant Companies, Transportation and Automobile Industries, Toll Plaza companies so on and so forth. We feel that it is opportune time for the Government to exclude the aforesaid industries from the purview of the Code and take up measures to rehabilitate the aforesaid industries.
In that regard, one simple route available to the Government is to issue an ordinance as Parliament is not in session. The other obvious route available to the Government is to issue directions to the RBI for sending circulars to banking companies to refrain from initiating any CIRP against the specified corporate persons, who are under stress.
There is adequate law available on the subject if we see Section 35AA of the Banking Regulations Act, 1949. The Central Government, however, may use the provisions of Section 35AA of the Banking Regulations Act, 1949 and may expressly authorise RBI to issue direction to banking companies with regard to CIRP in respect of corporate persons hit by Covid-19. The constitutional validity of this Section has been upheld by the Supreme Court of India [Dharni Sugars and Chemicals v Union of India, (2019) 5 SCC 480]. The Government may specify a reasonable period for such exclusion.
If any such steps are taken, it would result in clearing the mist in the mind of the corporate persons and the scope for better planning after Covid-19 would become more visible. It would save a number of entrepreneurs from being black-listed.
The entrepreneurs are national wealth and would need to remain available for proper utilisation of capital source. It would also help the banking industry, including NBFCs, to project anticipated figures of recovery of debts. More importantly in the present scenario, it would help all banks and save thousands of workmen/employees/executives from being retrenched/terminated.
Justice M.M.Kumar (Retired) sits as an Arbitrator in various domestic and international commercial arbitrations. He is also a Senior Consultant in commercial law, specifically in Insolvency and Bankruptcy Code. He was the founder President of the National Company Law Tribunal in India after serving as the Chief Justice of Jammu and Kashmir High Court.
Eshna Kumar is an Advocate with litigation practice before the Supreme Court of India, High Court of Delhi, National Company Law Tribunal, National Company Law Appellate Tribunal and other tribunals primarily relating to commercial matters.

One Reply to “Companies affected shouldn’t add to NPA defaulters list”

  1. Very well written by the experienced authors. The suggestions are most rffective and should be implemented at the earliest. Justice M M Kumar is perhaps most authoritative, with indepth knowldge. Congrats forvery timely suggestion.

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