Impact of the recent changes in the Insolvency and Bankruptcy Law on the corporate governance regime- A leeway to defraud creditors?
Written By: Sreshta Satpathy
The Government of India notified the Insolvency and Bankruptcy Code 2016 (the “Code”) on May 28, 2016, with the goal of consolidating and amending the law relating to insolvency resolution of corporate persons, partnership firms, and individuals in a time-bound manner in order to maximize the value of such person’s assets. Its goal was to encourage entrepreneurship, increase credit availability, and balance the interests of all stakeholders, including changing the priority of payment of government dues and establishing an Insolvency and Bankruptcy Board of India for problems related to or incidental to that. The Insolvency and Bankruptcy Code (Amendment) Act 2020 and the Insolvency and Bankruptcy Code (Second Amendment) Act 2020 (the ‘Insolvency Second Amendment Act’) are the most recent amendments to the Code, and they have significantly changed the dynamic of the corporate insolvency resolution process (CIRP) in India.
Changes Made In Laws
In the midst of the flare-up of Novel Coronavirus or COVID-19, the Government of India on 24 march 2020, reported a cross country lockdown. The Ministry of Home Affairs, Government of India vide Order dated 24-03-2020 gave certain bearings which followed the conclusion of dominant part of Government and private workplaces and other business foundations excepting a couple of fundamental administrations. . Because of this country wide lockdown, numerous Micro, Small and Medium Enterprises (MSME) confronted the inescapable danger of leaving business.
To shorten the frenzy among the MSME area and ease the fast-approaching danger of indebtedness, a huge number of measures have been taken to give a pad to the organizations prone to confront the slump. Among these actions were the expanded limit of summoning indebtedness to Rs 1,00,00,000 (Rupees one crore in particular) from the previous measure of Rs 1,00,000 (Rupees one lakh in particular) and prohibition of the lockdown time frame from the 330-day course of events recommended under the Insolvency and Bankruptcy Code, 2016 (hereinafter alluded to as “IBC”) for the culmination of the indebtedness interaction.
The Insolvency Amendment Act was notified on March 13, 2020, with retroactive effect, and went into effect on December 28, 2019, introducing significant changes to different sections of the Code, which which were Section 5 , Section 7, Section 11, Section 14 , Section 16 , Section 21 , Section 29A , Section 32A , Section 227 , Section 239 , Section 240.
There were two new introductions made to this code which were Introduction of Section 10A. Section 10A of the Code allows for a six-month suspension of the beginning of CIRP, during which no application under sections 7, 9, or 10 of the Code for the commencement of CIRP of a corporate debtor can be filed for any default occurring on or after March 25, 2020.
It is also established that no application for the commencement of CIRP on behalf of a corporate debtor may ever be submitted for defaults that occur during the stipulated timeframe. However, such an application might be issued for defaults that occurred before to March 25, 2020. The next section introduced was section 66(3). If it is detected during the CIRP that the corporate debtor’s business was conducted with the intent to defraud creditors or for any fraudulent purpose, the Adjudicating Authority may, on the RP’s application, pass an order directing a director or partner of the corporate debtor to make such contribution to the corporate debtor’s assets as it sees fit.
For the purpose of section 66, It is important for the person to prove the absence of any intent to defraud the creditors or any other comparable fraudulent intentions in respect to the transaction. Furthermore, while the general presumption under 66(2) is in favor of the directors, if the presumption is called into question, the directors must show that they exercised reasonable due diligence in minimizing the potential loss and lack of affirmative defenses at the time of corporate insolvency’s onset. The Bankruptcy and Bankruptcy Code (IBC) has substantially changed the insolvency legal landscape in India, reducing the
possibility for misbehavior by directors and promoters. Mandating directors to take creditor-focused action in the early stages of a financial issue, on the other hand, might put professional managers and directors in jeopardy, even if they are not acting fraudulently or criminally. Furthermore, the requirement of a special resolution of the shareholders prior to voluntarily filing for insolvency may create obstacles for those directors who truly believe that voluntary filing is the best path ahead for the company.
Until the dust settles on the law surrounding wrongful trading directors, they should make all efforts possible to avoid personal culpability without jeopardizing their fiduciary duty to the company’s shareholders. When a transaction involving the corporate debtor is called into question, IBC 2016 provides for a crystal clear extension of culpability on the directors and parent company of the corporate debtor. To guarantee the creditor’s interest is protected, such an extension of liability can be granted to the extent of reversing the transaction or providing a reasonable contribution to the corporate debtor’s assets. However, if the twilight period is kept in mind and adequate due diligence is performed without fraudulent intent, the same can be avoided.