Parliament passes Insolvency and Bankruptcy Code (Second Amendment) Bill, 2020

The Parliament on September 21, 2020 passed the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2020 with the Lok Sabha passing the bill through a voice vote. 

The Rajya Sabha had passed the bill earlier on September 19, 2020. The bill seeks to amends the Insolvency and Bankruptcy Code, 2016 that provides a time bound process for resolving insolvency in companies and also among individuals.

The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2020 seeks to temporarily suspend initiation of the corporate insolvency resolution process (CIRP) under the Code. The bill replaces the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 promulgated earlier in June 2020.

Insolvency and Bankruptcy Code (Second Amendment) Bill, 2020: Key Features

• The bill suspends initiation of CIRP for certain defaults. Under the Insolvency and Bankruptcy Code, 2016 when a default occurs, the creditors of the company or the company itself were allowed to initiate CIRP by filing an application before the National Company Law Tribunal (NCLT). 

• Under the new bill's provisions, CIRP can not be initiated by either the company or its creditors for defaults arising during the six months from March 25, 2020. The central government may extend this period further to one year through notification. 

• The Bill clarifies that during this period, corporate insolvency resolution process can still be initiated for any defaults arising before March 25, 2020.

• Further, under the Insolvency and Bankruptcy Code, 2016- a director or partner of the corporate debtor may be held liable to make personal contributions to the assets of the company in certain situations.

• This liability can occur if the person did not exercise due diligence in minimising the potential loss to the creditors despite knowing that the insolvency proceedings cannot be avoided.

• The Resolution Professional may apply to the NCLT to hold such persons liable. The Resolution Professional is appointed to manage the resolution process after the initiation of CIRP. 

• The new bill prohibits the Resolution Professional from filing such an application in relation to the defaults for which initiation of CIRP has been prohibited.

Significance

According to Union Finance Minister Nirmala Sitharaman, Insolvency and Bankruptcy is a significant part of the business and it is helping the companies and people to resolve the issues without going to NCLT. She stated that amendments were brought due to the COVID-19 situation to give immunity to the business from insolvency proceedings in this critical situation.

The Finance Minister further informed that the IBC mechanism has helped in the recovery of the amount related to the non-performing assets of scheduled commercial banks. On the employment front, it has helped rescue 258 companies, the Minister highlighted.