Insolvency Resolution Process And Exclusion Of Lockdown Period: Uncertainties And Challenges

Harshit Khare & Mohit Kishore
29 Jun 2020 2:18 PM GMT
Insolvency Resolution Process And Exclusion Of Lockdown Period: Uncertainties And Challenges
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Time is the essence of the corporate insolvency resolution process (CIRP) and with that intent alone, the Insolvency and Bankruptcy Code, 2016 (Code), prescribes an outer limit of 180 days for completion of a CIRP, which may be extended by a period of 150 days, as per the relevant provisions of the Code and while, there is no explicit provision under the Code, which entitles the stakeholders to seek further extension, over the period of time, the NCLT and NCLAT by way of its judgments, have carved out certain conceptual principles, that may be considered as good grounds for exclusion of time for counting of the total period of CIRP, which inter alia includes, ordering the stay on the CIRP, setting aside the CIRP by the Appellate Tribunal and reversal of such an order by the Hon'ble Supreme Court thereby restoring the CIRP and any other circumstances which justifies exclusion of certain period.

However, the global pandemic COVID – 19 and its impact on CIRP was unfathomable and hence neither the Code nor the judicial precedents provided for extension or exclusion of CIRP, on account of a pandemic.

This brings us to the foundation of this article i.e. "Exclusion of the Lockdown Period". For the uninitiated, it's important to understand the background. In view of the global pandemic COVID – 19, the Government of NCT of Delhi, Government of State of Maharashtra and many other States imposed a state-wide lockdown (Lockdown) on 23 March 2020 and the Government of India imposed a nationwide lockdown on 25 March 2020. As soon as the, lockdown was imposed, Hon'ble Supreme Court of India taking suo moto cognizance of the issues being faced by various stakeholders including the legal fraternity, vide its order dated 23 March 2020, ordered extension of the limitation period with effect from 15 March 2020, until further orders (SC Order).

Similarly, Hon'ble National Company Law Appellate Tribunal (Appellate Tribunal) also taking suo motu cognizance of the prevalent situation, vide its order dated 30 March 2020 (NCLAT Order), ordered that the period of Lockdown including the period, as may be extended, as applicable in the area, where the registered office of the Corporate Debtor is located, shall be excluded for the purpose of counting of the CIRP period under Section 12 of the Code, in all cases where CIRP has been initiated and pending before any bench of the National Company Law Tribunal or in Appeal before the Appellate Tribunal.

Accordingly, the CIRP period of all such Corporate Debtors, where the process was pending got extended automatically, by way of exclusion of the Lockdown period. While the commencement date of the Lockdown is certain i.e. 23 March 2020 or 25 March 2020, depending upon the State, where the registered office of the Corporate Debtor is situated, some practical issues have arisen with respect to the end date of the Lockdown and whether or not the Lockdown has come to an end.

While the nationwide Lockdown continued till 31 May 2020, on 30 May 2020, the Ministry of Home Affairs (MHA) issued an order to extend the Lockdown in Containment Zones (as identified by the Respective State / District Authorities) up-to 30 June 2020 and to re-open prohibited activities in a phased manner in areas outside the Containment Zones subject to the discretion of the State Governments.

Soon after issuance of the order by the MHA, various state governments, such as Government of State of Maharashtra and Government of NCT of Delhi, issued their respective orders with respect to the Lockdown. While, the Government of State of Maharashtra, under reference to the orders issued by the MHA, issued an order dated 31 May 2020, title of which reads "Easing of Restrictions and Phase-wise Reopening of Lockdown (Mission Begin Again)", the operative part reads "it is expedient to extent the lockdown in the entire State of Maharashtra further till midnight of 30 June 2020….hereby issues directions to extend the lockdown, with amendments, to operationalise Mission Begin Again". An endeavour to harmoniously construct the intent behind the title and the operative part, leaves us in a muddle, as to whether the Lockdown is continuing, for the purposes of the NCLAT Order.

Similarly, the Government of NCT of Delhi, vide its order dated 1 June 2020, under reference to the orders issued by the MHA, provides that, while the lockdown period in the Containment Zones in territory of NCT of Delhi is extended till 30 June 2020, for other areas of NCT of Delhi outside Containment Zones, there are certain permitted and prohibited activities (as part of the phased opening). A literal interpretation of the order relating to Containment Zones and non-Containment Zones, clarifies that the Lockdown is not extended for the non-Containment Zones.

Let's look at the issues arising out of the joint reading of the NCLAT Order and orders issued by various state governments:

  1. Whether, the period of Lockdown/Phased opening starting from 1 June 2020 till 30 June 2020 or beyond, is and will be excluded from the CIRP period, as per the NCLAT Order, since, the MHA has ordered phased reopening except in Containment Zones and the orders of various State Governments also lack clarity;

  1. The list of Containment Zones is dynamic and an area which may not be in the list of Containment Zones on 1 June 2020, may fall in the Containment Zone any time after 1 June 2020. In such a situation, how will the NCLAT Order be interpreted;

  1. The entire foundation of the NCLAT Order is based on the location of the registered office of the Corporate Debtor, under assumption that the entire business is operated from the registered office, which may not be true for many companies. Companies engaged in warehousing, manufacturing, production, commercial real estate etc. are dependent on their respective warehouse, factory and the commercial buildings. While, the registered office may be situated outside the Containment Zones, if the area, where the warehouse, factory and commercial buildings are situated is in the Containment Zones, the NCLAT Order may not achieve the desired results.

  1. The Appellate Tribunal in NCLAT Order has said that "Upon requests for urgent listing of cases having been made telephonically to Registrar of this Appellate Tribunal from various persons, who were unable to physically file the same on account of complete lockdown declared by Government with effect from 25th March, 2020, we take suo moto cognizance of the unprecedented situation arising out of spread of COVID19 virus declared a pandemic."

If the basis of excluding the Lockdown period was the issues being faced by the stakeholders in urgent listing and urgent filing of the matters, then even the current period must be excluded, since even today, regular filing and regular hearings are not taking place, in fact recently, the Appellate Tribunal vide notice dated 26 June 2020 has directed that "Due to Covid-19 Pandemic and as ordered by the Hon'ble Acting Chairperson, the Court work (Virtual hearing) and filing etc. in the NCLAT will remain suspended till 3rd July, 2020."

Going back to where we started, we reiterate that time is the essence of CIRP and a clarificatory order from the Appellate Tribunal may provide additional time period to a corporate debtor and prevent a corporate debtor from going into compulsory liquidation, if the corporate debtor is otherwise capable of running as a going concern and has significant value attached to it. A clarificatory order will also eliminate potential burden of unnecessary litigation seeking clarity on the NCLAT Order and its application, which may be filed by the resolution professionals acting for various corporate debtors or other stakeholders.

The views expressed in this article are personal views of the authors and not to be considered professional views of Khaitan & Co.

(Harshit Khare, Principal Associate, Restructuring & Insolvency, Khaitan & Co and Mohit Kishore, Senior Associate, Restructuring & Insolvency, Khaitan & Co.)

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