With the advent of the pandemic, it predominantly brought about severe financial crunch across all the sectors, which was the root cause for defaults by the Companies. Thereby, in order to save such companies from being proceeded against by the Creditors, the Central Government, by acting as their knight, promulgated an ordinance, leading towards suspension of certain provisions of the Insolvency and Bankruptcy Code.

The Central Government on 22nd April 2020 proposed to introduce Section 10 A under the Insolvency and Bankruptcy Code (IBC), with the objective of suspending Section 7, Section 9 and Section 10 and further on 05.06.2020 an ordinance was promulgated. That the said ordinance suspended the initiation of Corporate Insolvency Resolution Process (CIRP) of a Corporate Debtor under Section 7, 9 and 10 for a period of six months, which can subsequently be increased to 1 year.

The suspension of Section 7 and 9 of the IBC is likely to bring about reliefs to a large number of the Corporate Debtors. However, the suspension of Section 10 of IBC cannot be seen in the same light as the said suspension of Section 10 is likely to create additional problems for the Corporate Debtor than resolving it. The suspension which has though protected the Corporate Debtors from being proceeding against by any of its Creditors has nonetheless opened a floodgate to the remaining remedies/ proceedings available. Further, IBC had atleast managed a way out for such Corporate Debtor wherein it provided them with an opportunity to initiate CIRP proceedings against its own self on having committed default. Thereby, it favored the Corporate Debtor if its business is severely affected due to bad market conditions, non-availability of working capital funds and it is ineligible to repay any such amount. However, the said relief has seem to be wiped out for a period of 6 months, atleast, which will have an impact on the Corporate Debtor.

Section 10 is bring reproduced herein as follows:

10. Initiation of corporate insolvency resolution process by corporate applicant –

• Where a corporate debtor has committed a default, a corporate applicant thereof may file an application for initiating corporate insolvency resolution process with the Adjudicating Authority.
• The application under subsection (1) shall be filed in such form, containing such particulars and in such manner and accompanied with such fee as may be prescribed.

A perusal of Section 10 of IBC clearly elucidates that the Corporate Debtor is provided with an opportunity of initiating CIRP process on its own motion when it has committed default. Thereby, if there is a debt and a default has occurred and the Corporate Debtor, then the Adjudicating Authority has no option but to admit the application. However, with the promulgation of the ordinance that might seems to have been wiped out for a considerable portion of time.

In such a situation, it can be stated that an act of suspending Section 10 of the IBC would also amounts to be in violation of Article 19(1)(g) of the Constitution. It is submitted that Article 19(1) (g) of the Constitution provides the freedom to carry on business which also includes the right to close business, when the owner likes. Therefore, the State cannot compel a citizen to carry on the business, unless it is controlled, restricted or regulated by law in the interest of public. In the matter of Excel Wear Versus Union of India, the Hon’ble Supreme Court held that, nobody has a right to carry on business if he cannot pay even the minimum wages to the laborers. He then needs to close down the business. The refusal not to close down business even if he cannot pay is not a reasonable restriction in the public interest within the meaning of Article 19(6) of the Constitution. In the present scenario, suspension of Section 10 is definitely not within the gambit of “public interest”. In such a scenario, there may time when the Corporate Debtor will not be in a position to make timely payments, still it will be forced to carry out its business as the only remedy available stands suspended.

Therefore, by compelling the Corporate Debtor to not initiate insolvency process, which is not even in public interest amounts to sheer flagration of it’s right. It can be gauged that a stage might be reached where the Corporate Debtor is no longer in a position to carry on its business, unable to pay wages/salary, honour its commitment and thus be subjected to default. Thus, carrying on of any business being a right and not an obligation, any industrial concern ought to have as much liberty to carry it on as to close it down particularly when it does not yield any profit.

Further, it is submitted that pursuant to the admission of the application for the initiation of CIRP proceedings, a bar under Section 14 of the Code gets created. Section 14, which speaks about moratorium, clearly prohibits the following, namely:

• The institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority;
• Transferring, encumbering, alienating or disposing off by the corporate debtor any of its assets or any legal right or beneficial interest therein;
• Any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002);
• The recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.

Thus, Section 14 of IBC acted as a guardian and prevented any parties from initiating any proceedings against the Corporate Debtor once the application under section 7, 9 and 10 is admitted. However, at present after the ordinance, on default of payment of any amount, such Corporate Debtor will be under severe scrutiny and will stand liable to proceedings instituted across any forum in the form of suit, Arbitration, action under SARFAESI Act by the Banks. Further, if the same is decreed against the Corporate Debtor, it will be held liable to incur interest towards the Creditor. Therefore, the suspension of the CIRP proceedings, which was intended to offer respite and protection against any default occurred due to COVID has in a manner further thrown the Corporate Debtor into deeper mess. From now on, the Corporate Debtor will stand susceptible to all kind of proceedings, which can be initiated, against it and ofcourse with no protection.

Thereby, it is submitted that looking at the path ahead, such a measure of suspending Section 10 should not have been adopted, which has indirectly resulted in the Corporate Debtor being thrown under the bus. It being quite contrary to the constitutional guarantee under Article 19(1)(g) which enables an employer to close his business, if he so chooses, by placing upon him unreasonable restriction which is in no way in the interest of the general public. The employer which has a fundamental right to close his business if he so chooses subject to reasonable restrictions imposed by law in the interest of the general public cannot do it right now. Secondly, it is also quite vital to note that during the ongoing lockdown period, we have witnessed lakhs of migrants, working as laborers in plethora of industries, travelling back to their places of origin. The said factor is bound to create an adverse impact on the industries as without adequate labour and man power, the Corporate Debtor would not be able to carry out its business and the same would be a major hindrance for the Corporate Debtor in the next few months followed by ill functioning of logistics & poor cash flow. Thus, the Corporate Debtor will be taking a longer period to recuperate from the financial mess which has been created, followed by additional factors such as sheer absence of adequate man power and other essentials.

So, it can be said that suspension of Section 10 of the Code will hurt businesses stuck in the vicious cycle of debt and who are wanting to exit as they find it difficult to recover under the current COVID impact. Without an ounce of doubt, it can be said that a viable exit option has been taken away from the Corporate Debtor themselves, as a result of Suspension of Section 10 of IBC brought about by the promulgation of the ordinance.