Section 10A: Suspension of Initiation of Corporate Insolvency Resolution Process

The Insolvency and Bankruptcy Code, 2016 (IBC) has been one of the most significant reforms in India’s financial and corporate landscape. It provides a structured and time-bound process for resolving insolvency of companies, partnership firms, and individuals. However, the outbreak of the COVID-19 pandemic created unprecedented challenges for businesses across the country. Many companies faced sudden losses, disruptions in supply chains, and difficulty in meeting financial obligations.

To address this situation, the Government of India introduced Section 10A into the Code through the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020, which came into effect on 5th June 2020. This section temporarily suspended the initiation of corporate insolvency resolution process (CIRP) for defaults arising during a specified period.

This article explains the background, provision, objectives, judicial interpretation, and the overall impact of Section 10A in simple and clear terms.

Background of Section 10A

When the COVID-19 pandemic struck in early 2020, India went into a nationwide lockdown starting 25th March 2020. Businesses, especially small and medium enterprises, were hit hard as revenues declined drastically. Financial stress was widespread, and defaults on loan repayments and contractual obligations became inevitable.

The government realised that allowing creditors to initiate insolvency proceedings against companies during such an extraordinary situation would push many otherwise viable businesses into liquidation. This could harm employment, economic recovery, and the stability of financial markets.

To prevent misuse of insolvency proceedings during the pandemic, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 was promulgated, inserting Section 10A into the Code.

Text of Section 10A

Section 10A reads as follows:

“Notwithstanding anything contained in sections 7, 9 and 10, no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25th March, 2020 for a period of six months or such further period, not exceeding one year from such date, as may be notified in this behalf:

Provided that no application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the said default occurring during the said period.

Explanation – For the removal of doubts, it is hereby clarified that the provisions of this section shall not apply to any default committed under the said sections before 25th March, 2020.”

Key Features of Section 10A

• Suspension of Applications: No CIRP applications under Sections 7 (financial creditors), 9 (operational creditors), and 10 (corporate applicant) could be filed for defaults occurring on or after 25 March 2020.
• Time Period: The suspension was initially for six months, extendable up to one year.
• Absolute Bar: The proviso made it clear that applications for defaults during the suspension period could never be filed in the future.
• Pre-COVID Defaults Allowed: Defaults that occurred before 25 March 2020 could still be taken up under the IBC.

Objective of Section 10A

The objectives of introducing Section 10A can be summarised as follows:

• Relief for Corporate Debtors: To give breathing space to companies struggling due to the pandemic.
• Protection of Jobs and Economy: Preventing mass insolvency ensured continuity of businesses and protection of employment.
• Preserving Business Value: Companies facing temporary stress could avoid premature liquidation and have a chance to revive.
• Avoiding Misuse: Creditors were prevented from rushing to initiate insolvency proceedings against companies unable to meet obligations due to extraordinary circumstances beyond their control.

Effect of Section 10A

The introduction of Section 10A had wide-ranging effects on both debtors and creditors.

For Corporate Debtors

• They received protection from insolvency proceedings for defaults arising during the pandemic period.
• They were able to focus on survival, restructuring, and stabilising operations.
• Companies that faced only temporary distress were saved from being dragged into liquidation.

For Creditors

• Financial and operational creditors were restricted from initiating CIRP even if payments were not made.
• They had to explore alternative remedies such as debt restructuring, negotiations, or recovery through other legal means.
• It caused frustration among some creditors who feared losing their dues permanently.

Judicial Interpretation of Section 10A

Several cases came before the National Company Law Tribunals (NCLT) and the National Company Law Appellate Tribunal (NCLAT) to interpret Section 10A.

• Defaults before 25 March 2020: Courts consistently held that Section 10A does not apply to defaults committed before 25 March 2020. Creditors could still initiate CIRP for such defaults.
• Absolute Bar for Covered Defaults: The phrase “no application shall ever be filed” was strictly interpreted. This meant that defaults occurring between 25 March 2020 and 25 March 2021 (when the one-year suspension ended) could never form the basis of CIRP, even after the suspension was lifted.
• Temporary vs Permanent Relief: The section provided permanent protection for defaults within the suspension window, but not for defaults outside it.

Conclusion

Section 10A of the Insolvency and Bankruptcy Code was an extraordinary provision introduced to deal with an extraordinary situation. It suspended the initiation of corporate insolvency resolution processes for defaults occurring during the peak of the COVID-19 pandemic. While it provided necessary relief to debtors and supported economic stability, it also raised concerns about creditor rights and possible misuse.