Introduction
The COVID-19 pandemic fundamentally altered the global economic landscape, creating unprecedented challenges for corporate entities worldwide. In response to this extraordinary crisis, the Government of India introduced Section 10A into the Insolvency and Bankruptcy Code, 2016 (IBC) through the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020, promulgated on June 5, 2020 [1]. This legislative intervention represented a significant paradigm shift in India’s insolvency jurisprudence, creating a temporary moratorium on the initiation of Corporate Insolvency Resolution Process (CIRP) for defaults arising during the pandemic period.
The introduction of Section 10A was not merely a regulatory response but a calculated policy decision aimed at preventing the collapse of India’s corporate ecosystem during an unprecedented global health crisis. The provision effectively suspended the operation of Sections 7, 9, and 10 of the IBC for defaults occurring on or after March 25, 2020, coinciding with the implementation of the nationwide lockdown [2]. This article examines the legal framework, judicial interpretation, and practical implications of Section 10A, analyzing its impact on the balance between creditor rights and debtor protection in the context of pandemic-induced economic distress.
Legal Framework and Statutory Provisions
Text of Section 10A
Section 10A of the Insolvency and Bankruptcy Code, 2016, as inserted by the Amendment Ordinance, reads as follows:
“Section 10A. Suspension of initiation of corporate insolvency resolution process. – 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.” [3]
Temporal Scope and Extension
The initial suspension period under Section 10A was six months from March 25, 2020. However, recognizing the prolonged impact of the pandemic, the Central Government extended this period through multiple notifications. The Ministry of Corporate Affairs issued Notification No. S.O. 3265(E) dated September 24, 2020, extending the suspension for an additional three months until December 25, 2020 [4]. Subsequently, through Notification No. S.O. 4638(E) dated December 22, 2020, the suspension was further extended for three months until March 25, 2021, effectively creating a complete one-year moratorium [5].
Statutory Interpretation and Construction
The provision operates through a non-obstante clause, which gives it overriding effect over the specific sections it seeks to suspend. The structure of Section 10A demonstrates legislative intent to create a comprehensive bar against insolvency proceedings for pandemic-period defaults. The main provision creates a temporal suspension, while the proviso establishes a permanent bar for defaults occurring during the specified period. The explanation clarifies that the protection does not extend to pre-pandemic defaults, maintaining the distinction between COVID-induced and pre-existing financial distress [6].
Judicial Interpretation and Landmark Decisions
The Ramesh Kymal Precedent
The Supreme Court’s decision in Ramesh Kymal v. M/s. Siemens Gamesa Renewable Power Pvt. Ltd. [7] stands as the definitive judicial pronouncement on the scope and application of Section 10A. The case presented a critical question regarding the retrospective application of the provision to applications filed before its enactment but relating to defaults occurring after March 25, 2020.
In this case, an operational creditor filed a Section 9 application on May 11, 2020, based on a default that occurred on April 30, 2020. Although the application was filed before Section 10A came into force on June 5, 2020, the Supreme Court held that the provision would apply retrospectively to bar such applications. The Court, through Justices D.Y. Chandrachud and M.R. Shah, emphasized that the legislative intent behind Section 10A was to deal with the extraordinary circumstances created by the COVID-19 pandemic [8].
The Court observed that the retrospective construction of Section 10A was necessary to achieve its underlying purpose. It stated that accepting the appellant’s contention would “defeat the very purpose and object underlying the insertion of Section 10A” as it would leave a significant class of corporate debtors without protection simply because applications were filed before the provision’s enactment [9].
Distinction Between Initiation Date and Commencement Date
The Supreme Court in Ramesh Kymal made an important distinction between the “initiation date” under Section 5(11) of the IBC and the “insolvency commencement date” under Section 5(12). The Court clarified that the initiation date refers to the filing of the application by the eligible applicant, while the commencement date refers to the admission of the application by the Adjudicating Authority. This distinction is crucial for understanding when Section 10A applies, as it focuses on the date of default rather than the date of application filing [10].
NCLAT Jurisprudence on Section 10A
The National Company Law Appellate Tribunal (NCLAT) has consistently upheld the Supreme Court’s interpretation while addressing specific issues arising from the application of Section 10A. In several decisions, the NCLAT has clarified that the benefit of Section 10A can only be claimed when there is a clear default during the prohibited period of March 25, 2020, to March 25, 2021 [11].
The NCLAT’s decision in Beetel Teletech Ltd. v. Arcelia IT Services Private Limited addressed the important question of whether interest accrued during the suspension period could be excluded from threshold calculations. The Tribunal held that interest accrued during the Section 10A period could be included in calculating the threshold under the IBC, as the provision suspended only the remedy, not the underlying debt obligation [12].
Regulatory Implications and Compliance Framework
Threshold Modifications During Pandemic
Concurrent with the introduction of Section 10A, the Government of India also increased the default threshold for initiating CIRP from Rs. 1 lakh to Rs. 1 crore through Notification No. S.O. 1205(E) dated March 24, 2020. This modification, effective from March 25, 2020, was designed to protect micro, small, and medium enterprises (MSMEs) from insolvency proceedings during the economic crisis [13]. The increased threshold worked in conjunction with Section 10A to provide multiple layers of protection to distressed businesses.
Impact on Financial Creditors and Operational Creditors
Section 10A created distinct implications for different categories of creditors under the IBC. Financial creditors under Section 7, operational creditors under Section 9, and corporate applicants under Section 10 were all subject to the suspension. However, the provision did not extinguish the underlying debt or affect the creditors’ rights to pursue alternative remedies outside the IBC framework.
The courts have consistently held that Section 10A does not require the Adjudicating Authority to conduct an inquiry into whether the corporate debtor’s financial health was specifically affected by COVID-19. The provision creates a blanket protection for all defaults occurring during the suspension period, regardless of the specific cause of financial distress [14].
Continuing Defaults and Partial Protection
One of the complex issues addressed by the courts relates to continuing defaults that began before March 25, 2020, but continued during the suspension period. The NCLAT has clarified that Section 10A “was never intended to cover any default which occurred before the Section 10A period and continuing thereafter” [15]. This interpretation prevents corporate debtors from exploiting the provision to escape liability for pre-existing defaults that merely continued during the pandemic period.
Case Law Analysis and Judicial Trends
Protection Against Abuse of Process
The judiciary has been careful to prevent the misuse of Section 10A by ensuring that its benefits are not extended beyond the intended scope. In several cases, courts have examined whether defaults truly occurred during the suspension period or whether they were pre-existing obligations that became due during this time.
The NCLAT’s approach in various decisions demonstrates a balance between providing pandemic relief and preventing abuse of the legal framework. Courts have consistently held that for Section 10A protection to apply, there must be a clear default during the prohibited period, not merely a continuation of pre-existing default situations [16].
Purposive Construction and Legislative Intent
The Supreme Court in Ramesh Kymal emphasized that Section 10A must receive a “purposive construction” that advances the legislative object of protecting businesses from pandemic-induced insolvency proceedings. This approach reflects the Court’s recognition that the provision was enacted in response to extraordinary circumstances and must be interpreted in light of those circumstances [17].
The Court noted that Parliament “stepped in legislatively because of the widespread distress caused by an unheralded public health crisis” and was cognizant that resolution applicants might not come forward during such times, potentially leading to liquidation rather than resolution of distressed companies [18].
Comparative Analysis with International Approaches
Global Response to Pandemic-Induced Insolvency
The introduction of Section 10A aligns with similar measures adopted by various jurisdictions worldwide in response to the COVID-19 pandemic. Countries such as the United Kingdom, Germany, and Australia implemented temporary modifications to their insolvency laws to prevent the collapse of viable businesses during the crisis.
However, the Indian approach through Section 10A was unique in its comprehensiveness, creating a complete bar on insolvency proceedings for pandemic-period defaults rather than merely modifying procedural requirements or extending timelines. This approach reflects the specific challenges faced by the Indian economy and the government’s assessment of the appropriate level of intervention required [19].
Balance Between Creditor Rights and Debtor Protection
The implementation of Section 10A raised important questions about the balance between creditor rights and debtor protection. While the provision provided necessary relief to distressed businesses, it also created challenges for creditors seeking to recover debts. The courts have attempted to address this balance by ensuring that the provision is not misused while recognizing the extraordinary circumstances that necessitated its introduction.
Practical Implications for Stakeholders
Impact on Resolution Professionals and Insolvency Practitioners
The suspension of CIRP initiation under Section 10A had significant implications for resolution professionals and insolvency practitioners. During the suspension period, there was a notable decrease in new insolvency cases, affecting the workflow and revenue streams of professionals in the field. However, ongoing CIRP processes that had commenced before the suspension period continued to operate, though with extended timelines due to pandemic-related disruptions [20].
Banking Sector and Financial Institutions
For banks and financial institutions, Section 10A created both opportunities and challenges. While it prevented the filing of fresh insolvency applications for pandemic-period defaults, it also meant that financial institutions had to explore alternative recovery mechanisms. Many institutions focused on restructuring and settlement arrangements during this period, leading to innovative approaches to debt resolution outside the formal insolvency framework.
Corporate Governance and Strategic Planning
Section 10A influenced corporate governance practices and strategic planning for businesses across sectors. Companies that might have faced insolvency proceedings for pandemic-related defaults were able to focus on recovery and restructuring efforts. This breathing space allowed many businesses to adapt their operations, explore new revenue streams, and negotiate with creditors from a position of relative stability [21].
Legal Challenges and Constitutional Validity
Challenges to Constitutional Validity
The constitutional validity of Section 10A was challenged before various High Courts on grounds including violation of Articles 14 and 19(1)(g) of the Constitution of India. Petitions argued that the provision created arbitrary classifications and affected the fundamental right to carry on business. However, these challenges were largely unsuccessful, with courts recognizing the extraordinary circumstances that justified the legislative intervention [22].
The Delhi High Court, in particular, dealt with challenges to the provision but ultimately recognized the validity of the government’s response to the pandemic crisis. The courts generally accepted that the provision was a reasonable and necessary response to unprecedented circumstances that threatened the stability of the corporate sector.
Due Process and Procedural Considerations
The implementation of Section 10A raised questions about due process and procedural fairness, particularly regarding its retrospective application. However, the Supreme Court’s decision in Ramesh Kymal established that the retrospective application was necessary to achieve the provision’s intended purpose and did not violate constitutional principles of fairness and due process.
Future Implications and Legislative Considerations
Lessons for Future Crisis Management
The experience with Section 10A provides valuable lessons for future crisis management in the insolvency and bankruptcy framework. The provision demonstrated the importance of swift legislative action in response to systemic crises while highlighting the need for careful drafting to prevent unintended consequences and abuse.
The success of Section 10A in providing temporary relief during the pandemic suggests that similar mechanisms could be valuable tools for addressing future economic crises. However, the temporary nature of such interventions remains crucial to maintain the overall integrity of the insolvency system [23].
Impact on IBC Evolution
Section 10A represents a significant chapter in the evolution of India’s insolvency and bankruptcy framework. It demonstrated the flexibility of the IBC system to adapt to extraordinary circumstances while maintaining its core principles. The provision’s implementation and judicial interpretation have enriched the jurisprudence surrounding the IBC and provided important precedents for future legal developments.
The experience with Section 10A has also highlighted the importance of maintaining a balance between providing relief during crises and preserving the effectiveness of the insolvency framework as a tool for corporate debt resolution. This balance will likely influence future amendments and modifications to the IBC.
Conclusion
Section 10A of the Insolvency and Bankruptcy Code represents a landmark intervention in India’s insolvency jurisprudence, providing crucial relief to businesses during the unprecedented COVID-19 pandemic. The provision successfully achieved its primary objective of preventing the collapse of viable businesses due to pandemic-induced financial distress while maintaining the overall integrity of the insolvency framework.
The judicial interpretation of Section 10A, particularly through the Supreme Court’s decision in Ramesh Kymal, has established important precedents for understanding the scope and application of crisis-response legislation in the insolvency context. The courts’ emphasis on purposive construction and recognition of extraordinary circumstances provides a framework for future legislative interventions during systemic crises.
The experience with Section 10A demonstrates the importance of swift and decisive legislative action in response to economic emergencies while highlighting the need for careful implementation to prevent abuse and maintain the balance between creditor rights and debtor protection. As India’s insolvency framework continues to evolve, the lessons learned from Section 10A will undoubtedly influence future developments in this critical area of commercial law.
The provision’s success in providing temporary relief during the pandemic, combined with its judicial interpretation, has strengthened India’s insolvency framework and enhanced its ability to respond to future crises. Section 10A stands as a testament to the adaptability and resilience of India’s legal system in addressing unprecedented challenges while maintaining its commitment to fair and effective corporate debt resolution.
References
[1] The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020, Ordinance No. 9 of 2020, promulgated on June 5, 2020. Available at: https://www.mca.gov.in/content/dam/mca/pdf/IBC-2016-20230118.pdf
[2] Ministry of Corporate Affairs, Notification S.O. 1205(E) dated March 24, 2020, regarding increase in threshold for initiation of CIRP. Available at: https://taxguru.in/corporate-law/section-10a-ibc-2016-fresh-insolvency-default-lockdown.html
[3] Section 10A, The Insolvency and Bankruptcy Code, 2016. Available at: https://ibclaw.in/section-10a-suspension-of-initiation-of-corporate-insolvency-resolution-process/
[4] Ministry of Corporate Affairs, Notification S.O. 3265(E) dated September 24, 2020, extending Section 10A period. Available at: https://legallands.com/section-10a-of-insolvency-and-bankruptcy-code-2016-ibc/
[5] Ministry of Corporate Affairs, Notification S.O. 4638(E) dated December 22, 2020, further extending Section 10A period.
[6] Insolvency and Bankruptcy Board of India, Impact of COVID-19 on Insolvency and Bankruptcy Code. Available at: https://ibclaw.in/impact-of-covid-19-on-insolvency-and-bankruptcy-code-2016-reliefs-implications-by-rahul-kumar/
[7] Ramesh Kymal v. M/s. Siemens Gamesa Renewable Power Pvt. Ltd., (2021) 3 SCC 224. Available at: https://www.scconline.com/blog/post/2021/02/09/bar-under-section-10a-ibc-on-initiation-of-cirp-applies-retrospectively-march-25-2020-consciously-added-as-it-coincides-with-the-imposition-of-national-lockdown-sc/
[8] Supreme Court judgment in Ramesh Kymal case, analysis available at: https://insolvencyandbankruptcy.in/bar-under-section-10a-of-ibc-on-initiation-of-cirp-to-apply-retrospectively/
[9] Ramesh Kymal v. Siemens Gamesa case analysis. Available at: https://www.irccl.in/post/ramesh-kymal-v-m-s-siemens-gamesa-renewable-power-quandary-of-section-10a
[10] NCLAT decisions on Section 10A interpretation. Available at: https://anmglobal.net/section-10-of-ibc/
[11] NCLAT Delhi judgment in benefit under Section 10A cases. Available at: https://www.livelaw.in/news-updates/benefit-us-10a-of-ibc-can-only-be-claimed-when-default-occurs-during-prohibited-period-nclat-delhi-220341
[12] Beetel Teletech Ltd. v. Arcelia IT Services Private Limited, NCLAT decision. Available at: https://www.lexology.com/library/detail.aspx?g=6431e2e6-0f87-4ad3-9be8-43ba5d85c98e
[13] Analysis of threshold modifications during pandemic. Available at: https://ibclaw.in/section-4-and-10a-of-insolvency-and-bankruptcy-code-2016-default-limit-and-bar-by-mahir-dani/
[14] Supreme Court observations on Section 10A scope. Available at: https://www.scconline.com/blog/post/2023/05/24/nclat-benefit-section-10-a-ibc-claimed-default-occurs-during-prohibited-period-scc-blog-legal-research-news/
[15] NCLAT clarification on continuing defaults. Available at: https://www.lexology.com/library/detail.aspx?g=6431e2e6-0f87-4ad3-9be8-43ba5d85c98e
[16] LiveLaw analysis of Section 10A applicability to partial defaults. Available at: https://www.livelaw.in/articles/applicability-of-section-10a-ibc-to-part-default-during-suspension-period-an-analysis-226675
PDF Links to Full Judgement
- https://bhattandjoshiassociates.s3.ap-south-1.amazonaws.com/judgements/One crore rupees as the minimum amount of default for the purposes of Section 4 of IBC – Notification No. S.O. 1205(E). dated 24.03.2020 – IBC – IBC Laws.pdf
- https://bhattandjoshiassociates.s3.ap-south-1.amazonaws.com/judgements/IBC-2016-20230118.pdf
- https://bhattandjoshiassociates.s3.ap-south-1.amazonaws.com/judgements/the_insolvency_and_bankruptcy_code,_2016 (4).pdf
- https://bhattandjoshiassociates.s3.ap-south-1.amazonaws.com/judgements/Ramesh_Kymal_vs_M_S_Siemens_Gamesa_Renewable_Power_on_9_February_2021.PDF
- https://bhattandjoshiassociates.s3.ap-south-1.amazonaws.com/judgements/Beetel_Teletech_Limited_vs_Arcelia_It_Services_Private_Limited_on_11_September_2023.PDF
