In a significant move, the Centre has empowered itself to recover assets, properties, royalties and cancel leases of certain companies engaged in the oil sector even when they are undergoing the Insolvency and Bankruptcy Code (IBC) process.

The moratorium protection hitherto available under IBC — Section 14(1) — will not be applicable for certain companies having transactions, arrangements or agreements — production sharing contracts (PSC), revenue sharing contracts, exploration licences and mining leases under Oilfields (regulation and development) Act 1948, the Corporate Affairs Ministry (MCA) has ruled. Even joint operation agreements (JoA) are covered under the latest amendment. 

Put simply, the MCA has secured the interests of the government by allowing it to favour itself for recoveries if it were to come to a conclusion that IBC process may yield a lesser amount for the government and therefore it would prefer to realise sums upfront without waiting for the IBC resolution outcomes.

This latest government friendly tweak in the legal provision on IBC would essentially take away the protection (moratorium which was often seen as a life saving clause for the corporate debtor) that was available during IBC process to companies, said experts.

Nowhere in the world has such a withdrawal of moratorium protection happened specifically in respect of the oil sector, said another IBC expert who sought anonymity. This could even be a prelude to similar protection withdrawal for the companies in the telecom sector where recovery of spectrum dues has been a major litigation matter in respect of companies undergoing IBC process, this expert added.

Liquidation risk

The latest MCA move could consequently impact the health of the corporate debtor (in the oil sector) facing IBC and increase the risk of liquidation. “This MCA move is not resolution friendly step. Section 14(1) of IBC is always pro corporate debtor. Any exception to that will be an anti corporate debtor move”, an IBC expert said.

Anoop Rawat, Partner, Insolvency & Bankruptcy, Shardul Amarchand Mangaldas & Co, said the latest MCA notification is intended to allow actions under PSC and JoA notwithstanding the moratorium under Section 14. It is yet to be seen whether this notification will be prospective or retrospective in nature, he added.

“While the notification appears to allow the government to take action in the interest of scarce natural resources, however, this has the potential of creating a precedent for similar exclusions for other sectors and may have a far reaching implications on the revival prospect of corporate debtors”, Rawat added.

IBC Section 14

Section 14 of the IBC, 2016 (the Code) comes into operation when an application against a corporate debtor is admitted for initiation of the insolvency resolution process under the Code. On declaration of moratorium under section 14, it creates a standstill period by putting a moratorium on the institution of suit and other legal and recovery proceedings. Due to prohibition under the above section, even the license, permit, quota, concession, grant or right given by a government to the corporate debtor, cannot be suspended or terminated on the ground of insolvency.  

The Central Government has been conferred power to notify such transaction, agreements, or other arrangements to which the prohibition or moratorium under section 14 would not apply. The effect of the current notification dated 14th June 2023, that the production/revenue sharing contracts, exploration licenses, and mining lease and the related transaction made under the Oilfied (Regulation and Development) Act, 1948, will not be covered under the said moratorium under section 14 of the Code, thereby enabling the Government to exercise its rights and remedies under such contract and take action for termination or withdrawal of license, permit, quota, concession, grant or right is given by a government to the corporate debtor under the notified arrangements.

The law holds that the Government is the trustee of natural resources for public and since the corporate debtor and the government not being the owner, therefore, such assets should remain outside the insolvency process.