COVID-19: Govt amends insolvency law; suspends initiation of fresh proceedings for six months

Seeking to provide relief for corporates, the government on Friday promulgated an ordinance to amend the Insolvency and Bankruptcy Code (IBC) whereby fresh insolvency proceedings will not be initiated for at least six months starting from March 25 amid the coronavirus pandemic.

Default on repayments from March 25, the day when the nationwide lockdown began to curb coronavirus infections, would not be considered for initiating insolvency proceedings for at least six months.

The move is expected to provide relief for corporates as the pandemic and subsequent lockdowns have significantly impacted economic activities.

For latest updates and live news on coronavirus, click here

However, proceedings can be initiated for defaults made before March 25.

Insolvency proceedings would not be initiated for "any default arising on or after March 25, 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," the ordinance said.

"... 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," it said.

Initiation of corporate insolvency resolution process has been suspended for the given time. Three sections under the Code -- 7, 9 and 10 -- would not be applicable for at least six months.

In this regard, a new section '10A' has been inserted in the IBC.

While sections 7 and 9 provide for initiation of insolvency proceedings by financial creditors and operational creditors, respectively, section 10 pertains to corporate applicants.

The IBC, which came into force in December 2016, has been amended five times.

CORONAVIRUS SPECIAL COVERAGE ONLY ON DH

IBBI Chairperson M S Sahoo said suspension of fresh insolvency proceedings for at least six months in the wake of the coronavirus pandemic would help in providing "breathing space" for corporates to recalibrate their business to an all-new normal.

The Insolvency and Bankruptcy Board of India (IBBI) is a key institution in implementation of the IBC.

According to him, the latest move would prevent companies from being pushed into insolvency for their inability to meet repayment obligations due to business disruptions on account of COVID-19.

Under the IBC, an entity can seek insolvency proceedings against a company even if the repayment is delayed by just one day. This is subject to the minimum threshold of Rs 1 crore. Earlier, the threshold was Rs 1 lakh.

On May 17, Finance and Corporate Affairs Minister Nirmala Sitharaman said the government would provide various relaxations under the insolvency law, including suspending fresh proceedings for up to one year.

"After all, when lockdown gets lifted immediately, you are not sure how much of the businesses will get restored... No fresh insolvency proceedings will be initiated for up to one year," she had said.

The measures were announced as part of the fifth and final tranche of the over Rs 20 lakh crore stimulus package that was unveiled to boost the economy ravaged by the COVID-19 outbreak and subsequent lockdowns.

The IBC -- which provides for a time-bound and market-linked resolution process for stressed assets -- was enacted on May 28, 2016 and came into force on December 1, 2016.

Cyril Shroff, Managing Partner at Cyril Amarchand Mangaldas, said the government has been proactive in recognising and addressing the stress brought on by the exogenous shock of COVID -19 and has suspended fillings under the IBC for defaults that occur on or after March 25.

"It has been clarified that this suspension does not apply to defaults that occurred prior to this date. Accordingly, this measure seeks to balance the credit discipline engendered by IBC with alleviating the distress caused by COVID-19," he noted.

He also said that usefully, in a reprieve to directors, the wrongful trading related penalties for directors can also not be filed for defaults that occur during this period.

"By providing an objective criteria and a suspension period that aligns with the RBI payment moratorium, it is hoped that the suspension will be responsibly used by all stakeholders," he added.