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COVID-19: Govt. to suspend insolvency proceedings for next 6 months, amends IBC

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KOLKATA: On Wednesday, the Union Cabinet approved the proposal to introduce a new clause under the Section 10 of the Insolvency and bankruptcy Code (IBC), 2016. The addition of this new clause, 10A, was proposed so that the businesses that are severely affected due to the COVID-19 Pandemic, aren’t forced into insolvency proceedings.

Government sources close to the development are saying that the formal announcement for this amendment has been held back because the Modi Administration wants to unveil this along with a host of relief measures, like stimulus packages. Furthermore, these sources added, “The proposal which has been approved is to move the amendments via promulgation of an ordinance…The ordinance is now expected to get the President’s nod soon, before government makes a formal announcement to notify the amendments.”

The Government has made this addendum to prevent businesses from being dragged into insolvency proceedings if they declare bankruptcy, within the next 6 months.

This new clause, 10A, seeks to suspend Sections 7, 9 and 10 of IBC, for the next 6 months or until further orders. The catch or the rider is that this amendment cannot be extended to more than 1 year and is intended as a one-time measure for the companies seeking it, sources have said.

A Government official stated, “Amendment is proposed to give a six month window. Lenders/creditors during these six months, under the current impact due to COVID-19, cannot drag a fresh case of default for bankruptcy. The move will be announced formally later with the comprehensive economic package.”

Earlier, On March 24th, Union Finance Minister Nirmala Sitharaman had announced that if the troubling situation in our country continue beyond April 30th, the government may consider suspending Section 7,9 and 10 of the IBC, 2016for a period of 6 months. She added that this will be done to stop companies, at large, from being forced into insolvency proceedings, in these times of crisis.

The section 7 of IBC, 2016 outlines the protocols for financial creditors who initiate insolvency proceedings while section 9 outlines the protocol that operational creditors should follow. However, it is Section 10 that allows a company to approach the National Law Tribunal (NCLT) to declare it insolvent.

For the record, it should be noted that the insolvency proceedings that are already underway, won’t stop.

Industry experts are applauding this move by our Government, saying that it shall bring in more stability to the business community in our country.

Uday Bhansali, President of the Financial Advisory at Deloitte acknowledged, “This is a pragmatic move in line with finance minister’s remarks in late March when the first economic package was announced. At a time when the focus of the government is to revive economic activity post a future lifting of the lockdown, suspension of IBC for 6 months removes an element of risk for a company while it is trying to secure necessary financing, renegotiating loans, and attempting to secure other reliefs from banks. (Example: Not becoming an NPA or triggering an event of default).”

However, experts are still trying to be realistic. They are asking for more steps to speed up the IBC process in India.

Anoop Rawat, Partner, Insolvency and Bankruptcy, Shardul Amarchand Mangaldas & Co. feels that “the suspension for six months is a step in the right direction in the current situation, however, it is necessary to create an enabling framework for swift resolution of debt outside the IBC framework. The current framework of RBI does not have enough force to bind all creditors. It would be important to introduce law which makes debt resolution through (specified) majority decision binding on all creditors with adequate safeguards for the impaired classes of creditors.”

Additionally, Rawat opines, “While an insolvency petition from creditors should be suspended in these situations, however, a voluntary reference to insolvency should be allowed. This is justifiable on the analogy that all debt resolution outside the IBC would be with the concurrence of the existing management and therefore if the existing management is of the view that resolution under insolvency law is the best solution then no further time should be spent on any other efforts for debt resolution sine delays would lead to deterioration in value.”

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