COVID-19: Government to suspend insolvency proceedings for six months.

To  avoid companies at large from being forced into insolvency proceedings as businesses get impacted due to COVID-19, the union cabinet on Wednesday has given its nod to the proposal to introduce a new clause — 10A, under section 10 of the Insolvency and Bankruptcy Code (IBC), 2016, government sources told CNBC-TV18.

The announcement, however, has been held back as Narendra Modi government aims to unveil it along with other relief measures, source close to the development said.

“The proposal which has been approved is to move the amendments via promulgation of an ordinance, and the ordinance is now expected to get President’s nod soon, before government makes a formal announcement to notify the amendments,” government sources added.

The government has decided to provide this relief to companies from being dragged into insolvency proceedings for the next six months.

The new clause — Section 10A is to suspend Sections 7, 9 and 10 for six months or until further orders, with a rider that the amendment clause cannot be extended to more than a year, as a onetime measure, sources quoted above said.

“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,” a government official said.

Union finance minister Nirmala Sitharaman on March 24 had said if the current situation continues beyond April 30, the government may consider suspending Section 7, 9 and 10 of the IBC, 2016 for a period of six months so as to stop companies at large from being forced into insolvency proceedings at the time of crisis.

While Section 7 deals with financial creditors initiating insolvency action, Section 9 deals with operational creditors initiating action. Section 10 allows a defaulting company to approach the National Company Law Tribunal (NCLT) to declare it insolvent.

It is to be noted that the old proceedings will continue.

Hailing the move, experts say that it shall bring in more stability to the business community in the country.

“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),” said Uday Bhansali, President, Financial Advisory at Deloitte.

However, is this enough! Well experts say more steps are needed to speed up the IBC process in the country.

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.”

“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,” Rawat added.

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