Covid-related default: Bill passed in Rajya Sabha to offer IBC relief

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September 20, 2020 7:00 AM

Insolvency proceedings suspended for fresh defaults after March 25

The minister, however, made it clear that insolvency applications filed for default before March 25 (when a national lockdown was imposed) are being entertained.The minister, however, made it clear that insolvency applications filed for default before March 25 (when a national lockdown was imposed) are being entertained.

The Rajya Sabha on Saturday approved a Bill to suspend insolvency proceedings for up to a maximum of one year against fresh Covid-related default from March 25. The Bill seeks to replace an ordinance that was promulgated in June to provide relief to thousands of firms battered by the pandemic.

Once the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2020, gets passed in the Lok Sabha as well, it will be made into law with Presidential assent.

Replying to a debate on the Bill in the Upper House, finance minister Nirmala Sitharaman said the aim of the IBC is to “keep the companies as going concern rather than liquidating them”. Since the pandemic has hit every industry, it’s difficult to find suitors if a large number of companies are put on the block for resolution, hence the move to suspend insolvency against Covid-related default.

The minister, however, made it clear that insolvency applications filed for default before March 25 (when a national lockdown was imposed) are being entertained.

The government had sought to suspend invocation of three sections — 7, 8 and 10 — of the IBC for fresh default from March 25. These sections deal with the initiation of the insolvency proceedings by financial and operational creditors and corporate debtors.

Explaining the reason behind not allowing even the debtors to seek their own insolvency proceedings under Section 10 of the IBC, the minister said: “The restraint that we put was because of difficulty in finding enough resolution applicants as well as resolution professionals. So, irrespective of who initiates the process, the outcome will be the same—liquidation of the company. The Code actually balances the interests of creditors with debtors’, and we can’t allow only the debtors to initiate (insolvency proceedings) while denying the option to the creditors.”

Citing RBI data, the minister said in FY19, the recovery under the IBC was as much as 42.5% of the admitted claims, way better than that through other tools, such as Lok Adalat (5.3%) , Debt Recovery Tribunals (3.5%) and the SARFAESI Act (14.5%).

The cut-off date of March 25 (for filing insolvency application) also came as a relief for the lenders who had filed applications or intended to do so against stressed firms that had defaulted before the pandemic started to spread, in sync with the central bank’s June 7, 2019, circular. According to this circular, a default case will have to be referred to the NCLT under the IBC if no other resolution plan is firmed up within six months.

However, as some analysts have pointed out, the breather will potentially hit financial and operational creditors hard and bleed their balance sheet, apart from temporarily depriving them of a credible mode of bad debt resolution.

Commenting on the Bill’s passage, Daizy Chawla, senior partner at Singh & Associates, said: “To give formal approval to the ordinance passed was the need of the order as the economy has still not recovered. Further, limiting the suspension to one year only is also the need of the hour, as extending the suspension for more than one year will defeat the overall purpose of the Code.”

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