Firms get relief from IBC for six months, ordinance soon

By: |
Published: April 24, 2020 3:50 AM

While the Reserve Bank of India (RBI) has allowed borrowers a three-month repayment holiday for term loans, keeping insolvency proceedings in abeyance would be an additional breather for borrowers who may default on loan repayments thereafter.

Any repayment default post 90-days, sees the exposure slip into a non-performing asset (NPA) and banks need to make bigger capital provisions.

As the prospect of several companies turning bankrupt in the wake of the Covid-19 outbreak loomed large, the Cabinet on Wednesday cleared a proposal to promulgate an ordinance to suspend insolvency proceedings against new defaulters for six months, sources told FE.

While the breather will allow several firms that are unable to service their debt to ward off the threat of being dragged to the insolvency courts for six months, it will also hit financial and operational creditors. However, proceedings in the insolvency cases that were already admitted earlier would remain unaffected by the latest move.
Once the Ordinance comes into force following the Presidential assent, sections 7,9 and 10 of the Insolvency and Bankruptcy Code (IBC) will remain suspended for six months, said one of the sources. Finance minister Nirmala Sitharaman had said on March 24 that the government might suspend these sections to offer relief to liquidity-starved companies if the crisis deepened.

Section 7 of the code allows a financial creditor, either by itself or jointly, to make an application for initiating the corporate insolvency resolution process against a corporate debtor. Section 9 of IBC gives power to the operational creditors to initiate the corporate insolvency resolution process after default. Under Section 10 of the IBC, a defaulting company has the right to approach the adjudicating authority to declare it insolvent, giving protection from creditors.

Already, in a bid to insulate small businesses from being dragged to the NCLT, the default threshold for triggering insolvency has recently been raised to Rs 1 crore from just Rs 1 lakh earlier. However, experts believe that given the unprecedented crisis, the existence of companies must take precedence over the resolution of stressed assets.
They even say a six-month breather from the Insolvency and Bankruptcy Code (IBC) may not be adequate and the government may have to extend it further later, due to growing uncertainties about an economic recovery and the ability of the companies concerned to service debt anytime soon.

Nevertheless, the move will dent the cash flow of operational creditors like raw material suppliers hard and may force the small ones to shut shop. Financial creditors will see a sudden surge in their provisioning unless the central bank grants regulatory forbearance.

While the Reserve Bank of India (RBI) has allowed borrowers a three-month repayment holiday for term loans, keeping insolvency proceedings in abeyance would be an additional breather for borrowers who may default on loan repayments thereafter.

Even before the pandemic, the slowdown in the economy had caused a deterioration in credit quality. For instance, SMA-2 loans – those where repayments are delayed by 61-90 days – increased by about 143% between March 2019 and September 2019, Reserve Bank of India (RBI) data cautioned. Any repayment default post 90-days, sees the exposure slip into a non-performing asset (NPA) and banks need to make bigger capital provisions.

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Boycott of Chinese products should be done in calibrated manner: Traders’ body
2Airtel rolls out priority 4G network offer with faster speed, preferential service
3Poco mojo: Understanding the Xiaomi spin-off brand, its product choices, and future goals including monetization prospects