Lenders will not be able to drag corporate defaulters to insolvency court for defaults arising within six months from March 25, 2020. Government has promulgated an ordinance amending the Insolvency and Bankruptcy Code, which prohibits application for initiation of insolvency resolution process against a debtor during this period. The ordinance has been floated in view of the economic crisis and subsequent pressure on business due to coronavirus lockdown.
Named 'Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020', the ordinance introduces Section 10A under Section 10 of the Insolvency and Bankruptcy Code (IBC). Sections 7, 9 and 10 of IBC have been suspended. The amendments introduced by the means of this ordinance have already come into effect.
"Notwithstanding anything contained in sections 7, 9 and 10, no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after March 25, 2020 for a period of six months or such further period, not extending one year from such date, as may be notified in this behalf," Section 10A reads.
This, however, will not apply to defaults committed before March 25, when a nationwide lockdown was imposed by the Centre to check the spread of coronavirus.
Corporate defaults have been on the rise due to restrictions under the coronavirus lockdown. Amid the worsening economic situation, resolution applicants to rescue defaulters were becoming difficult to come by. Usually, under the IBC, an entity can seek insolvency proceedings against a company even if the default is only one day.
As part of the Atma Nirbhar Bharat package, Finance Minister Nirmala Sitharaman had promised changes in the IBC to promote Ease of Doing Business. It has increased the minimum threshold to initiate insolvency proceedings to Rs 1 crore from Rs 1 lakh.
On Wednesday, Cabinet had approved an ordinance to suspend requests for insolvency proceedings for a specified period of time. Earlier on March 30, the Insolvency and Bankruptcy Board of India (IBBI) had amended regulations for Corporate Insolvency Resolution Process (CIRP) to exclude the period of lockdown from the timeline for any activity under the resolution process that could not be completed due to the lockdown.