IBC: Ordinance Issued To Suspend Insolvency And Bankruptcy Code For Six Months

India has suspended initiation of fresh insolvency proceedings for a period of six months to shield companies impacted by the outbreak of Covid-19. The ordinance, issued today and effective immediately, allows the government to extend the suspension up to one year. It applies to defaults arising on or after March 25, 2020.

This comes after the finance minister recently announced the government's intent to suspend the code as a part of the economic relief measures presented by the government.

Section 7, 9 and 10 of the Insolvency and Bankruptcy Code, 2016 allow for insolvency filings by financial creditors, operational creditors and the corporate debtor itself. This effectively shuts down all insolvency filings against any company that defaults on a debt or payment.

The ordinance suspends these sections on grounds that

• the pandemic has created uncertainty and stress for business for reasons beyond their control
• the nationwide lockdown has added to disruption of normal business operations
• in such circumstances it would be difficult to find adequate number of resolution applicants for a distressed/defaulting business

The ordinance also perpetually prohibits initiation of insolvency proceedings on account of default committed by the company during these six months (or a year if the suspension is extended).

The six-month IBC suspension will run almost parallel to a six-month loan moratorium that banks and non banking financial companies can extend to borrowers. Hence, the likelihood of financial defaults during this period are slim to none and few banks and NBFCs would have had cause to invoke IBC. But the RBI moratorium does not apply to other financial creditors, such as bond and debenture holders, those to whom receivables have been sold etc.. In case of a default, they can no longer invoke IBC.

“...the practical impact of this exclusion is more likely to be felt by creditors who are outside the RBI framework and those who have not granted borrowers a moratorium,” L Vishwanathan, of law firm Cyril Amarchand Mangaldas said in an emailed comment.

The suspension will also curb operational creditors, such as vendors and suppliers, from filing insolvency proceedings against corporate debtors. It will also block corporate debtors from self-filing in order to restructure debt.

While the ordinance is intended to provide respite to the corporate debtor, taking away recourse under IBC will only mean ballooning of the liabilities without resolution, Ajay Shaw, partner at DSK Legal, said in an emailed comment to BloombergQuint. “Having said that, in such a situation lenders and corporate debtor will need to look at options of restructuring. It may also require lenders and corporate debtor to look at a scheme of restructuring under Section 230-32 of the Companies Act.”

Sudip Mahapatra, partner at S&R Associates, said while the ordinance is a welcome move, the suspension of voluntary initiation of insolvency proceedings by companies themselves isn't warranted. “If a company based on the circumstances believes that the best option for it is to undergo insolvency, it should be permitted to exercise the option.”

The ordinance clarifies that the suspension won't apply for defaults committed prior to March 25, 2020. It has also said that resolution professionals will be barred from initiating fraudulent trading or wrongful trading application against directors of companies where the IBC process is suspended.

(Corrects an earlier version that misstated Sudip Mahapatra's first name)

Watch | Quick analysis of the ordinance