IBC Suspension Extended By Three More Months

The government has issued a fresh notification extending the suspension of Insolvency and Bankruptcy Code by another three months. The suspension was due to expire on Sept. 25.

The government, through an ordinance, had suspended initiation of fresh insolvency proceedings for defaults arising on or after March 25, 2020, for a period of six months. Suspension of Sections 7, 9 and 10 meant no fresh insolvency filings could be made by financial creditors, operational creditors, and the corporate debtor itself. This effectively shut down all insolvency filings against any company that defaults on a debt or payment post March 25.

The ordinance also gave the government power to extend the IBC suspension up to one year. On Monday, the parliament approved the Insolvency and Bankruptcy Code (Second Amendment) Bill that replaced this ordinance.

Also Read: IBC Suspension: Reforms That Can Fill The Gap

Replying to a debate on the bill in the Lok Sabha, Finance Minister Nirmala Sitharaman said the amendments would provide relief to companies reeling under the impact of the pandemic.

Extension of suspension of sections 7,9,10 of the IBC reinforces the Government's commitment to protecting businesses. It also gives companies breathing time to recover from financial stress.

An extension in a calibrated manner, rather than a blanket extension demonstrates the careful wait and watch approach of the government and a confidence that economic conditions could be slowly improving, L Viswanathan, partner at Cyril Amarchand Mangaldas, said.

The Covid-19 Restructuring Framework released by the RBI on August 6, 2020, allows a two-year moratorium and requires that such restructuring be initiated by Dec. 31, 2020, and implemented in 90 days thereafter. This period is now co-terminus with the extended IBC Ordinance period and therefore if a restructuring is not initiated within the timeline stipulated by the RBI, lenders will have the right to initiate insolvency proceedings for future defaults.

L Viswanathan, Partner, Cyril Amarchand Mangaldas

Earlier this month, RK Bansal, managing director and chief executive officer of Edelweiss Asset Reconstruction Co., had told BloombergQuint that the IBC suspension should continue. Even if defaults post March 25 were permitted to trigger insolvency resolution, he had said, they wouldn't have been admitted because neither are the courts working nor do they have the infrastructure to admit cases. The other challenge is finding willing buyers, he had pointed out.

Covid-19 isn't a situation created by borrowers or promoters but it has obviously impacted their operations and finances, Nikhil Shah, managing director, Alvarez & Marsal, had said. And so, for them to lose control and value of their companies wouldn't be fair, he had opined.

But both these experts had opined that the government should lift the bar over voluntary insolvency filings—Section 10 filings that allow corporate debtors to themselves trigger insolvency proceedings versus creditors taking them to court.

But the notification issued on Sept. 24 makes no such distinction. Even as the IBC has now been suspended till Dec. 25, the Delhi High Court is hearing a petition that has challenged this restriction. The petitioner has told court that suspension of Section 10 deprives companies from taking the benefit of the code for resolution of its debts in a time-bound manner.

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