Covid-19 Economic Package: No New Insolvency Proceedings Up To One Year, Says Finance Minister

India has shielded companies from insolvency proceedings by suspending IBC for a year.

Rings are piled up in a metal workshop in Mayapuri Industrial Area in New Delhi. (Photographer: Sanjit Das/Bloomberg)
Rings are piled up in a metal workshop in Mayapuri Industrial Area in New Delhi. (Photographer: Sanjit Das/Bloomberg)

India has suspended initiation of fresh insolvency proceedings for a period of one year to shield companies impacted by the outbreak of Covid-19 as part of the economic relief package announced by the government.

Finance minister Nirmala Sitharaman announced today that the initiatives would contribute to the ease of doing business in India. The government had initially announced its intent to suspend the Insolvency Code for a period of six months, which has now been extended to a year.

Here are the key changes announced by the government.

  • The minimum threshold to initiate insolvency proceedings has been raised to Rs 1 crore as compared to the existing threshold of Rs 1 lakh.
  • A special insolvency resolution framework for micro, small and medium enterprises will be notified under Section 240A of the insolvency code.
  • Suspension of fresh initiation of insolvency proceedings up to one year depending on the pandemic situation--increased from six months earlier.
  • Amending the insolvency law to exclude debt relating to Covid-19 from the definition of “default” under the code.

An ordinance detailing these changes will be issued shortly, the finance minister said.

Even as the details of the amendments to the code are awaited, most experts have argued against a blanket suspension of the law.

The government should focus on the impact to lenders, who have heavily relied on IBC for debt recovery, Atul Pandey, partner at Khaitan & Co. said. These restrictions on debt recovery through IBC will certainly impact the lending ability of banks, he added.

Veena Sivaramakrishnan, partner at Shardul Amarchand Mangaldas & Co., also expressed caution on the blanket suspension of the law. The insolvency code was brought in as an alternative to enforcement and as a measure for viable companies to survive as a “going concern”. Suspending IBC in entirety, while it looks like a relief, could actually lead to corporates being in a state of flux, Sivaramakrishnan said.

Questions like why should an entity not refer itself to insolvency, what is the parallel regime of resolution, recovery steps are not curtailed and therefore will continue to rise, what is the framework for creditors to come up with a viable resolution plan outside of IBC, continue to remain unanswered.
Veena Sivaramakrishnan, Partner, Shardul Amarchand Mangaldas & Co. 

Even before measures were announced, experts had advised caution.

A complete lockdown on IBC filings will delay recoveries from legacy cases, require further provisioning, and compromise capital adequacy, Suharsh Sinha, partner at AZB & Partners, had argued.

Trilegal’s corporate law partner Ramakant Rai had suggested a nuanced approach to amending IBC, with a view to ensure that the interests of borrowers/promoters as well as creditors are adequately protected

A blanket suspension of the IBC will harm the very firms that such suspension seeks to protect, and firms that can be restructured under this law may get pushed to liquidation, Bhargavi Zaveri, senior researcher at the Finance Research Group had opined.