President approves ordinance to suspend IBC, offer 6-month relief to firms

Reprieve can be extended up to a year via govt notification; default committed before March 25 not to enjoy benefit

President Ram Nath Kovind on Friday approved the ordinance to amend the Insolvency and Bankruptcy Code (IBC) exempting companies from facing insolvency proceedings against any default arising for at least a six month period starting from March 25, assuring no such proceedings will ever be initiated for default during this period .  

The ordinance gives permanent protection to companies for default during these six months that can be extended up to a year through a government notification. The IBC amendment ordinance stated, “No application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the said default occurring during the said period.” 

This suspension of IBC will not be applicable to any default committed  before March 25, 2020. The three sections which stand suspended include section 7, 9, 10. A new section 10A has been added to suspend the IBC. 

Section 7 of the Code enables financial creditors to start insolvency proceedings against a company while section 9 gives these powers to an operational creditor. Under section 10, the promoter of the company can trigger insolvency proceedings against his own company. 

Industry experts are concerned how the move will impact the credit discipline which was one of the main objectives of IBC. “It needs to be seen how this proviso is interpreted, especially the word ‘ever’, and how does the government ensure that this proviso is not misused,” said Anshul Jain, partner, PwC India. 

The ordinance said that Covid-19 pandemic had impacted the economy all over the world and created uncertainty and stress for business for reasons beyond their control . It said “It is difficult to find adequate resolution applicants to rescue the corporate person who may default in discharge of their debt obligation.” 

Experts however, said that till an application for insolvency is filed there is no way for any possible resolution applicants to come forward. 

“While the ordinance acknowledges the covid related unprecedented disruption, it does not grant any relief to such applicants whose resolution plans recently got approved. Their ability to implement the said plans will equally be directly impacted by such disruptions going forward. A cut off date in this regard ought to have been considered,” Diwakar Maheshwari Dispute Resolution Partner, Khaitan & Co.

The ordinance said that it was considered expedient to suspend the IBC sections triggering insolvency “to prevent corporate persons which are experiencing distress on account of unprecedented situation being pushed into insolvency proceedings.” 

Finance Minister Nirmala Sitharaman on May 17 had announced the proposal to suspend IBC in light of Covid-19 pandemic as part of Prime Minister Narendra Modi’s call for Atmanirbhar (self-reliant) India. 

What the ordinance says

No defaults for six months from March 25 or up to one year will face insolvency proceedings

No application shall ‘ever’ be filed for initiation of CIRP for the said default occurring during the said period.

Suspension won’t apply to default committed before March 25, 2020