Government extends IBC pause by 3 months

Code will not be invoked against companies that have defaulted on loans since March 25

Corporate India has got three more months of relief from invocation of insolvency and bankruptcy proceedings by lenders, with the government extending the suspension of relevant provisions of the Insolvency and Bankruptcy Code (IBC) against firms defaulting on their loans since March 25 this year.

The IBC’s invocation was first suspended for a period of six months in view of the emergent stress on balance sheets due to the COVID-19 pandemic and the national lockdown announced in March. The Corporate Affairs Ministry notified a further three-month extension on Thursday evening, when that six-month period was due to end.

Finance Minister Nirmala Sitharaman said that the extension of the suspension of sections 7, 9 and 10 of the IBC reinforces the government’s commitment to protecting businesses. “It also gives companies breathing time to recover from financial stress,” she said in a tweet. The government had issued an ordinance to amend the IBC in June to enable the suspension of the Code’s provisions for firms committing defaults after March 25. The ordinance permits the government to extend the suspension of insolvency invocation for up to one year, and was passed as a legislation by Parliament this week.

‘Result still elusive’

“The notification was expected but the desired result is still elusive,” said Anoop Rawat, partner, insolvency and bankruptcy at Shardul Amarchand Mangaldas & Co.

“The rate of stress resolution outside IBC is abysmal and the stress is only accumulating,” he added. Mr. Rawat hoped the three months could be used to build stakeholder consensus on resolving the stress created on account of COVID-19 to avoid further build-up of stress at the end of the period.

While the economy contracted more than 23% in the first quarter, when the harshest lockdown restrictions were in place, the industry is yet to see a significant revival in revenues as consumers remain cautious and hold on to cash amid a surge in novel coronavirus infections and dwindling jobs and incomes.

The suspension of the corporate insolvency resolution process for another three months will help companies stay afloat, said Uttara Kolhatkar, partner at J. Sagar Associates.

“The current COVID-19 situation has had a debilitating effect on the Indian economic situation and the passing of the Bill will give such stressed companies the much–needed cushioning effect,” she added.

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