Policy

Centre extends suspension of insolvency initiation under IBC till March 25

KR Srivats New Delhi | Updated on December 23, 2020

Calibrated end of suspension may have helped debtors, say experts

The Ministry of Corporate Affairs (MCA) has extended by three more months — from December 25 to March 25 — the suspension of insolvency proceedings initiation against corporates for debt defaults.

A six-month suspension was first introduced on June 5 for debt defaults arising post March 25, 2020, when the Covid-induced lockdown was announced. The suspension was to end on September 25, but was extended up to December 25.

Also read: Corporate Insolvency: IBBI may rein in engagement of third party consultants

The latest MCA move comes on the heels of Finance Minister Nirmala Sitharaman indicating a few days back, at an industry interaction, that the government had decided to extend IBC suspension till March next year.

In effect, the government has now ensured that any corporate debt defaults arising between March 25, 2020 and March 25, 2021 will remain outside the Insolvency and Bankruptcy Code (IBC) forever, said IBC experts. However, if the default had occurred before March 25, 2020, there will be no protection, they added.

Impact on companies

The suspension of IBC initiation is expected to save several companies from being pushed into insolvency or being liquidated. Companies which were otherwise viable but got into trouble (became unviable) because of Covid-19 and the resultant lockdown will now be protected, said experts. These companies are expected to revert to good health when the pandemic is contained.

Also read: ICRA expects FY21 and FY22 to see lower realisations under IBC

While the law now prohibits insolvency proceedings against the corporate debtor for defaults occurring during the specified period till March 25 next year, it does not disallow such action against the personal guarantors of a corporate debtor, said Daizy Chawla, Senior Partner at law firm Singh & Associates.

She also said that the suspension of proceedings will lessen the burden of the Adjudicating Authorities as regards applications against corporate debtors with respect to default occurring between March 2020 and March 2021. Yet, it might increase the burden of the Debt Recovery Tribunal (DRT) and other courts, as lenders/creditors with corporate debtors may turn to them for redress.

Calibrated progress

Aseem Chawla, Managing Partner at law firm ASC Legal, said: "Instead of extending the suspension a calibrated progress may have been a worthwhile option. A significant number of borrowers are still struggling with restructuring of loans and the distress assets market needs some more filip. If there are signs of economic recovery as per the government's assertion, then some sort of opening up would have been a step in the right direction as some beginning has to be made.”

Sushmita Gandhi, Partner at law firm IndusLaw, said the further suspension of IBC proceedings may have provided a safe haven to many borrowers during this time of economic distress but would surely push back quick resolution of stressed loans for lenders.

“Even though the lenders can approach other forums for recovery of debt, those proceedings are time consuming and not as effective as the resolution process envisaged under the IBC. The suspension is also likely to impact smaller operational creditors as their chance of settling the bona fide claims with companies owing huge debt to them is affected, too,” she said.

While the suspension may have been extended looking at the larger interest and to curb the misuse of IBC by lenders, it is bound to severely prejudice the entire banking and lending system, she added.

Souvik Ganguly, founder and Managing Partner of Acuity Law, said: "A general prohibition to initiate proceedings under the insolvency law may have been required in the initial months of the pandemic. However, as more than nine months have passed, corporate debtors in distress should be allowed to use the IBC process to restructure businesses or, if required, initiate liquidation.”

Published on December 23, 2020

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor

You May Also Like