Money & Banking

Corporate insolvency suspension ordinance promulgated

KR Srivats New Delhi | Updated on June 05, 2020

MS Sahoo , Chairperson, IBBI   -  Manvender Vashist

No insolvency initiation for debt defaults arising on or after March 25

The much-awaited ordinance suspending initiation of Corporate Insolvency Resolution Process (CIRP) in the country was issued on Friday, bringing relief to lakhs of companies facing defaults of their debt obligations due to the Covid-induced lockdown since March 25.

It has now been stipulated that no application for a CIRP can be filed for any default arising on or after March 25 (when lockdown began) for six months or such further period as may be notified for this purpose. However, this facility cannot exceed one year, according to the ordinance.

The ordinance has however also made it clear that the provision of new Section 10 A (which has suspended initiation of CIRP) would not apply to any defaults committed under Sections 7,9 and 10 before March 25 this year.

Simply put, the corporate insolvency process initiation suspension facility will not be available for debt defaults committed prior to March 25.

Commenting on the insolvency ordinance, IBBI Chairperson MS Sahoo told BusinessLine that any default by a company during the period, when the Covid-19 holds sway, is considered Covid-19 related default.

Until govt orders

“This period begins with March 25, 2020, when the first phase of national lockdown commenced and continues for six months or such further period, not exceeding one year, as the Government may decide, as the story unfolds further”, he said. Sahoo said that the ordinance excludes such defaults from the purview of the Code for ever. This means that such defaults shall not be the basis for initiation of insolvency proceeding at any time. This will prevent companies from being pushed into insolvency for their inability to meet repayment obligations due to business disruptions on account of Covid-19, he added.

“Let me explain the rationale. Typically, rescue process of a viable firm under the Code requires a saviour. When every other firm is under stress in the wake of Covid-19, the market may not have many saviours to rescue them. It is dangerous for an economy if the market fails to rescue viable firms. If all such firms are pushed into insolvency, many of them may end up with premature liquidation. Upon such liquidation, the assets would have distress sale, realising abysmally little for creditors. Consequently, the firms would have a premature death while creditors would realise next to nothing. The endeavour is to allow the firms breathing space to recalibrate their operations and business to an all-new normal,” he said.

The defaults not related to Covid-19, however, will continue to be dealt with under the Insolvency and Bankruptcy Code.

Post pandemic

“One can initiate insolvency proceeding in respect of default that has arisen prior to March 25, 2020 or that arises after Covid-19 period. Further, the applications already filed for initiation of insolvency proceedings and ongoing insolvency proceedings will continue to be dealt with in accordance with the Code,” he said.

Further, a resolution professional cannot file an application seeking contribution from directors in respect of defaults during the Covid-19 period, he added.

Published on June 05, 2020

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