India Inc Gets IBC Breather For Six Months Amid Coronavirus Outbreak

The government has decided to suspend the insolvency and bankruptcy proceedings for at least six months in light of the challenges being faced by the businesses due to the coronavirus (Covid-19) pandemic, a senior government official told Business Standard.

A new section is likely to be added in the IBC, which will suspend section 7, 9 and 10 which are used to trigger insolvency for six months or a period not exceeding one year from the date of commencement of the insolvency, the senior government official said.

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.

All the three sections would lose effect for a period of six months or further as may be notified.

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The provision is likely to require a change in the present Act, according to experts.

“Certainly a positive step for companies which are impacted in current times. But for companies which were otherwise already in stress and could have found resolution under IBC, their resolution may also get delayed due to this suspension,” Anshul Jain, partner, PwC India said.

Jain also said that it needs to be seen if this move will have a positive impact on privately negotiated merger and acquisition transactions.

Earlier in March, Finance Mminister Nirmala Sitharaman had indicated that the government will consider suspending IBC for a few months if the Covid situation persists and causes stress to businesses.

Already, the default threshold for stressed companies facing the threat of insolvency amid the coronavirus crisis, has been increased from Rs 1 lakh to Rs 1 crore to prevent triggering of insolvencies.

The latest move provides a much stronger protection to companies of all sizes which are facing issues in carrying business in the present environment.

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According to industry sources, many creditors had been considering invoking the force majeure clauses which refer to unforeseeable circumstances that prevent someone from fulfilling a contract, to trigger insolvencies against companies.

Some parties are also likely to take advantage of the situation and blame the delay or non-delivery of projects on the coronavirus (Covid-19) pandemic, for instance in the real estate sector, experts said.

The Reserve Bank of India, earlier this month, provided a relief to the standard bank accounts availing a loan moratorium between March 1 and May 31. The 90-day non-performing asset (NPA) norm would exclude the moratorium period for such accounts.