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COVID-19: Govt Modifies Legislation On Insolvency; Suspends Six Months After Commencement Of Fresh Proceedings

Suspension could be extended for a year and companies are expected to return to business without fear of insolvency.


On Wednesday, the Union Cabinet cleared a proposal for suspending six months of the IBC process, extendable to a year, sources said.

The government will probably promulgate an order to bring about the change soon. If the Legislation is published, the specifics of the decision by the Cabinet will be released.

On 17 May, Finance Minister Nirmala Sitharaman declared the plan to suspend the insolvency mechanism in view of the Covid-19 pandemic. The FM also reported that the Government was working on a Specific Resolution System for MSMEs. The government had previously declared that the insolvency requirement for Crore Rs 1, Rs 1 lakh, will raise.

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The government said “all Covid ‘s debt” should be excluded from the IBC ‘s default concept. The Corporate Ministry will soon issue a circular specifying the loan period to be eligible for this exemption.

The Reserve Bank of India allowed lending institutions to extend the moratorium on all temporary loan payments up to the year of August, 31, 2020, in order to alleviate companies unable to pay their loans during the pandemic.

β€œThe moratorium period will be excluded from the classification of non-performing assets. As such, a company availing of the moratorium will not be classified as a bad loan until August 31,” the RBI had said.

The idea of suspending IBC was mentioned by industry experts as following the Central Bank ‘s theme. This move is expected to enable companies to keep track of their business without fear of insolvency.

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Some IBC experts have indicated that the choice granted to promoters to insolvency should not be restricted under Section 10 of the IBC. Whether such a decision is taken remains to be seen.

According to legal experts, the government may provide for MSMEs with insolvency plans that are pre-packaged, common in the US and in the UK. The underlying business and its shareholders commit to an deal with a bidder prior to the insolvency proceedings being launched.

44 percent of the debt has been recovered from the initiation of legislation in 2016, out of the 221 cases solved under the IBC. Total accepted statements surpass Rs 4,13 trillion, of which about Rs 1,84 trillion are the actual realizable sum.

The insolvency cases for no less than six months will not be regarded as an insolvency failure from 25 March, the day when national lock-downs started to avoid the COVID-19 infections. The change could benefit industries because of the economic impact of the pandemic and ensuing shutdown.

Any failure arising on or after March 25th 2020, for a period of 6 months or a period no longer than one year from that date, as notified by the order, would not be initiated for insolvency proceedings, the order said.