Firms get 6-month relief from IBC rules

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The government promulgated an ordinance on Friday to suspend three sections in the Insolvency and Bankruptcy Code to prevent companies from being forced into insolvency proceeding due to debt default triggered by the Covid-19 crisis. Corporate insolvency resolution filing will be suspended for six months for any debt defaults post March 25, the day the nationwide lockdown was rolled out to contain the spread of the pandemic.

The suspension will remain in force for six months or “such further period, not exceeding one year from such date, as may be notified in this behalf”, the ordinance said. “…a nationwide lockdown is in force since March 25, 2020 to combat the spread of Covid19, which has added to the disruption of normal business operations… It is difficult to find resolution applicants to rescue the corporate person who may default in discharge of their debt obligation,” it said.

The ordinance received the President’s assent on Friday. The Union cabinet had approved the ordinance on Wednesday. It suspended IBC Sections 7, 9 and 10, to provide relief to borrowers from being dragged into insolvency amid the struggle with the impact of the lockdown. Section 7 of the IBC allows a financial creditor to initiate corporate insolvency resolution process against a corporate debtor. Section 9 provides for application of insolvency by an operational creditor, while Section 10 is for initiation of insolvency resolution proceedings by a corporate applicant.

This means that lenders will not be able to drag borrowers into insolvency for any debt default for six months beginning March 25. Equally, borrowers will themselves also not be able to declare bankruptcy in this period. The government has also amended the section that empowered resolution professional to initiate insolvency against promoters or related parties of the corporate defaulter for this period.

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