President suspends IBC for at least six months to aid businesses during pandemic1 min read . Updated: 05 Jun 2020, 09:36 PM IST
- No business will be dragged into a bankruptcy tribunal for defaults for six months starting from 25 March
- However, the IBC suspension will not apply to any corporate default committed before 25 March
New Delhi: President Ram Nath Kovind on Friday promulgated an Ordinance suspending the Insolvency and Bankruptcy Code (IBC) for at least six months so that no business will be dragged into a bankruptcy tribunal for defaults during this period starting 25 March.
India rolled out stringent stay at home restrictions on 25 March that shut down the economy for two months that pushed many companies towards bankruptcy.
The IBC (Amendment) Ordinance says that no business can ever be taken to bankruptcy tribunals for defaults during the period of its suspension. The IBC suspension is applicable for a period “of six months or such further period, not exceeding one year from such date, as may be notified in this behalf".
However, the IBC suspension will not apply to any corporate default committed before 25 March, the Ordinance said. It explained that the move was taken because of the coronavirus pandemic has caused uncertainty and stress for businesses for reasons beyond their control. The Ordinance also said that it was expedient to exclude defaults arising on account of the current unprecedented situation from IBC proceedings.
Suspension of IBC was a measure originally announced by finance minister Nirmala Sitharaman on 17 May. While pausing fresh bankruptcy proceedings could be a breather for many companies, it could deprive lenders the opportunity to restructure certain companies which may be beyond redemption.
"This (IBC suspension) is intended to provide respite to the corporate debtor who has defaulted for the situation arising out of Covid 19 from being dragged into insolvency proceeding. However, in cases where the question is with respect to the sustainability for a corporate debtor, taking away recourse under IBC will only mean ballooning of the liabilities without resolution," said Ajay Shaw, Partner at DSK Legal.
In such a situation, lenders and corporate debtor will need to look at options of restructuring and a one-time restructuring package by the RBI may be helpful, said Shaw, adding that excluding defaults committed before 25 March from the IBC suspension was a welcome move. "This is an important clarification as blanket suspension of IBC would have been a regressive move," said Shaw.