Covid-related defaults: Insolvency suspension may be extended by six months in one go

The government will likely extend the suspension of insolvency cases against fresh Covid-related default by another six months from September 25 in one go, once the current six-month deadline is over, to soften the blow to thousands of Covid-ravaged firms, a source told FE.

The government has already secured Parliamentary clearance to the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2020, which provides for up to one-year suspension of the initiatition of insolvency proceedings for fresh defaults from March 25.

A final call on the extension, however, will be taken by finance and corporate affairs minister Nirmala Sitharaman, said the source. “It makes more sense to entend the suspension for six months in one go, instead of doing it in phases, because it will bring in more predictability to the insolvency system,” added the source.

The Bill was brought in to replace an ordinance that was promulgated in June to protect thousands of firms from being dragged into insolvency proceedings.

The government had sought to suspend invocation of three sections –7, 9 and 10—of the IBC for Covid-related defaults. These sections deal with the initiation of the insolvency proceedings by financial and operational creditors and corporate debtors.

Sitharaman had, on Monday, said a surge in insolvency cases was unlikely once the suspension of such proceedings against Covid-related default was lifted, as other modes of debt resolutions were still operational and a large number of companies were expected to get back on their feet by then.

As for other modes of resolution, the RBI has already come out with a one-time debt recast scheme, under which as many as 26 sectors, hit hard by Covid-19, are being eligible for relief. The government is working on a special resolution framework for MSMEs and the work has started on a pre-pack framework as well.

Already, the government has raised the default threshold for initiating insolvency proceedings to `1 crore from `1 lakh earlier, which will prevent many MSMEs from being dragged to the NCLT.

Last week, speaking on the Bill in the Rajya Sabha, Sitharaman had said the aim of the IBC was to “keep the companies as a going concern rather than liquidating them”.

Since the pandemic has hit every industry, it’s difficult to find suitors if a large number of companies are put on the block for resolution. Hence without a temporary suspension of the initiation of insolvency for Covid-related default, many companies would have faced the prospect of liquidation. The minister, however, made it clear that insolvency applications filed for default before March 25 (when a national lockdown was imposed) are being entertained.