Fresh defaults: IBC breather extended by three more months

The government on Tuesday notified its decision to extend the suspension of insolvency proceedings against fresh Covid-related defaults by another three months from December 25. The move was aimed at providing breather to thousands of firms battered by the pandemic.

Finance minister Nirmala Sitharaman had on Monday said the extension could be granted. The move comes at a time when cash flows of companies in various Covid-hit sectors have remained far from normal and businesses are going through a “reset” phase.

The government, through the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2020, has already received Parliamentary approval to suspend up to a maximum of one year the initiation of insolvency proceedings against new defaults from March 25. Initially, the suspension was valid for six months, which was then extended by three months. The government had planned to review, before the current deadline expired, whether a further extension of three months (up to March 24) was required.

The government had suspended invocation of Sections 7, 8 and 10 of the IBC for fresh default from March 25. These sections deal with the initiation of the insolvency proceedings by financial and operational creditors and corporate debtors. However, insolvency applications filed for default before March 25 are being entertained.

The cut-off date of March 25 for filing insolvency application also came as a relief for the lenders who had filed applications or intended to do so against stressed firms that had defaulted before the pandemic started to spread, in sync with the central bank’s June 7, 2019, circular. According to this circular, a default case will have to be referred to the National Company Law Tribunal under the IBC if no other resolution plan is firmed up within six months.

The idea behind the suspension is to help thousands of cash-strapped firms tide over the impact of the pandemic without the fears of getting dragged to the NCLT.