President Ram Nath Kovind on Friday promulgated an ordinance suspending the Insolvency and Bankruptcy Code (IBC) for a period of at least six months from 25 March to protect businesses from being dragged to bankruptcy courts.
India rolled out stringent stay-at-home restrictions on 25 March that shut down the economy for two months, pushing many companies toward bankruptcy.
The IBC (Amendment) Ordinance says that no business can be taken to bankruptcy tribunals for defaults during the period of the IBC’s 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".
The suspension will not apply to any corporate default committed before 25 March, the ordinance said.
The ordinance cited the coronavirus pandemic for the move, saying it 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.
The measure was originally announced by finance minister Nirmala Sitharaman on 17 May. But while pausing fresh bankruptcy proceedings could give a breather to many companies, it could also deprive lenders the opportunity to restructure certain companies which may be beyond redemption, analysts said.
“This (suspension of the Insolvency and Bankruptcy Code) 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 the Insolvency and Bankruptcy Code will only mean ballooning of the liabilities without resolution," said Ajay Shaw, partner at DSK Legal.
In such a situation, lenders and corporate debtors will need to look at options of restructuring and a one-time restructuring package by the Reserve Bank of India may be helpful, said Shaw, welcoming the exclusion of defaults committed before 25 March from the Insolvency and Bankruptcy Code suspension.
“This is an important clarification as blanket suspension of Insolvency and Bankruptcy Code would have been a regressive move," said Shaw.
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