The government is set to move an Ordinance to suspend fresh insolvency action against companies for six months by lenders or other creditors due to the Coronavirus pandemic.
The Centre is looking at amendments to sections 7, 9 and 10 of the Insolvency and Bankruptcy Code (IBC) through the Ordinance at a time when a large number of companies have seen their revenues collapse during the last month or so, with forecasts suggesting that demand for goods will remain weak due to Covid-19.
Besides, there has been a spurt in cases where companies have resorted to the force majeure clause to hold back payments – from dues to vendors to mall rentals.
Although the Reserve Bank of India has allowed lenders to provide a three-month loan moratorium for a majority of borrowers, banks fear a spike in defaults and loan repayment problems in the coming months as the impact of the pandemic-induced distress is going to linger for a while.
While announcing relief measures last month, finance minister Nirmala Sitharaman had indicated that the government will review the situation and consider suspending the three provisions of IBC. The move to amend the law has been initiated sooner than expected. Sitharaman has already announced relief for micro-small and medium enterprises under IBC and raised the default threshold from Rs 1 lakh to Rs 1 crore for triggering insolvency proceedings.
The fresh moves will mean that financial creditors, including home buyers in residential real estate projects, cannot initiate action insolvency action, for six months under section 7 of IBC. Similarly, section 9 of the law empowers operational creditors such as vendors to seek action. Section 10 allows a defaulting company to approach the National Company Law Tribunal (NCLT) to declare it insolvent, providing protection from creditors.
“The centre of gravity will shift from NCLT based resolution to informal restructuring under RBI sponsored scheme, which too would need an urgent tweak. With the streams of global distressed asset investors and resolution applicants likely drying, and with existing promoters disqualified to bid in view of Section 29A, the banks are likely to prefer resolution outside of NCLT. The pending cases will also see a spike in withdrawal as banks opt to settle cases due to enhanced uncertainties under IBC process,”
Source- Times of India