The Union Cabinet has cleared a proposal from the Corporate Affairs Ministry to give companies relief from insolvency for the next six months via amendment to Insolvency and Bankruptcy Code (IBC), 2016, sources told CNBC-TV18.
This was cleared on April 22 and has been moved as a one-time measure.
“Amendment has been proposed to give a six month window. Lenders or creditors during these six months, under the current impact due to COVID-19, cannot drag a fresh case of default for bankruptcy. The move will be announced formally later with the comprehensive economic package,” the source told the channel.
The government is awaiting presidential nod to allow the new clause – Section 10A, which will suspend Sections 7, 9 and 10 for six months or until further orders. The clause shall not be extending over a year, the source added
Section 7 of the IBC deals with financial creditors and initiating insolvency action, Section 9 allows operational creditors to initiate action, and Section 10 allows a defaulting company to approach the National Company Law Tribunal (NCLT) to declare it insolvent.
This is in line with Finance and Corporate Affairs Minister Nirmala Sitharaman’s stance on March 24, when she said that if the coronavirus situation continued beyond April 30, the government may consider suspending IBC Sections 7, 8 and 9 for six months.
This is so that companies at large at not pushed into insolvency proceedings in force majeure causes of default. Sitharaman had then also hiked the default threshold from Rs 1 lakh to Rs 1 crore for triggering insolvency proceedings.
The government also announced that no additional fees would be charged for late filing of any document required to be filled on the MCA-21 registry during a moratorium period from April 1 to September 30.
The move is expected to not only reduce the compliance burden, including financial burden of companies and limited liability partnerships (LLPs) at large, but also enable long-standing non-compliant companies and LLPs to make a fresh start.