The Union Cabinet on Wednesday cleared the proposal to suspend the insolvency proceedings under the Insolvency & Bankruptcy Code (IBC) to avoid companies at large from being forced into insolvency proceedings for non-performing assets during the COVID-19 period starting from 25 March until a date which will be notified later by the government, sources told CNBC-TV18.
The move is on the back of the government giving its nod to the proposal to introduce a new clause — 10A, under section 10 of the Insolvency and Bankruptcy Code (IBC), 2016. The section makes it clear that creditors cannot drag any company to courts/insolvency proceedings, which will be in effect for the next six months and can be extended by up to one year.
This would imply that any default from March 25 until a date, which will be notified later, can never be dragged for insolvency proceedings. Thereby, giving a lifetime exemptions to such defaults.
Finance Minister Nirmala Sitharaman (on May 17) as part of the Atmanirbhar Bharat Package announced the suspension of any fresh initiation of insolvency proceedings up to 1year, permanently excluding debt accrued due to COVID-19 to be considered as default. But, the government had not notified the date from which the move will be considered.
It was earlier on March 24 when Sitharaman had said that if the situation remained bleak beyond April 30, the government may consider suspending Section 7, 9 and 10 of the IBC, 2016 for a period of six months so as to stop companies at large from being forced into insolvency proceedings during such a crisis.
The new clause overrides sections 7, 9 and 10 of IBC. Section 7 deals with financial creditors initiating insolvency action, Section 9 deals with operational creditors initiating action. Section 10 allows a defaulting company to approach the National Company Law Tribunal (NCLT) to declare it insolvent.
The government had earlier decided to provide this relief to companies from being dragged into insolvency proceedings for the next six months, through a cabinet proposal, which was cleared on April 22, but it had not earmarked a time-period for which the clause should be considered.
CNBC-TV18 earlier reported that the new clause — Section 10A — is to suspend Sections 7, 9 and 10 for six months or until further orders, with a rider that the amendment clause cannot be extended more than a year, and will be a one-time measure.
The proposal, which has been approved by the union cabinet is to move the amendments via promulgation of an ordinance. Sources said, a formal announcement on the ordinance is now expected post it gets the president’s nod.
It is to be noted that the old proceedings will continue.
