Government Issues Ordinance to Suspend Insolvency and Bankruptcy Code (IBC) for Six Months

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The Ministry of Law and Justice has issued a notification dated June 5, 2020 notifying the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020. By the said Ordinance, the Central Government suspended initiation of fresh insolvency proceedings for a period of six months to protect companies affected by the outbreak of COVID-19. The ordinance, issued on Friday is effective immediately and allows the government to extend the suspension up to one year. It applies to defaults arising on or after March 25, 2020.

This comes after the finance minister recently announced the government’s intent to suspend the code as a part of the economic relief measures presented by the government.

Provisions Affected

Section 7, 9 and 10 of the Insolvency and Bankruptcy Code, 2016 allow for insolvency filings by financial creditors, operational creditors and the corporate debtor itself. This effectively shuts down all insolvency filings against any company that defaults on a debt or payment.

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Bloomberg Quint reports, the ordinance suspends these sections on grounds that

  • the pandemic has created uncertainty and stress for business for reasons beyond their control
  • the nationwide lockdown has added to disruption of normal business operations
  • in such circumstances it would be difficult to find adequate number of resolution applicants for a distressed/defaulting business The ordinance also perpetually prohibits in

The ordinance also perpetually prohibits initiation of insolvency proceedings on account of default committed by the company during these six months (or a year if the suspension is extended).

The six-month IBC suspension will run almost parallel to a six-month loan moratorium that banks and non banking financial companies can extend to borrowers. Hence, the likelihood of financial defaults during this period are slim to none and few banks and NBFCs would have had cause to invoke IBC. But the RBI moratorium does not apply to other financial creditors, such as bond and debenture holders, those to whom receivables have been sold etc.. In case of a default, they can no longer invoke IBC.

Key Changes to the IBC via IBC Amendment Ordinance, 2020

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The following sections have been inserted and the key changes are:

Section 10A

No application for initiation of corporate insolvency resolution process (“CIRP”) shall be filed for any default arising on or after March 25, 2020 for a period of 6 months for such further period not exceeding 1 year from such date as may be notified.

No application shall ever be filed for initiation of CIRP for the said default occurring during the said period.

This suspension shall not apply to any default committed under Section 7 (initiation of CIRP by financial creditor), 9 (application for initiation of CIRP by operational creditor), 10 (initiation of CIRP by corporate applicant) before March 25, 2020.

Section 66(3)

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No application shall be filed by a resolution professional under Section 66(2) in respect of defaults against which initiation of CIRP is suspended under Section 10A of the Insolvency and Bankruptcy Code, 2016.


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