Explained: Suspension of Insolvency and Bankruptcy Code in 2020

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Ministry of Corporate Affairs issued a notification in 2020 to extend the suspension of Insolvency and Bankruptcy Code by three months that was to be effected from 25th December 2020.

Introduction

Union finance minister Nirmala Sitharaman at the Bangalore Chamber of Industry and Commerce virtual conference on 21st December 2020 said the suspension of IBC was extended till March 21st, 2020.

In September 2020, the government had extended the suspension of insolvency proceedings for any Covid-19 relating default by a period of three months, effectively from September 25th with effect from 25th March 2020. The insolvency and bankruptcy code (IBC) was suspended for six months by the government earlier, to protect those experiencing financial distress on account of the COVID-19 pandemic. The suspensions were as follows:

  • 1st suspension w.e.f. 25th March 2020, for six months.
  • 2nd suspension w.e.f. 25th September 2020, for 3 months.
  • 3rd suspension w.e.f. 25th December 2020, for 3 months.
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Hence, no insolvency proceeding can be initiated against any borrowers for defaults arising on or after March 25, 2020, until such time that the IBC remains suspended.

Ms. Nirmala Sitharaman said, “At the starting stage of lockdown, there was constant engagement with industry. So many deadlines were postponed and many compliances relaxed. Even the suspension of the IBC has been postponed even further from December 25, I think we have moved to say that will be in abeyance till March 31, 2021.”

The government has assured the firms that are small, medium and big companies will get adequate liquidity to carry on business operations through the emergency credit line guarantee scheme even if they avoided bankruptcy cases due to the IBC suspension. This will help in distressing the corporate balance sheets due to the pandemic.

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Nirmala Sitharaman also mentioned the industry situation, pointed out the necessity of the adaptation technology, automation, and benefits from big data for the low-level industry. Companies and individuals would not suffer insolvency and performance better than before in transaction.

What is IBC?

The trend of the economy in India changes decade by decade. In 1991, India brought economic reforms known as liberalization, privatization, globalization. In 1991, policies were made for the companies to enter the Indian market. In 2002, the Competition Act was passed, and in 2009 the Competition Commission of India was established, a framework to create competition amongst the companies in Indian markets. So companies have the right to entry and the right to competition. But the right to exist from the market is missing.

The IBC 2016

The IBC 2016, is the bankruptcy law of India that seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. The IBC has 255 sections and 11 schedules. The objective of this code is to protect and make business less cumbersome. After enforcement of this code, Indian companies have rights to entry, the right to competition, and the right to exist from the market.

This code consolidates and amends the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals in a time. It is also beneficial for making bigger the value of assets of such persons, to promote entrepreneurship, availability of credit, and balance the interests of all the stakeholders.

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Provisions such as, Section 7 enables financial creditors to file for insolvency against a corporate debtor. Section 9 provides for the application of insolvency by an operational creditor. Similarly, Section 10 relates to the initiation of insolvency proceedings by a corporate debtor himself.

Section 10A by the 2020 IBC amendment act reads, “Notwithstanding anything contained in section 7,9,10, no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25th march 2020, for six months or such further period not exceeding one-year .such date as may be notified in this behalf”. The government had earlier said it was difficult to find an adequate number of resolution applicants to resist a corporate person who may default in the discharge of their obligation. Therefore the government decided to suspend sections 7,9 and 10 from the IBC.

The legal/banking fraternity has criticized this suspension extension. The Insolvency and Bankruptcy Board of India hits out at critics of the IBC ordinance. IBBI said the suspension of the law due to Covid-19 was not a setback to insolvency reforms. IBBI argued that insolvency law is not the panacea to deal with the stress of all firms impacted by Covid-19.


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