Suspension of initiation of CIRP for 6 months: Covid-19 Impact
Government of India vide Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 dated 5th June 2020 1 has suspended insolvency triggering provisions i.e Section 7, 9 and 10 of the Insolvency and Bankruptcy Code (IBC) in respect of defaults arising on or after 25th March, 2020 for 6 months or such further period not exceeding 1 year. Ordinance has also clarified that such suspension shall not apply to any default committed before 25th March, 2020.
Aforesaid Ordinance has inserted a new Section 10A in IBC which states that no application for initiation of Corporate Insolvency Resolution Process (CIRP) of corporate debtor shall be filed on or after 25th March, 2020 for a period of six months or such further period, not exceeding one year from such date, as may be notified in this behalf.
The objective of this amendment is to prevent corporate persons which are experiencing distress, on account of nationwide lockdown imposed due to pandemic Covid-19, being pushed into insolvency proceedings under IBC. The rationale behind issuing this ordinance is that it is difficult to find adequate number of resolution applicants to rescue the corporate persons who may default due to lock down imposed with effect from 25th March 2020.
Section 7 of IBC enables financial creditors to start insolvency proceedings against a company, Section 9 gives these powers to an operational creditor while Section 10 enables a company itself to file petition for CIRP. All these three provisions will remain suspended for six months which may be extended to one year.
This amendment to IBC is a welcome move by the Government of India to address the hardship of businesses which risk being dragged into bankruptcy due to pandemic-fuelled distress.
Key Factors which prompted the Government to make this amendment:
- Due to standstill caused by lockdown, many corporates are likely to be in default. If insolvency proceedings are initiated at a mass scale, then it can have a devastating impact on the economy.
- Suspension of insolvency provisions was also much needed because otherwise it would have been very difficult to achieve any resolution process as there will be no resolution applicants at good value in the cash strapped market, thus, inevitably leading the companies into liquidation.
Conclusion:
With the suspension of insolvency triggering provisions of IBC, no corporate borrower can be dragged into insolvency during the six months period in respect of defaults arising on or after 25th March, 2020. However, it is pertinent to note that new petitions u/s 7, 9 and 10 of IBC can be filed/admitted in NCLT in respect of defaults occurred before 25th March, 2020. Also, petitions u/s 7, 9 and 10 of IBC which have already been filed in NCLT before 25 March, 2020 but not yet admitted by NCLT, can be admitted by NCLT.