Govt clears proposal to amend IBC, Ordinance soon

An ordinance is being expected to be issued soon that will empower the government to exclude COVID-19 related debt from the definition of default under the Insolvency & Bankruptcy Code (IBC). 

Created On: Jun 4, 2020 14:35 IST
Amendment to IBC
Amendment to IBC

The central government has approved a proposal to amend the Insolvency & Bankruptcy Code (IBC) in order to prevent companies from going insolvent because of the loan defaults triggered by the COVID-19 crisis.

An ordinance is being expected to be issued soon that will empower the government to exclude COVID-19 related debt from the definition of default under the code. The details of the decision taken by the cabinet will be announced soon, once the ordinance is ready.

Finance Minister, Nirmala Sitharaman had announced the proposal to suspend the insolvency process because of the COVID-19 pandemic on May 17, 2020. She had also announced that the government has been devising a special resolution framework for micro, small and medium enterprises (MSMEs).

Key Highlights:

•  The Finance Minister while making an announcement regarding the amendment had mentioned that this will be done to exclude the debt taken during the COVID-19 outbreak as well as to suspend any fresh resolution filings as part of the Atmanirbhar Bharat Abhiyaan.

•  The central government has also announced an increase in the threshold for triggering insolvency from Rs. 1 lakh to Rs. 1 crore. This move was aimed at insulating micro, small and medium enterprises (MSMEs).

•  Amending the relevant provisions of IBC- Sections 7, 9, and 10- will provide relief and will prevent the borrowers from being dragged into the insolvency court.

•  The Ministry of Corporate Affairs will also issue a circular to specify the loan period qualified for the exemption.

Steps taken by RBI:

In order to provide relief to the firms who have not been able to pay their loans, the Reserve Bank of India (RBI) had allowed the lending institutions to extend a moratorium on all term loan installments till August 31, 2020.

RBI had stated that the moratorium period will be excluded from the classification of non-performing assets. Company availing to the moratorium will not be classified as a bad loan until August 31.

Experts advice on amending IBS:

Experts have stated that the idea of amending IBC follows the theme set by the Central bank. The announced move has been expected to allow companies to get their business back on track without having a fear of being declared insolvent.

As per the legal experts, the government can also allow pre-packaged insolvency resolution plans, that are popular in the United Kingdom and the United States, for MSMEs. Such a scheme will involve an agreement by the stressed company and its creditors with a buyer before initiating the insolvency proceedings.

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