The union cabinet on Wednesday cleared the proposal to suspend the Insolvency and Bankruptcy Code for a period of six months, which could be extended up to a year in light of Covid-19 pandemic, sources said.

Government is likely to promulgate an ordinance soon to bring the change in the IBC law into effect. The details of the cabinet decision will be announced once the ordinance is ready, the source said.

The proposal to suspend IBC was announced by Finance Minister Nirmala Sitharaman on May 17. The FM has said that the government was suspending any fresh initiation of insolvency for up to one year and devising a special resolution framework for micro small and medium enterprises. Government had already announced the increase in the threshold limit for triggering insolvency to 1 crore from 1 lakh under IBC, more relief is likely for the MSMEs.

Government had also announced that it would exempt “all covid related debt” from the definition of default under the insolvency and bankruptcy code. The Ministry of Corporate Affairs will issue a circular soon to specify the loan period which would qualify for this exemption.

The Reserve Bank of India had allowed lending institutions to extend the moratorium on term loan installments till August 31, 2020. “The moratorium period will be excluded from the classification of non-performing assets. As such, a company availing of the moratorium will not be classified as a bad loan until August 31,” RBI had said.

Industry experts have pointed out that the idea of suspending IBC for six months to begin with, follows the theme set by the central bank.

The move is expected to allow companies to get their business back on track without the fear of being dragged into insolvency.

Some of the IBC experts have also suggested that the option given to promoters to trigger insolvency under section 10 of the IBC need not be suspended. Whether such a decision will be taken, is not known yet.

According to legal experts, the government could allow pre-packaged insolvency resolution plans, popular in the United States and United Kingdom, for MSMEs. Such a scheme involves an agreement by the stressed company and its creditors with a buyer before initiating insolvency proceedings.

Of the total 221 resolved cases under IBC, 44 per cent amount of debt has been recovered since the inception of the law in 2016. The total amount of claims admitted are over Rs. 4.13 trillion of which the total realisable amount is around Rs. 1.84 trillion.

Till February 2020, 13,566 cases involving a total amount of Rs. 5.01 trillion were withdrawn before admission under provisions of IBC.