The Union Cabinet on Wednesday cleared a proposal to suspend the Insolvency and Bankruptcy Code (IBC) process for six months, which could be extended up to a year, sources said.

The government is likely to promulgate an Ordinance soon to bring the change into effect. The details of the Cabinet decision will be announced once the Ordinance is ready, a source said.

The proposal to suspend the insolvency process, taken in light of the Covid-19 pandemic, was announced by Finance Minister Nirmala Sitharaman on May 17. The FM had also said the government was devising a special resolution framework for micro small and medium enterprises (MSMEs). The government had already announced the increase in the threshold for triggering insolvency to Rs 1 crore, from Rs 1 lakh.

The government had said it would exempt “all Covid-related debt” from the definition of default under the IBC. The Ministry of Corporate Affairs will issue a circular soon to specify the loan period which would qualify for this exemption.

In more relief to firms unable to pay their loans amid the pandemic, the Reserve Bank of India had allowed lending institutions to extend a moratorium on all 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,” the RBI had said.

Industry experts have pointed out that the idea of suspending IBC 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. It remains to be seen whether such a decision will be taken.

According to legal experts, the government could allow pre-packaged insolvency resolution plans, popular in the United States and the 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 221 resolved cases under IBC, 44 per cent of debt has been recovered since the inception of the law in 2016. The total amount of claims admitted is over Rs 4.13 trillion, of which the total realisable amount is around Rs 1.84 trillion.