No insolvency proceeding for Covid-related default, Sitharaman places Bill in Rajya Sabha

Finance minister Nirmala Sitharaman on Tuesday introduced in the Rajya Sabha a Bill to replace an ordinance that was promulgated in June to suspend insolvency proceedings for up to one year against fresh Covid-related default from March 25. The move was aimed at providing breather to thousands of firms battered by the pandemic.

The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2020, will be made into law once Parliament clears it and replace the Ordinance the validity of which expires in six months.

The government had sought to suspend invocation of three sections – 7, 8 and 10 — of the IBC for fresh default from March 25. These sections deal with the initiation of the insolvency proceedings by financial and operational creditors and corporate debtors. However, insolvency applications filed for default before March 25 are being entertained.

The cut-off date of March 25 (for filing insolvency application) also came as a relief for the lenders who had filed applications or intended to do so against stressed firms that had defaulted before the pandemic started to spread, in sync with the central bank’s June 7, 2019, circular. According to this circular, a default case will have to be referred to the NCLT under the IBC if no other resolution plan is firmed up within six months.

However, as some analysts have pointed out, the breather will potentially hit financial and operational creditors hard and bleed their balance sheet, apart from temporarily depriving them of a credible mode of bad debt resolution.