The government has extended the suspension of insolvency proceedings for any COVID-19 related default by a period of three months, effective from September 25.
The Insolvency & Bankruptcy Code (IBC) was suspended for a period of six months with effect from March 25, 2020, by the government earlier, to protect those experiencing financial distress on account of the pandemic.
This means that no insolvency proceedings can be initiated against any borrower for defaults arising on or after March 25, 2020, until such time that the IBC remains suspended.
The government has now decided to further extend the suspension for another three months until the last week of December under the newly inserted Section 10A of the IBC.
Section 10A of the IBC reads, “Notwithstanding anything contained in Sections 7, 9 an 10, no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising 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. Provided that no application shall ever be filed for initiation of corporate insolvency process of a corporate debtor for the said default occurring during the said period.”
“In exercise of the powers conferred by section 10A of the Insolvency and Bankruptcy Code, 2016 (31 of 2016) [as inserted by section 2 of the Insolvency and Bankruptcy Code (Second Amendment) Act, 2020 (17 of 2020)], the Central Government hereby notifies further period of three months from the 25th September 2020 for the purposes of the said section,” the government notification said
While suspending the IBC in June, the government had said it was “difficult to find an adequate number of resolution applicants to rescue a corporate person who may default in the discharge of their obligation”.
Therefore, it decided to suspend Section 7, 9 and 10 of the IBC to prevent the initiation of insolvency proceedings for COVID-related defaults.
While Section 7 of IBC enables financial creditors to file for insolvency against a corporate debtor, Section 9 provides for the application of insolvency by an operational creditor.
Similarly, Section 10 relates to the initiation of insolvency proceedings by a corporate debtor himself.
Any defaults, occurring on or after March 25, 2020, until the suspension remains in force, have been permanently excluded for the purpose of initiating insolvency proceedings, something that came under the criticism of the legal and banking fraternity.
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