Covid 19: Govt notifies exclusion of the lockdown period from insolvency and liquidation processes

Updated on Apr 25, 2020 03:31 PM IST

Coronavirus in India: The first notification said “the period of lockdown imposed by the Central Government in the wake of Covid-19 outbreak shall not be counted for the purposes of the time-line for any activity that could not be completed due to such lockdown, in relation to a corporate insolvency resolution process”.

A fruit vendor wearing a face mask as a precaution against the new coronavirus waits for customers during lockdown in Bangalore, India, Friday, April 24, 2020.(AP)
A fruit vendor wearing a face mask as a precaution against the new coronavirus waits for customers during lockdown in Bangalore, India, Friday, April 24, 2020.(AP)
Hindustan Times, New Delhi | ByRajeev Jayaswal

The government has issued two orders that exclude the lockdown period because of the Covid-19 outbreak from any corporate insolvency resolution or liquidation processes, the notifications issued on Friday said.

The first notification said “the period of lockdown imposed by the Central Government in the wake of Covid-19 outbreak shall not be counted for the purposes of the time-line for any activity that could not be completed due to such lockdown, in relation to a corporate insolvency resolution process”.

The second order also excluded the lockdown period “for the purposes of computation of the timeline for any task that could not be completed due to such lockdown, in relation to any liquidation process”.

The law provides for completion of the liquidation process in relation to any corporate person in a limited time-frame, unless extended by the adjudicating authority. Similarly, a model timeline is given within which various IBC processes should be completed, Gaurav Gupte, partner at law firm Cyril Amarchand Mangaldas said.

The orders will, however, be applicable retrospectively, one government official with direct knowledge of the matter said requesting anonymity. Although the governing board of the Insolvency and Bankruptcy Board of India (IBBI) had taken a decision on these matters on March 27, it could not be immediately notified due to the nationwide lockdown from March 25, the official said.

While the orders mentions the start day of the lockdown from March 25, they are, however silent on the end date. As per the home ministry order the second phase of the lock down is scheduled to end on May 3.

Misha, partner at law firm Shardul Amarchand Mangaldas & Co said, “It is relevant to clarify that this does not extend the mandatory timelines within the Insolvency and Bankruptcy Code, 2016 such as total time period of insolvency resolution process to be limited to 180 days extendable upto 270 days and only grants relaxations for timelines under the two regulations.”

Experts called it a pragmatic move in line with finance minister Nirmala Sitharaman’s announcement on March 24, but they also expect a 6-12 months moratorium.

Day before the lockdown, Sitharaman had made a series of announcements to provide relief to the common man and the industry from various compliance provisions that included matters pertaining to Insolvency and Bankruptcy Code (IBC).

“Due to the emerging financial distress faced by most companies on account of the large-scale economic distress caused by COVID 19, it has been decided to raise the threshold of default under section 4 of the IBC 2016 to Rs 1 crore (from the existing threshold of Rs 1 lakh). This will by and large prevent triggering of insolvency proceedings against MSMEs [micro, small and medium enterprises],” she had said in a statement.

“If the current situation continues beyond 30th of April 2020, we may consider suspending section 7, 9 and 10 of the IBC 2016 for a period of 6 months so as to stop companies at large from being forced into insolvency proceedings in such force majeure causes of default,” the statement said. While sections 7 and 9 pertain to initiation of corporate insolvency proceedings by a financial creditor and an operational creditor, respectively, the section 10 relates to filing an application for insolvency resolution by a corporate.

PTI on Wednesday reported that the Cabinet had decided to amend the insolvency law through an ordinance to suspend these sections provisions that trigger insolvency proceedings against defaulters from six months to one year and allow banks to restructure loans. The ordinance is awaited.

Uday Bhansali, partner at global consultancy firm Deloitte India said, “At a time when the focus of the government is to revive economic activity post a future lifting of the lockdown, suspension of IBC for 6 to 12 months removes an element of risk for a company while it is trying to secure necessary financing, renegotiating loans, and attempting to secure other reliefs from banks especially given the impact of COVID 19.”

“Equally, this needs to also be supplemented by proactive measures to provide MSMEs with additional liquidity, moratorium on past borrowing etc so that they may recover from the enormous dislocation in business.” he added.

The proposed relief from initiating insolvency proceedings for the next six months is expected to provide relief to not only MSMEs, but also big and small firms that may have defaulted on their obligations in light of the COVID pandemic, and would ordinarily fall within the crosshairs of the insolvency regime, Atul Pandey partner at law firm Khaitan & Co said.

According to Misha, the two notifications issued on Friday have nothing to do with the announcement made by the finance minister on March 24, 2020. “The proposed suspension of Sections 7, 9 and 10 of the Code will have to take effect by passing of an Ordinance by the central government cabinet, followed by Presidential asset in absence of the Parliament being in session,” she said.

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