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Wednesday, April 21, 2021

No extension for IBC, pre-pack inclusions under inter-ministerial consideration

The government had also raised the threshold for initiation of insolvency proceedings to Rs 1 crore from Rs 1 lakh to prevent small companies from facing insolvency proceedings.

Written by Karunjit Singh | New Delhi |
Updated: March 13, 2021 12:02:26 am
The government had also raised the threshold for initiation of insolvency proceedings to Rs 1 crore from Rs 1 lakh to prevent small companies from facing insolvency proceedings.

The government is not planning to extend the moratorium on new insolvency proceedings under the Insolvency and Bankruptcy Code (IBC), which is set to expire on March 24, according to officials aware of developments.

The government had in June granted a moratorium on the initiation of insolvency proceedings for any defaults occurring March 25 onwards for a period of 12 months leading to only 161 insolvency petitions which were related to earlier defaults being admitted during the first half of this fiscal compared to 889 cases in the year-ago period.

The government had also raised the threshold for initiation of insolvency proceedings to Rs 1 crore from Rs 1 lakh to prevent small companies from facing insolvency proceedings.

“No bill is being framed so there is no scope for an extension to the moratorium,” said an official aware of developments noting that the
moratorium would be lifted completely and would not be extended for any distressed sectors such as the travel and tourism sector.

“This cannot be revoked in a phased manner”, said the official. The official also said that a proposal to include pre-packs as a resolution mechanism under the IBC was at an advanced stage and was undergoing inter-ministerial discussions. A pre-pack mechanism allows creditors to enter into an agreement with an investor directly instead of opening up a public bidding process.

An official noted that this process in which the debtor remains in control during the resolution process would first be opened up for the resolution of Micro, Small and Medium Enterprises in line with the announcement made by Finance Minister Nirmala Sitharaman about a
special insolvency resolution framework for MSMEs.

The inclusion of pre-packs as a resolution mechanism is also expected to reduce the time taken for insolvency resolution which has been a key criticism of the IBC.

Daizy Chawla, senior partner at law firm, Singh and Associates said that the deterrent effect of insolvency proceedings under the IBC played a key role in resolving defaults and noted that while the valuations for some distressed companies may be negatively affected by the economic slowdown, this would depend significantly on the business of the corporate debtor.

” Even though IBC is not a recovery proceeding, but sill the deterrent effect of IBC works and Corporate Debtors try to resolve outside IBC either at the time of receiving notice in case of Operational Creditor or at the time of hearing both in cases of Operational Creditors and Financial Creditors,” Chawla said.

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