In the last tranche of the COVID relief package, Finance Minister Nirmala Sitharaman Sunday said that while debt defaults “related to the virus” will be excluded, there would be no initiation of fresh insolvency cases for up to one year, “depending upon the pandemic situation”. Apart from changing the norms for triggering of insolvency, the minimum default threshold to initiate proceedings under the Insolvency and Bankruptcy Code (IBC) has been raised from Rs 1 lakh to Rs 1 crore, an attempt aimed at giving relief to MSMEs.
The norms for which defaults will be excluded or from when the one year will be counted have, however, not been announced.
Though the norms are likely to benefit companies which want to pull themselves out of the economic slump due to the ongoing lockdown, it is likely to hamper the recovery proceedings of financial institutions and lead to an increase in the non-performing asset book of the lenders, experts said.
A new insolvency resolution framework for Micro, Small and Medium Enterprises (MSME), which are among the hardest hit due to the countrywide lockdown that began on March 25, will also be announced soon, Sitharaman said.
“While the MSME amendments have given some breathing space to the sector, the blanket suspension of defaults on account of COVID could lead to unintended consequences,” said Veena Sivaramakrishnan, partner at law firm Shardul Amarchand Mangaldas adding that proceedings under other laws including civil laws, Sivaramakrishnan also said that the government had not given a viable framework for resolution outside the IBC and had not explained why companies themselves would not be permitted to initiate insolvency under section 10 of the IBC.
The government has already exempted MSMEs from Sec 29A of the IBC which prevents defaulters from bidding for distressed assets under the IBC, allowing promoters of distressed MSMEs to bid for their companies under the corporate insolvency process.
“The government may decide to use MSME fund to provide some funding for MSMEs to support revival of a company,” said Manoj Kumar, partner at law firm Corporate Professionals, noting that the government had not yet hinted at how the framework for MSMEs may differ from the corporate insolvency resolution process.
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