Parliament on Monday approved the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2020, whereby fresh insolvency proceedings will not be initiated for at least six months starting from March 25 in view of the coronavirus pandemic.
The Bill replaces an Ordinance that restricts financial and operational creditors and corporate debtors from initiating insolvency proceedings for defaults occurring for six months post-March 25, with the government having the option of extending this exemption period to one year. Creditors will not be able to initiate insolvency proceedings under the IBC for defaults during the specified period, even after it has elapsed.
“The defaults occurring out of this particular pandemic are being kept out forever,” said Finance Minister Nirmala Sitharaman in her reply to the debate on the Bill in Lok Sabha. Sitharaman and government officials have noted that the suspension of insolvency proceedings was necessary as, under the current economic circumstances, it was likely that companies entering into insolvency proceedings would not find bidders and would likely end up in liquidation proceedings.
Experts noted that the government should have considered not suspending the right of companies to voluntarily initiate insolvency proceedings under Section 10 of the IBC. Bishwajit Dubey, partner at Cyril Amarchand Magaldas, said the government should not have suspended Section 10 of the IBC, under which a company can voluntarily enter insolvency proceedings, noting that “if a company is in a situation where its debt keeps piling up and it is not able to make payments”, it should be allowed to voluntarily initiate insolvency proceedings.
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