Centre to pass Ordinance to suspend insolvency cases for 6 months

The Government is likely to bring amendments to sections 7, 9 and 10 of the Insolvency and Bankruptcy Code (IBC) through an Ordinance to suspend fresh insolvency action against companies for six months by lenders or other creditors due to the Coronavirus pandemic.

There has been a spike in cases where companies have resorted to the force majeure clause to hold back payments.

The Reserve Bank of India has allowed lenders to provide a three-month loan moratorium for a majority of borrowers. However, Banks fear a spike in defaults and loan repayment problems in the coming months as the impact of the pandemic-induced distress is going to remain for a while.

Finance Minister Nirmala Sitharaman had hinted that the government will review the situation and consider suspending the three provisions of IBC while she announced relief measures last month. She has already announced relief for micro-small and medium enterprises under the IBC and raised the default threshold from Rs. 1 lakh to Rs. 1 crore for triggering insolvency proceedings.

Section 9 of the law empowers operational creditors such as vendors to seek action. Section 10 allows a defaulting company to approach the National Company Law Tribunal (NCLT) to declare it insolvent, providing protection from creditors. Once the Ordinance is passed, financial creditors, including home buyers in residential real estate projects would not be able to initiate action insolvency action for six months under section 7 of IBC.