The government of India promulgated an ordinance to suspended initiation of fresh insolvency proceedings for a period of six months to shield companies impacted by the outbreak of Covid-19. Ministry of Finance has announced that the Insolvency & Bankruptcy Code (“IBC”) proceedings under Section 7, 9 and 10 would be suspended for a period of 6 months and no new proceedings can be filed under these Sections. President Ram Nath Kovind on last Friday promulgated an ordinance suspending the Insolvency and Bankruptcy Code (IBC) for a period of at least six months from 25 March to protect businesses from being dragged to bankruptcy courts. The suspension will remain in force for six months or “such further period, not exceeding one year from such date, as may be notified in this behalf”, the ordinance said. The amendment has imposed a blanket ban on initiating insolvency proceedings against all defaults which removes the ambiguity over what constitutes ‘Covid related defaults’, as it would otherwise have been a herculean task to draw a distinction between specific Covid led defaults and others. The government has also amended the section that empowered resolution professional to initiate insolvency against promoters or related parties of the corporate defaulter for this period.
Section 7 of the IBC provides a financial creditor to initiate corporate insolvency resolution process against a corporate debtor.
Section 9 of the IBC provides for application of insolvency by an operational creditor, and
Section 10 is for initiation of insolvency resolution proceedings by a corporate applicant.
A new section 10 A has been inserted in the Code which states that no insolvency application will be filed for defaults arising on or after March 25 for a period of six months (can be further extended up to one year).
The suspension of the above sections of IBC and insertion of a new section means that lenders will not be able to drag borrowers into insolvency for any debt default for six months beginning March 25. Equally, borrowers will themselves also not be able to declare bankruptcy in this period. However, the ordinance does not address the issues faced by operational creditors or financial creditors other than banks and financial institutions (not coming under the purview of the RBI moratorium) and closing the door on the corporate debtor to voluntarily file for insolvency. The IBC ordinance also spells some trouble to bondholders where moratorium does not apply and in case of inter-company loans as the IBC amendment closes the door for initiating insolvency in case of default.