Extension of IBC Suspension

Extension of IBC Suspension

In order to help the Small Business personnel, the Insolvency and Bankruptcy Code (IBC) was amended.  Accordingly, no fresh insolvency proceedings could be filed for a period of six months starting 25 March 2020. This was extended by another three months in November.  The IBC has several protective provisions that aid in the functioning of distressed businesses.

It was later stated that the government is likely to extend IBC suspension further to prevent companies from being forced into insolvency proceedings due to debt defaults triggered by the COVID-19 crisis.

  • As per earlier reports, the government, last month, was still undecided whether to extend the suspension further or not since the “arguments on both sides are strong”.
  • A senior government official was quoted in a report saying that while on the one hand green shoots were visible in the economy and the stock market was booming, on the other things were not moving under the Insolvency and Bankruptcy Code (IBC). “Both are valid arguments,” stated the official.
  • The extension speculation comes at a time when small businesses are seeking an extension of the protection given to them from bankruptcy proceedings for defaults during the pandemic beyond the nine-month period, which is set to expire on 24 December.
  • The ministry of corporate affairs and the Insolvency and Bankruptcy Board of India (IBBI) will reportedly decide on extending the current suspension of fresh bankruptcy proceedings soon.

Background of the Issue:

  1. Under the IBC (Second Amendment) Act, 2020, fresh cases were barred initially for six months from 25 March.
  2. It was later extended by another three months till 24 December but the law allows a maximum of one-year suspension of new cases during the pandemic till the end of March 2021.
  3. As per experts, it makes sense to extend the suspension of new cases under IBC by another three months so that a comprehensive solution could be brought out.
  4. It is worth adding that as per ICRA, the suspension of new proceedings under IBC, financial creditors may realise just Rs 60,000-65,000 crore in the current fiscal through successful resolution plans from the IBC, as compared to about Rs 1 lakh crore in the last financial year (FY20), registering a decline of up to 40 per cent.
  5. Going ahead, realisations for financial creditors could continue to suffer in FY22 as well due to suspension of fresh insolvency proceedings till December 24, 2020, for accounts that defaulted after March 25, 2020, which be extended by three more months, the rating agency said.
  6. The rating agency mentioned that for the first six months of FY21, only 42 companies undergoing a corporate insolvency resolution process (CIRP) have seen a resolution plan being approved, yielding Rs 12,600 crore as recovery for financial creditors. During the April-September period, the number of cases admitted (which were in default before the suspension was announced) declined by 82 per cent compared to the first half of FY20.
  7. Additionally, the backlog of cases has not reduced due to hampering of normal business operations during the pandemic. The number of CIRPs closed during H1FY21 declined by 61 per cent compared to H1FY20, added ICRA.

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