Synopsis–Policymakers are of the view that a further extension is required as the economy is yet to emerge from contraction and businesses need relief for some more time.
New Delhi: The government is likely to extend the suspension of the bankruptcy code by another three months to prevent companies from being forced into insolvency proceedings due to debt defaults triggered by the Covid-19 crisis.
The government had suspended fresh proceedings under the Insolvency and Bankruptcy Code (IBC) for loan defaults on or after March 25, the day the country went into lockdown to contain the pandemic, for six months initially. It was extended on September 25 for another three months, which ends Friday.
“Overall, the thinking is that the suspension be extended as the economy is yet to fully heal,” the official said. A final call will be taken soon, he said.
The government had suspended Sections 7, 9 and 10 of the IBC on March 25 by promulgating an ordinance as part of measures to provide relief to industry in the wake of the pandemic. Finance minister Nirmala Sitharaman announced this soon after the nationwide lockdown was imposed as part of the first relief package.
Data from CARE Ratings show cases admitted for insolvency proceedings fell to 161 in the first half from 889 cases admitted in the year earlier. “This can be attributed to the suspension of fresh bankruptcy proceeding for Covid-19 defaults,” CARE Ratings said in a report earlier this month.
Policymakers are of the view that a further extension is required as the economy is yet to emerge from contraction and businesses need relief for some more time.
India’s economy shrank 7.5% in the second quarter against a decline of 23.9% in the April-June period. The Reserve Bank of India (RBI) expects it to emerge from contraction in the third quarter and grow marginally by 0.1%.
However, private economists expect a turn to positive territory only in the fourth quarter. Meanwhile, banks are working with companies in stressed sectors to restructure loans.
‘Resolution Plans not Sufficient’
“Resolution plans are coming but not sufficient. So, unless enthusiasm comes back in the industry, we will see more liquidations,” said Manoj Kumar, partner, Corporate Professionals.
The law provides for the suspension of Section 7, 9 and 10 for six months, extendable to a year. For any relief beyond one year, the government will need to amend the law.
Section 7 of the IBC allows financial creditors to initiate insolvency proceedings against a corporate debtor. Section 9 allows operational creditors and Section 10 enables corporate debtors to initiate insolvency proceedings. Proceedings can be initiated against any entity by a lender for default by a single day. The threshold for default was raised to ₹1 crore from 1 lakh when the law was amended.
Kumar said it would be better if the government kept IBC in suspension and, in the meanwhile, worked out the rules for prepackaged insolvency resolution and the package for micro, small and medium enterprises (MSMEs) as contemplated earlier. India is considering two options for pre-packaged insolvency resolution, including one that includes private discussions between promoters and financial creditors, ET reported in November.