Partial relief for firms as govt extends IBC suspension for three months

Companies were looking for a six-month extension; suspension doesn't apply to defaults before March 25

The central government has extended the suspension on initiating insolvency and bankruptcy proceedings against firms for three more months till December 24, a notification from the corporate affairs ministry said.

The exemption was introduced through an Ordinance in June, suspending insolvency proceedings against any default arising for at least a six month period starting from March 25. That period came to an end on Thursday.

 “We have the power to increase the suspension up to one year. We would like to see how the situation progresses...We have taken a calibrated approach. You cannot curtail it once it’s extended,” a senior government official said.

The Insolvency and Bankruptcy Code (IBC) has also been amended to include the exemption provision, which allows the government to extend the suspension for a period not exceeding one year.

This suspension will not be applicable to any default committed before March 25. The three sections that stand suspended are Sections 7, 9, 10 of the IBC. A new Section 10A has been added to bring this to effect.

“The first time suspension was brought in was at the peak of the pandemic and supply chains had been disrupted...Things are improving but businesses will still take time to get back to normal. Hence, we have extended it for three months for now,” the senior official added.

The Centre had said earlier that it was difficult to find adequate resolution applicants to rescue a company that may default on debt obligations and that the Covid-19 pandemic had impacted economies across the world.

“This further extension has resulted in the ‘permanent default free period’ under IBC to now continue for nine months. This may have a long lasting impact on the financial dealings due to the uncertainties in the current evolving economic scenario created by the ongoing Covid situation,” said Diwakar Maheshwari, dispute resolution partner, Khaitan & Co.