Wrong call on IBC

Govt should not have extended suspension of bankruptcy work

Business Standard Editorial Comment | New Delhi
Last Updated at December 21, 2020 22:50 IST

The Insolvency and Bankruptcy Code (IBC) is one of the major reforms of the National Democratic Alliance government. Its purpose is to make the market for capital considerably more flexible and address what former chief economic advisor Arvind Subramanian called “the problem of exit”. A modern bankruptcy law prevents capital being tied up endlessly in litigation and frees it to more productive purposes. This is the context in which observers should evaluate Monday’s announcement by Union Finance Minister Nirmala Sitharaman that the IBC’s normal operation would remain suspended for another three months. The IBC was suspended for new defaults shortly at the time of the national lockdown in end March, and this suspension was extended subsequently up till December 24. The law permitted one last three-month extension, and the government has utilised that window. The initial suspension made sense because the purpose of the IBC is to deal with those businesses that are insolvent, and not the ones facing a temporary crisis of liquidity. In a market-wide liquidity shock such as presented by the initial weeks of the pandemic, there was no question that suspending the IBC was one of the few options available.

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