Normalcy restored for resolution of stress under IBC, says Sahoo

IBBI Chairperson M. S. Sahoo said ‘normalcy’ has been restored with respect to resolution of stress under the insolvency law, with the expiry of suspension of fresh proceedings.

After a year of relevant provisions being suspended amid the coronavirus pandemic, fresh proceedings under the Insolvency and Bankruptcy Code (IBC) can now be initiated

Certain provisions under the Code, which provides for time-bound and market-linked resolution of stressed assets, were suspended with effect from March 25 last year in the wake of the pandemic significantly impacting business activities. The suspension, which was in place for one year, ended on March 24.

Mr. Sahoo said three things are clear now.

“The Supreme Court cleared the haze around moratorium on loans. Second, the suspension on initiation of corporate insolvency proceedings in respect of COVID-19 defaults expired on Wednesday. Third, COVID-19 has become the new normal for business. Thus, normalcy is restored for resolution of stress under IBC.”

IBBI is a key institution in ensuring implementation of the Code.

In June 2020, an ordinance was promulgated to suspend fresh insolvency proceedings and the same came into force retrospectively from March 25 — the day when the nationwide lockdown to curb spreading of coronavirus infections had come into effect.

Later, a bill to replace the ordinance that had amended the Code was cleared by Parliament in September last year.

Initially, the suspension of fresh proceedings was for six months starting from March 25. The same was extended twice for three months each — one till December 24, 2020 and then till March 24, 2021.

The corporate affairs ministry had suspended Section 7, 9 and 10 to provide relief for companies hit by the pandemic.

Sections 7, 9 and 10 deal with initiation of corporate insolvency resolution process by a financial creditor, operational creditor and corporate debtor, respectively.

On March 22, the ministry had told Lok Sabha that the benefit of the suspension was applicable to all those defaults of the corporate debtor that occur from March 25, 2020 till the end of period of suspension.

“Such defaults arising from March 25, 2020 and till completion of suspension period will remain as nonest for the purpose of initiation of CIRP under the code as permanent carve out,” it had said in a written reply.

L Viswanathan, Partner at law firm Cyril Amarchand Mangaldas, said there is no requirement for the government to take any action for bringing the provisions related to IBC filings in force.

“The amendment had suspended these provisions for a maximum period of one year and accordingly on the expiry of the period of one year these provisions will be active without any further act of the government,” he noted.

On what are the likely immediate implications of revocation of suspension, Viswanathan said he does not expect a significant amount of cases to be filed in National Company Law Tribunal (NCLT) since creditors are likely to use the Code only if other interventions for resolution or restructuring do not yield necessary results.

“Creditors are more likely to use the RBI framework for restructuring on a consensual basis prior to invoking IBC.

“There can be cases where non regulated lenders may take recourse to IBC where they are not aligned with the creditors for a consensual restructuring and in other cases you may see either settlement or restructuring as a outcome or in a few cases perhaps a resolution process which may culminate in a resolution over a period of time,” he said.