Why in news?
In a major relief to corporate borrowers hit hard by coronavirus pandemic, the government announced to amend the insolvency law to suspend up to one year provisions that trigger insolvency proceedings against defaulters.
• An ordinance would be promulgated to suspend three sections of the IBC for up to one year.
• Sections 7,9 and 10 of the IBC would be suspended for six months and the suspension time can be extended by up to one year. An enabling provision with respect to extending the time would be part of the ordinance.
• Section 7 & 9 belong to initiation of corporate insolvency proceedings by a financial creditor and an operational creditor, respectively.
• Section 10 relates to filing of an application for insolvency resolution by a corporate.
Significance of the amendment:
• Amendments to the IBC would pave the way for banks to restructure loans.
• The decision provides more freedom for corporate borrowers in repaying their loans.
• Currently, RBI norms prohibit restructuring of loans and resolution has to be done under IBC.
o As per the existing norms, if a payment default exceeds 90 days then the lender has to refer the account for resolution under IBC or any other mechanism permitted by the RBI.
o The lender does not have the option to restructure the loan.
• In March, the government raised the threshold default amount for invoking insolvency proceedings under IBC to ₹ 1 crore from ₹ 1 lakh in order to prevent triggering of such proceedings against small and medium enterprises. Many such enterprises are under financial stress due to lockdown.
This move by the government is of great help for the companies as well as for the banks. The companies will get more freedom in paying their loans and the banks will get time to restructure their loans in a more planned manner. This is a positive step for companies. But for companies, which were otherwise already in stress and could have found resolution under the IBC, their resolution may also be delayed due to this suspension. Also it is needed to be seen if this move would have a positive impact on privately negotiated transactions on mergers and acquisitions.