Government Extends IBC Suspension by Three Months

The government suspended the Insolvency and Bankruptcy Code (IBC) in June due to the pandemic situation for six months, starting from 25 March 2020. Thus, the suspension of IBC was in effect till 25 September 2020. The government further extended the suspension for three months, resulting in IBC suspension extension till 25 December 2020. On Monday, the Union Finance Minister, Smt. Nirmal Sitharaman stated that the government has decided to extend the suspension by another three months, i.e. till 25 March 2021.

The Union Minister stated that “The suspension of the IBC has been postponed even further, from 25 December, I think, till 31 March 2021” via video conferencing in an interaction with the Bangalore Chamber of Industry and Commerce. She also stated that this extension is because every industry is still facing large-scale stress due to the COVID-19 pandemic. Thus, industries should not be drawn towards the insolvency process, which might have occurred during the pandemic.

Accordingly, on Tuesday, the Ministry of Corporate Affairs (MCA) issued a notification for further extension of Section 10A of IBC by the Central Government for another three months starting from 25 December 2020. This notification officially confirms the Finance Minister’s statement of extending the suspension of IBC till March 2021. The IBC is a code that consolidates laws relating to reorganisation and insolvency resolution of individuals, corporate persons and partnership firms in a time-bound manner. 

Initially, when the government announced the suspension of IBC, a new Section, i.e. Section 10A was inserted in the code on 5 June 2020 providing IBC suspension. Section 10A says that a financial or operational creditor cannot file an application under IBC for commencing corporate insolvency resolution process for any default of a corporate debtor arising after 25 March 2020. It also states that Section 10A is effective for six months from 25 March 2020. 

Section 10A also provides the power to the government for further extension of six months period. Thus, the government extended this section, providing the suspension of IBC by three months in September and again for another three months in December. However, it clearly states that this Section 10A does not apply to any default committed by the corporate debtor before 25 March 2020. Thus, there can be an initiation of the corporate insolvency resolution process against the default of the corporate debtor committed before 25 March 2020.

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The suspension of IBC extends to the three sections of Section 7, 9 and 10 for COVID-19 related defaults. These sections allow commencing the corporate insolvency resolution process by the financial and operational creditors and the corporate debtor themselves.

With the Government extending this suspension for another three months starting from 25 December 2020 till 25 March 2021, there can be no initiation of fresh corporate bankruptcy proceedings for default in loans during the pandemic period till the end of the financial year. As a result, there will be a freeze in the corporate bankruptcy proceedings under IBC for a year beginning from 25 March 2020 extending till 25 March 2021. 

The extension of the suspension of IBC comes as a relief for the COVID-19 hit companies and industries. This provision of this extension comes at the right time. The unlock is currently taking place across the country, allowing the business to hit the reset phase. Yet, the cash flows have not reached the expected level in various sectors affected by the COVID-19 pandemic. In such a situation, the extension of IBC till 25 March 2021 provides relief to the pandemic affected industries and companies.

For any clarifications/feedback on the topic, please contact the writer at mayashree.acharya@cleartax.in