In wake of COVID-19, many businesses got severely affected during the lockdown which was implemented to curtail the spread of virus. Due to lockdown, there is lack of demand and depletion of reserves which is leading to the closure of many companies;if it happens it will massively disrupt supply chain and could impact financial system.To revive back economy from this situation recently economic stimulus package was announced by the government. Along with this, many sectorial and legislative reforms were also announced by Finance Minister Nirmala Sitharaman.
While announcing legislative measures to help businesses to tide over the present crisis, it was also announced that there will be no fresh bankruptcy proceedings for one year against defaulters. New provisions will be introduced to exclude all debts associated with COVID-19 from defaults covered under Insolvency Bankruptcy Code for triggering action against defaulters by creditors and to make sure that companies which are trying to get back will not be dragged to tribunals. Threshold to trigger a bankruptcy against companies will be raised from 1 lakh to 1 crore. A special framework is also to be notified for dealing bankruptcy of micro, small and medium enterprises (MSMEs). These measures will be brought to effect through an ordinance. Complete details of these measures will be known once after ordinance and notifications are issued.
Also Read- APPROVAL OF RESOLUTION PLAN BY CoC in Insolvency Process
Explaining the provisions in the proposed ordinance finance minister Nirmala Sitharaman said “Many businesses have got severely affected particularly during the lockdown and the coronavirus pandemic. Debt related to COVID-19 shall be excluded from the category of ‘default’ under Insolvency Bankruptcy Code. No fresh insolvency proceeding shall be initiated for up to one year”.
Sumant Batra, managing partner of law firm Kesar Dass B. and associates opined that“Bankruptcy laws have undergone fundamental changes during uncertain times like these in past. What we need is a revolutionary rehash of insolvency law and not a pause of bankruptcy proceedings for a year. A brand new out-of –the-box resolution approach is needed, which incentivizes banks and public sector institutions to proactively participate in rescuing businesses. The government should take another leap on IBC”.Many experts said that there should be some fundamental changes in Insolvency Bankruptcy Code in this economic uncertainty which is very badly hit by COVID-19 instead of suspending it for a temporary period.
Also Read- INSOLVENCY AND BANKRUPTCY CODE AMENDMENT, 2019
This pausation of bankruptcy proceedings could affect lenders and deprive them from restructuring the companies which are beyond the redemption, but at the same time it will help many companies to get back on their feet.
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This post is written by Diwakar Ayyala.
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