In a major relief for corporate borrowers hit hard by the coronavirus pandemic, the government has decided to amend the insolvency law to suspend up to one-year provisions that trigger insolvency proceedings against defaulters, according to sources.
Further, the sources said amendments to the IBC (Insolvency and Bankruptcy Code) would pave the way for banks to restructure loans.
The sources said an ordinance would be promulgated to suspend three sections of IBC for up to one year and a decision in this regard was taken by the Union Cabinet on Wednesday.
Section 7, 9, and 10 of the IBC would be suspended for six months and the suspension time can be extended up to one year. An enabling provision with respect to extending the time would be part of the ordinance, they added.
Suspension of these provisions could be extended up to one year based on the economic situation going forward.
The effective date of the amendments coming into force would be the date of promulgation of the ordinance, the sources said.
Section 7 and 9 pertain to initiation of corporate insolvency proceedings by a financial creditor and an operational creditor, respectively. Section 10 relates to filing an application for insolvency resolution by a corporate.
The coronavirus outbreak and the nationwide lockdown to curb spreading of infections have significantly impacted economic activities and the latest decision in a way provides more leeway for corporate borrowers in repaying their loans.
As per existing norms, if a payment default exceeds 90 days then the lender concerned has to refer the account for resolution under IBC or any other mechanism permitted by the Reserve Bank of India (RBI). The lender does not have the option to restructure the loan.
Currently, RBI norms prohibit restructuring of loans and resolution has to be done under IBC.
Last month, Finance Minister Nirmala Sitharaman indicated that the government may consider suspending some key provisions of IBC in case the current situation following the outbreak of COVID-19 pandemic continued beyond April 30.
Sitharaman is also in charge of the corporate affairs ministry, which is implementing IBC.
"If the current situation continues beyond April 30, 2020, we may consider suspending section 7, 9 and 10 of the IBC 2016 for a period of six months so as to stop companies at large from being forced into insolvency proceedings in such force majeure causes of default," she had said.
In March, the government raised the threshold default amount for invoking insolvency proceedings under IBC to Rs 1 crore from Rs 1 lakh in order to prevent triggering of such proceedings against small and medium enterprises. Many such enterprises are under financial stress due to the lockdown.
The move was part of relief measures that were announced in view of the coronavirus pandemic.