The Lok Sabha on Monday passed the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2020, whereby fresh insolvency proceedings will not be initiated for at least six months starting from March 25 amid the coronavirus pandemic.
The Bill mandates that a default on repayments from March 25, the day when a nationwide lockdown began to curb the spread of coronavirus, would not be considered for initiating insolvency proceedings for at least six months. The Bill, which was passed by the Rajya Sabha on Saturday, seeks amendment in the Insolvency and Bankruptcy Code, 2016 and replaces the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 which was promulgated by the President on June 5 this year.
Speaking on the Bill while moving for passage, Union Finance Minister Nirmala Sitharaman said the amendment was necessitated in the form of ordinance. In Parliament registry, this is among one of those Bills, now an Act, Sitharaman said, which come very quickly each time when the ground situation required changes so that this becomes a robust law.
Giving detailed reasons behind amendment in the law, the minister said the need for such ordinance has never been contextual in the last 100 years. “Such kind of atmosphere cannot be in the coming 100 years too.” Indicating towards the Covid-19 disease, the minister said the dimension and the scale of the pandemic was obvious and therefore we had to come up with an ordinance which clearly suspended the application of three sections – 7, 9 and 10 — of the Insolvency and Bankruptcy Code.
“We had to prevent any company which is experiencing distress because of Covid being pushed into the insolvency proceedings. And therefore we had to suspend these sections.” The ordinance had prohibited the initiation of insolvency proceedings for defaults arising during the six months from March 25 this year (extendable up to one year).
Simply put, no insolvency proceedings can be initiated by either the corporate debtor or any of its creditors for defaults arising during this six-month period beginning March 25.The ordinance came in response to the Covid-19 pandemic, which had created uncertainty and stress for businesses for reasons beyond their control. It was also felt that during the Covid-19-induced lockdown, it may be difficult to find an adequate number of resolution applicants to rescue the corporate debtor who may default in discharging their debt.
The Finance Minister also defended the provision in the Bill to cap the suspension of sections 7, 9 and 10 for one year. By putting the upper limit of one year, the government is ensuring that excessive delegation does not go to the executive and also that Parliament approval would be necessary if the suspension were to be extended beyond one year, she noted. “I would rather not remove (the one-year cap) it. This is a restraint we have put for ourselves,” she said.
With the six-month timeline for the suspension coming to an end on September 25, Sitharaman indicated that a formal announcement on the way forward will be made on September 24. She also asserted that the amendments brought through the ordinance were not intended to protect promoters from their fraudulent transactions.