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India: Insolvency in times of COVID-19

May 19, 2020

By Reetika Wadhwa and Nishtha Das

In India, the Corporate Insolvency Resolution Process (hereinafter referred to as ‘CIRP’) is governed under the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as ‘Code’). Insolvency laws in India provides for an expeditious settlement of insolvency cases, protecting the interests of the creditors through a balanced procedure, in a time bound manner. A financial creditor, an operational creditor and the corporate debtor are eligible to initiate the CIRP.

For the initiation of CIRP, an application can be made to the National Company Law Tribunal (hereinafter referred to as ‘NCLT’) as per the provisions of the Code. The Code prohibits liquidation process of an insolvent company until and unless it goes through the CIRP. The resolution process gives the insolvent company an opportunity for revival and only when the CIRP fails the purpose, liquidation for the insolvent company can be initiated.

As per the provisions of the Code, CIRP has to be completed within a maximum period of 180 days from the date of admission of the application to initiate such proceedings. An extension of 90 days can be granted but the same is at the sole discretion of the government authorities.

Business challenges: COVID 19 – Year 2020

The year 2020 is proving to be an extremely challenging year worldwide, as people are battling with the novel COVID 19 pandemic. The COVID 19 virus which originated in China, late in the year 2019, has now affected over 3 million lives globally. As a precautionary measure to control the deadly spread of the virus, the Central Government of India announced nationwide lockdown starting March 23, 2020. The said lockdown has deeply impacted businesses all around India as all kinds of activities and movements have ceased to operate in compliance with the lockdown, excluding essentials services.

Several businesses are now struggling to exist as their functioning has been temporarily terminated. Amongst various other things employers are unable to maintain their employees, premises, etc. As the business operations are completely at halt, creditors now can be found lining up for repayments. In view thereof, certain relief measures have been introduced by the government to ensure sustenance of businesses and prevent them from becoming insolvent.

Insolvency Relief measures introduced in view of COVID 19

  • Under the Code, the threshold limit for default by corporate debtors is affixed at INR 1,00,000. However, in view of the COVID 19 outbreak and subsequent lockdown, the above threshold has been extended to INR 1,00,00,000. The said amendment has been made through Notification no. S.O. 1205 (E), dated March 24, 2020 as issued by the government.

Impact of relief – The above relief measure has been introduced to protect the interest of MSME enterprises CIRP can be easily triggered given the previous threshold in the present situation. This relief can also safeguard corporate debtors as the earlier threshold limit for insolvency could be easily met in the present situation.

For more information on the threshold limit, read our article Threshold limit under IBC enhanced to INR 1 Crore amid Coronavirus crisis

  • The Insolvency and Bankruptcy Board of India has issued the Insolvency and Bankruptcy Board of India (Liquidation Process) (Second Amendment) Regulations, 2020 to insert Rule 47A in the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016. The newly inserted Regulation has exempted the period of lockdown imposed by the Central government in light of the COVID 19 outbreak, from the timelines of CIRP activities.

Impact of relief – The above relief intends to safeguard corporate debtors from initiation of insolvency during the lockdown period. The intent behind the exclusion is to protect business owners from insolvency as the cessation of business operations is beyond the control of the business owners presently.

For more information on the exclusion period refer to our article at Lockdown period to be excluded from Insolvency Resolution Process Timeline

Sources

http://www.mca.gov.in/MinistryV2/insolvency+and+bankruptcy+code.html 

 

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