Govt to Exempt Coronavirus-Related Debt of Companies from Insolvency Law Ambit

Seeking to provide relief for the coronavirus pandemic-hit economy, the government will provide various relaxations under the insolvency law, including suspending fresh proceedings for up to one year, exempting COVID-19-related debt and coming out with a special framework for MSMEs.

The measures were announced by Finance and Corporate Affairs Minister Nirmala Sitharaman on Sunday as part of the fifth and final tranche of the Rs 20-lakh crore stimulus package unveiled to boost the economy ravaged by the pandemic and subsequent lockdown.

In a significant move that is expected to provide relief for various entities, the government has decided to suspend fresh initiation of insolvency proceedings up to one year depending upon the pandemic situation.

"After all, when lockdown gets lifted immediately, you are not sure how much of the businesses will get restored... No fresh insolvency proceedings will be initiated for up to one year," she said at a press meet here.

Under the Insolvency and Bankruptcy Code (IBC), which provides for a time-bound and market-linked resolution of stressed assets, an entity can seek insolvency proceedings against a company even if the default is only one day. This is subject to the minimum threshold of Rs 1 crore. Earlier, the threshold was Rs 1 lakh.

Sitharaman said hiking of the minimum threshold largely insulates micro, small and medium enterprises (MSMEs).

According to the minister, COVID-19-related debt would be excluded from the definition of 'default' under the Code for the purpose of triggering insolvency proceedings.

Further, a special insolvency resolution framework for MSMEs under Section 240A of the Code would be notified soon.

L Viswanathan, partner at law firm Cyril Amarchand Mangaldas, said a special insolvency resolution is critical to allow MSMEs the opportunity to resolve existing end impending stress.

"While the details are awaited, it is expected to balance speed and transparency and safeguards for all stakeholders. It is also likely to apply to the expanded definition of MSMEs announced a few days ago," he said,

He also said that suspension of fresh initiation of proceedings would allow breathing space for companies to recover.

"Since companies maybe required to take on additional debt to tide over this period, default on COVID related debt will be specifically excluded from the definition of the default under the Code," he added.