Bankruptcy Laws Suspended For Six Months

Indian Bankruptcy Code suspended for 6 months

Amidst severe impact on small businesses and start-ups due to the lockdown, the Indian government has suspended particular sections of the Indian Bankruptcy Code to aid industries in getting back to feet.
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Crux of the Matter

Suspension To Save
The Indian government recently cleared the proposal to suspend Section 7, 9, and 10 of the Insolvency and Bankruptcy Code (IBC). Consequently, proceedings regarding bankruptcy would be suspended for 6 months, which could be extended to 1 year. The modifications would be applicable to Non-Performing Assets (NPAs) – assets unable to bring income, after 25 March. The insolvency initiation limit has also been increased to a default of ₹1cr. The mentioned sections enabled initiation of insolvency by the following:

  • Section 7: By Financial creditors
  • Section 9: By Operational Creditors
  • Section 10: By the company itself

What Is IBC?
IBC was passed by the Indian government in 2016. The code was designed to ease the process of bankruptcy and to aid small and medium businesses while increasing liquidation efficiency. Its impact is witnessed in its recovery of NPA; in 2018-19, ₹70,607 or 56% of total recovery of NPA by Scheduled Commercial Banks (SCB) of India was done under IBC.

How Insolvency Works?
Insolvency is the condition when a company is unable to fulfill debts and financial obligations. It is initiated by the creditor or company itself. The Resolution Professional (RP) takes charge of the company and its assets and designs a resolution paradigm. The time limit for resolution is 270 days, after which the company is put into liquidation.

Experts have welcomed the step amidst Coronavirus pandemic which has severely affected Micro Small and Medium Enterprises as revenues fell.

Some experts have pointed to the negative impact of the step on banks. As the Insolvency process already took 270+ days, further addition of 6 months will delay the recovery process. ICRA has predicted a decrease of 30-40% in the realization (recovery) for creditors in Financial Year 2020-21. Moreover, as resolution and liquidation both require 3rd party funds, lack of funds in the hands of investors due to lockdown might increase the NPA.

  • Lehman Brothers Holdings Inc. was a global financial services firm founded in 1847. Before filing for bankruptcy in 2008, Lehman was the fourth-largest investment bank in the United States. The filing for bankruptcy by Lehman Brothers remains the largest bankruptcy filing in U.S. history, with Lehman holding over $600 billion in assets.
  • The word ‘bankruptcy’ is derived from Italian banca rotta, literally meaning “broken bench” but more idiomatically “broken bank,” since bankers traditionally dealt from wooden benches. A folk etymology alleges that Italian bankers’ benches were smashed if they defaulted on payment, but this is often dismissed as a legend.
  • Anil Dhirubhai Ambani, son of the founder of Reliance Group Dhirubhai Ambani, is the chairman of Reliance Group, which was created in July 2006 following a demerger from Reliance Industries Limited. Ambani, once the sixth richest person in the world, declared before a UK court in February 2020 that his net worth is zero and he is bankrupt.