Companies get 6-month grace on defaults after lockdown

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Jun 3, 2020

NEW DELHI: The Union cabinet on Wednesday recommended the promulgation of an Ordinance to amend the Insolvency and Bankruptcy Code and provide relief for loan defaults after March 25, initially for six months.
Default in repayment of loans by companies — other than financial services — up to September-end, which can be extended by another six months, will not be counted as default under the Insolvency & Bankruptcy Code (IBC). This is in addition, to a bar on initiating any insolvency action either by banks or other creditors, such as suppliers, in the National Company Law Tribunal.
A formal announcement by the corporate affairs ministry is expected over the next few days.
While the amendments to the IBC will provide respite to the corporate sector, it has not gone down well with lenders and insolvency professionals. A top banker said that the move was not required as the Reserve Bank of India had provided a standstill clause for six months, while announcing the loan moratorium.
Besides, bankers said, it will upset the payment culture, which had improved in recent years due to the fear of lenders invoking the IBC, which could result in the promoter getting ousted.
“Pushing the pause button on classification of non-performing assets of borrowing post 25 March can cause many pitfalls. This is simply treading on RBI terrain and sets a dangerous precedent. It also poses risk of abuse by scrupulous borrowers,” said Sumant Batra, managing partner at law firm Kesar Dass.
The government has, however, argued that the move is necessary to ensure that businesses are not going to get back to full capacity immediately after the lockdown is lifted. During the lockdown, most businesses had lost significant amount of revenue.
Separately, the government is readying a simpler framework for insolvency resolution of micro, small and medium enterprises, which will have fewer processes to comply with and come out of the framework during a shorter period. Under the current mechanism, the corporate insolvency resolution process has to be completed within a maximum 270 days.


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