NEW DELHI – In order to provide relief to Covid-19 pandemic-hit companies, the government temporarily suspended the initiation of corporate insolvency resolution processes from March 25, 2020, initially for six months. It was successively extended twice by three months each.
Lenders are free to initiate new insolvency and bankruptcy proceedings against financially stressed companies from Thursday as the one-year moratorium period has ended, however, the government is working to provide a framework to save small and medium firms from the lengthy legal hassles, two officials close to the development said on Wednesday.
As per the law, the moratorium, which exhausted on March 24, cannot be extended beyond one year. It is also not prudent to keep lenders in the lurch and allow accumulation of non-performing assets (NPAs) by not allowing initiation of fresh cases under the Insolvency and Bankruptcy Code (IBC), the officials said on condition of anonymity.
In order to provide relief to Covid-19 pandemic-hit companies, the government temporarily suspended the initiation of corporate insolvency resolution processes from March 25, 2020, initially for six months. It was successively extended twice by three months each.
The government is expecting a flurry of default cases in the National Company Law Tribunal (NCLT) now and preparing a framework so that the lender and the borrower could settle the matter outside the tribunal, the people quoted above said.
The people cited above said retailers are unlikely to raise fuel prices in the near future because of the state elections that begin from March 27.
The top court on Tuesday said the benefit of a waiver of compound interest, or interest on interest, should be available to all borrowers, irrespective of how much of their loan was outstanding.
According to the officials, the number of total pending cases in the National Company Law Tribunal (NCLT) has mounted to over 21,250, a substantial jump from 19,844 pending cases on July 31, 2020, and out of these cases, 12,438 cases were related to the IBC.
“The ministry of corporate affairs (MCA) is willing to provide all support to companies, particularly small and medium firms, so that they do not face legal hassles and amicable settlement is possible for them under a framework in the making,” one of the officials said.
The second official said the framework will have a provision of pre-pack mechanism, which can be used by lenders and investors to resolve the matter amicably.
Rajiv Chandak, partner at consultancy firm Deloitte India, said that a further extension will not resolve stress in loan portfolio of banks. “Government should look to expedite bringing provisions around pre-pack which can facilitate consensual resolution of case between corporate debtor and lenders,” he said.
Faisal Sherwani, partner at law firm L&L Partners, said private firms had a one-year breather, sufficient to put their operations in order.
“Lenders have patiently waited for their rights to crystallize all this while. Of course, we may witness a surge in insolvency proceedings, which I think is the supposed ‘devil’ that the government seeks to avoid. But those consequences are a necessary evil and must be accepted if you have faith in the IBC and are a believer in a free economy with a fair system for dues recovery.”
