FM announced the suspension of IBC operations for 3 Months

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1. The Centre on Thursday suspended the operation of the Insolvency and Bankruptcy Code (IBC) by another three months to protect companies in distress from being dragged into bankruptcy tribunals in view of the crisis.

2. The ministry of corporate affairs said the suspension of the Code, issued initially for six months, is extended for another three months starting 25 September. The Code has been suspended with effect from 25 March to allow financially-stressed companies to recover without facing an immediate threat of being pushed into insolvency proceedings.

3. The suspension, which was announced by finance and corporate affairs minister Nirmala Sitharaman on 17 May, had led to heated debates about its desirability with former Reserve Bank of India governor Raghuram Rajan questioning its utility.

Rajan had said suspending fresh bankruptcy cases was unfortunate as it viewed the resolution as a punishment and not as a way of restructuring capital structure and ownership.

4. The government clarified that the idea is to save viable firms even if it comes at the cost of keeping unviable ones alive during the period of IBC suspension. The IBC (Second Amendment) Act, 2020, enables the Centre to bar initiation of any bankruptcy proceedings against companies for defaults after 25 March for up to a year. However, the government chose to extend it only by three more months at the expiry of the first six months. This calibrated extension shows a wait-and-watch approach by the government and confidence that economic conditions could be slowly improving, said L. Viswanathan, partner, Cyril Amarchand Mangaldas.

5. A debt restructuring framework released by RBI in August requires such a process to be initiated by December-end. This coincides with the end of extended IBC suspension. Therefore, if restructuring is not initiated within the timeline stipulated by RBI, lenders will have the right to initiate insolvency proceedings for future defaults, explained Viswanathan.

6. There is also no bar on lenders to continue the judicial process in the case of corporate defaults prior to 25 March.

Sumit Batra, partner, India Law Alliance, said the extension “will further aggravate the situation and lead to an unprecedented rise in fresh filings once the suspension is revoked”.

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