Insolvency Law Ambit Exempts Massive Corona Virus Related Debts

insolvencyGOI will include various relaxations under the insolvency rule, exclude COVID-19-related debt and come up with a clear structure for MSMEs in order to provide relief for the coronavirus pandemic-hit economy.

As part of the final tranche of the Rs 20-lakh crore stimulus package launched to improve the economy devastated by the pandemic and lock-down, the steps were announced by Finance and Corporate Affairs Minister Nirmala Sitharaman.

The government has agreed to postpone the introduction of new insolvency proceedings for up to one year, depending on the pandemic situation, in a significant step that is expected to provide relief for different entities.

“After all, you are not sure how many of the companies will be recovered when the lock-down is immediately lifted … No new insolvency proceedings will be launched for up to one year,” she said.

Under the Insolvency Code, 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.

The minimum Rs 1 crore mark, which was previously Rs 1 lakh. Sitharaman said the minimum threshold increase primarily isolates small, micro, and medium-sized enterprises.

According to the minister, for the purpose of initiating insolvency proceedings, COVID-19-related debt will be exempt from the concept of ‘default’ under the Code.

Furthermore, under Section 240A of the Code, a special insolvency resolution system for MSMEs will soon be informed.

Cyril Amarchand Mangaldas, a partner at law firm L Viswanathan, said a special insolvency resolution is crucial to giving MSMEs the opportunity to overcome current end-imminent stress.

While specifics are awaited, pace and accountability and protections for all stakeholders are expected to be balanced. The expanded concept of MSMEs announced a few days ago is also likely to apply, “he said,”

He also added that the suspension of the new introduction of proceedings would allow businesses to reclaim breathing space.

Since companies may be forced to accept additional tidal debt during this time, default on COVID-related debt will be expressly excluded from the Code’s concept of default, “he added.”

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