COVID-19 related debt excluded from definition of ‘default’ under Insolvency and Bankruptcy Code

New Delhi: Union Finance Minister Nirmala Sitharaman on Sunday (May 17) said that the government has decided to exclude COVID 19 related debt from the definition of “default” under Insolvency and Bankruptcy Code (IBC) while outlining the final tranche of the Rs 20 lakh crore economic package announced by Prime Minister Narendra Modi to boost economy in the view of coronavirus crisis. 

The Finance Minister said “With an eye on further enhancement of Ease of Doing Business, the government announces suspension of fresh initiation of insolvency proceedings up to one year; decides to exclude COVID 19 related debt from the definition of “default” under IBC.”

Further enhancement of Ease of Doing business through IBC related measures 

-Minimum threshold to initiate insolvency proceedings raised to Rs. 1 crore (from Rs. 1 lakh, which largely insulates MSMEs). 
– Special insolvency resolution framework for MSMEs under Section 240A of the Code to be notified soon. 
– Suspension of fresh initiation of insolvency proceedings up to one year depending upon the pandemic situation. 
– Empowering Central Government to exclude COVID 19 related debt from the definition of “default” under the Code for the purpose of triggering insolvency proceedings. 

Recent Corporate Law measures for Ease of Doing Business 

– Rationalization of Related Party Transaction related provisions 
– Timely Action during COVID-19 to reduce compliance burden under various provisions of the Companies Act,2013 as well as enable Companies conduct Board Meetings, EGMs & AGMs, Rights issue by leveraging the strengths of Digital India 
– In 221 resolved cases, 44% Recovery has been achieved since inception of IBC, 2016 
– Admitted claims amount to Rs 4.13 Lakh crores 
– Realizable amount is Rs 1.84 Lakh crores 
-Under IBC, 13,566 cases involving a total amount of Rs 5.01 lakh crores (approx.) have been withdrawn before admission under provisions of IBC till 29th Feb 2020. 

FM Sitharaman said the government has decided to decriminalise Companies Act defaults and drop 7 compoundable offences and 5 to be dealt with under alternative framework. The measures are:

– Decriminalization of companies act defaults involving minor technical and procedural violations
– Majority of the compoundable offences sections to be shifted to internal adjudication mechanism and powers of RD for compounding enhanced 
– The Amendments will de-clog the criminal courts and NCLT
– Seven compoundable offences altogether dropped and 5 to be dealt with under alternative framework

“All sectors are open to the private sector while public sector enterprises will play an important role in defined areas,” she said. Accordingly, the government will announce a new policy whereby:

– List of strategic sectors requiring the presence of PSEs in public interest will be notified
– In strategic sectors, at-least one enterprises will remain in the public sector but the private sector will also be allowed
– In other sectors, PSEs will be privatised 
– To minimize wasteful administrative costs, the number of enterprises in strategic sectors will be between one to four, others will be privatised or merged or brought under holding companies. 

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