Lok Sabha passes amendment in Insolvency and Bankruptcy Code for firms under stress due to Covid-19

The Lok Sabha on Monday passed the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2020 that prohibits initiation of fresh insolvency proceedings against companies under stress due to the spread of Covid-19 pandemic since March 25.

The Rajya Sabha passed the bill on Saturday. The bill seeks to replace an ordinance promulgated to provide relief to pandemic-hit firms in June this year.

The ordinance, promulgated on June 5, prohibited initiation of insolvency proceedings against companies for their defaults for six months starting from March 25. The protection period is, however, extendable up to one year.

Finance minister Nirmala Sitharaman told the house that the ordinance was issued to provide “immediate relief” to companies as the government had to prevent companies, stressed due to Covid-19, from being pushed into insolvency.

“This Bill is successor to the ordinance issued on June 5. The object of the Bill is for temporary suspension of any CIRP [Corporate Insolvency Resolution Process] for a period not exceeding one year due to unusual circumstances caused by the pandemic,” Abir Lal Dey, partner at law firm L&L Partners said.

“It will be interesting to see how the willful defaulters will be dealt with during the suspension period. Also upon expiry of the suspension period, which is not very far, there may be an increase in filing,” he added.