NEW DELHI: With the countrywide lockdown expected to hit small and medium businesses the hardest, the government on Tuesday moved to protect them from bankruptcy proceedings.
It has declared that the minimum threshold for defaults under the Insolvency and Bankruptcy Code (IBC) will be raised from Rs 1 lakh to Rs 1 crore.“Most small businesses are likely to default on payments owed to their banks and raw material suppliers, given the fact that a lockdown has been announced, which may be extended. Considering that, and the possible fallout on business even after that, we have taken this extraordinary measure,” said a top finance ministry official.
MSME businesses and the industry ministry had made several pleas to the finance ministry ahead of the move. “The ability of these MSMEs to rake up funds to avoid delinquencies is limited, and the move is welcome. Without it, possibly tens of thousands of businesses would have been dragged to insolvency,” said Raman Chadha, director, BRS Tax Consultancy.
Finance Minister Nirmala Sitharaman, who made the announcement on Tuesday, also said that the government will consider suspending Sections 7, 9, 10 of the IBC for six months if the current economic situation continues beyond April. She added that this would help companies being forced into insolvency on default of loans.
Chadda said the move meant that the finance minister has “reserved the right to suspend these three Sections, which allow financial and trade creditors to file applications for insolvency, and after expiry of 10 days, initiate actual insolvency proceedings.”
While Section 7 says a financial creditor or creditors can individually or jointly file an application for initiating corporate insolvency resolution process against a corporate debtor, Section 9 says that after 10 days of serving a notice, an operational creditor may initiate the insolvency resolution process.
The CAIT, while welcoming the measures, said that repayment of bank loans, EMIs and other banking obligations should be extended up to September 30 and no interest or penalty should be charged on the extended period.
