Insolvency code suspension was not meant to protect firms that commit fraud, Sitharaman says
Economy

Insolvency code suspension was not meant to protect firms that commit fraud, Sitharaman says

Finance Minister Nirmala Sitharaman says saving companies impacted by the pandemic was more important than facilitating recovery by creditors under the law.

   
Union Finance Minister Nirmala Sitharaman speaks in Lok Sabha on 18 September 2020 | ANI

File photo of Union Finance Minister Nirmala Sitharaman | ANI

New Delhi: Defending the suspension of the insolvency and bankruptcy code provisions in the wake of Covid-19, Finance Minister Nirmala Sitharaman Saturday said in Parliament that saving companies impacted by the pandemic was more important than facilitating recovery by creditors under this law. 

She added that the suspension of the code was not meant to protect companies, which indulge in frauds. 

The Rajya Sabha passed the amendments to the Insolvency and Bankruptcy Code (IBC) Saturday that will enable the government to suspend some crucial provisions of the IBC Act for a period upto 24 March 2021. The Bill will now have to be passed by the Lok Sabha. 

The government had promulgated an ordinance in June 2020 and suspended provisions of the IBC for a period of 6 months upto 24 September, thereby protecting companies against initiation of insolvency proceedings by creditors whose dues remained unpaid on account of the halt in economic activity due to the pandemic. 


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‘Creditors can pursue other recovery options’

Replying to a debate on the Bill in the Upper House, Sitharaman said that it will only protect companies from defaults occurring after 25 March and not prior to this date. The cases filed prior to this date can continue, she said. 

“It will take years to wipe off the deep stress from the pandemic for some companies. The provisions are aimed at ensuring that a company is not pushed into insolvency when it is trying to recoup its losses,” she said. 

Sitharaman added that creditors can pursue other recovery options outside the Act.  

“In the light of the extraordinary economic situation caused by Covid-19 pandemic, a need was felt to temporarily suspend initiation of corporate insolvency resolution process under the code, initially for a period of six months or such further period, not exceeding one year from 25 March 2020 to provide relief to companies affected by Covid-19, to recover from the financial stress without facing immediate threat of being pushed to insolvency proceedings,” according to the statement of the objects and reasons of the bill. 

What is IBC?

The IBC was enacted in 2016 to ensure easy exits for firms. It was aimed at providing time-bound settlements of insolvency proceedings as well as faster revival of businesses. However, since its enactment the Act has seen frequent changes to plug loopholes in the law and to prevent misuse by unscrupulous promoters.

Sitharaman said the enactment of the IBC in 2016 has ensured that most of the resolutions are aimed to make a company a “going concern” rather than pushing it into liquidation. 

She also said that the IBC’s track record at recovery of bank loans has been much better compared to other bodies like the Lok Adalat and the debt recovery tribunals. 

In 2018-19, specific to non-performing assets of scheduled commercial banks, the recovery rate of Lok Adalats was 5.3 per cent, 3.5 per cent for debt recovery tribunals, 14.5 per cent under the provisions of the Sarfaesi act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002) and 42.5 per cent under the IBC Act, according to government data. 


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