Context: The Parliament passed a bill that temporarily suspends initiation of corporate insolvency resolution process under the IBC, for a period not exceeding one year from March 25, to provide relief to companies affected by COVID-19 to recover from the financial stress.

The Insolvency and Bankruptcy Code (Second Amendment) Bill 2020 

  • The proposed amendments suspended the application of three provisions to prevent any company, stressed due to the COVID-19 situation, from being pushed into insolvency proceedings. 
  • The benefit of the suspension will be available to all defaults of the corporate debtor that occur from March 25, 2020 till the end of the period of suspension.
  • A proviso for further extension of six months has also been given. 
  • The creditors, including MSMEs (micro, small and medium enterprises), had several other options to recover their claims. 
  • The recovery rate under the Code was 42.5%, while under Lok Adalat (2018-19), the figure was 5.3%; DRT proceedings had led to 3.5% recovery and under the SARFAESI Act, 14.5% of the dues were recovered.

Insolvency and Bankruptcy Code, 2016

  • The Insolvency and Bankruptcy Code, 2016 (Code) sets out a time-bound insolvency resolution process for defaulting corporate debtors.
  • It introduces a creditor-in-possession model whereby a committee of creditors (CoC) is constituted to take decisions regarding the operations of the corporate debtor, including evaluating prospective resolution plans for resolving the corporate debtor's account.

Salient Features of IBC

  • It applies to both Individual and companies.
  • Earlier it provided for a 180-270 days period to resolve insolvency but now the deadline of 330 days has been set for completion of corporate insolvency resolution process (CIRP), including litigation and other judicial processes.
  • It provides immunity to the debtors from claims of resolution by creditors during this period of resolution.
  • It provides for a common platform of debtors and creditors of all classes to resolve insolvency.
  • The Code gives the highest priority to those who have brought interim finance to meet the costs of resolution or liquidation, followed by dues to workers for the past two years and dues to secured creditors in equal priority. 
    • Employees other than workmen, and unsecured creditors and operational creditors are further down the line in the priority of receiving resolution or liquidation proceeds.

Image source: Economic Times