New Delhi, Jun 5 (PTI) Suspension of fresh insolvency proceedings for at least six months in the wake of the coronavirus pandemic will help provide "breathing space" for corporates to recalibrate their business to an all-new normal, IBBI Chairperson M S Sahoo said on Friday.

Against the backdrop of the pandemic and lockdowns disrupting economic activities, the government on Friday promulgated an ordinance to amend the Insolvency and Bankruptcy Code (IBC) following which fresh proceedings can be suspended for up to one year starting from March 25. The government would decide on the time period.

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Entities can initiate proceedings for defaults made before March 25. Also, applications already filed for initiation of insolvency proceedings and ongoing proceedings would continue to be dealt with in accordance with the IBC, according to Sahoo.

Any default by a company during the period, when the coronavirus holds sway, would be considered COVID-19 related default.

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"This period begins with 25th March, 2020, when the first phase of national lockdown commenced and continues for six months or such further period, not exceeding one year, as the government may decide, as the story unfolds further

"The ordinance excludes such defaults from the purview of the Code for ever. This means that such defaults shall not be the basis for initiation of insolvency proceeding at any time," Sahoo told PTI.

He is the head of the Insolvency and Bankruptcy Board of India (IBBI), a key institution in implementation of the IBC.

According to Sahoo, the latest move would prevent companies from being pushed into insolvency for their inability to meet repayment obligations due to business disruptions on account of COVID-19.

"The endeavour is to allow the firms breathing space to recalibrate their operations and business to an all-new normal," he emphasised.

Elaborating on the rationale of the insolvency process, he said typically rescue process of a viable firm under the IBC requires a saviour and when every other firm is under stress in the wake of COVID-19, the market may not have many saviours to rescue firms.

"It is dangerous for an economy if the market fails to rescue viable firms. If all such firms are pushed into insolvency, many of them may end up with premature liquidation.

"Upon such liquidation, the assets would have distress sale, realising abysmally little for creditors. Consequently, the firms would have a premature death while creditors would realise next to nothing," Sahoo said.

Further, the IBBI chief said a resolution professional shall not file an application seeking contribution from directors in respect of defaults during the COVID-19 period.

(The above story is verified and authored by Press Trust of India (PTI) staff. PTI, India’s premier news agency, employs more than 400 journalists and 500 stringers to cover almost every district and small town in India.. The views appearing in the above post do not reflect the opinions of LatestLY)