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India Suspends Bankruptcy Claims For Twelve Months

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India is suspending bankruptcy claims for one year to allow businesses affected by the coronavirus to get back on their feet. The Insolvency and Bankruptcy Code (IBC) has announced more lenient measures which exclude all debt that is associated with the coronavirus from defaults to help businesses through the crisis period. India’s Finance Minister, Nirmala Sitharaman, has raised the minimum payment threshold that triggers bankruptcy proceedings from ₹1 crore to ₹1 lakh (AUD$2,052 to AUD$205,000)- this is to primarily insulate micro, small and medium enterprises. Additionally, the Finance Minister has announced “decriminalisation of the Companies Act in violations involving minor technical and procedural defaults including shortcoming in CSR reporting, inadequacies in board report, filing defaults and delay in holding AGM.”

Domestic and international lockdowns have severely affected many businesses in India and caused widespread financial distress. Relaxing these rules is an important action that will assist India’s economy in sailing through the rough waters created by the coronavirus pandemic. Lifting these rules will also prevent the criminal courts and the National Company Law Tribunal (NCLT) from being overrun and clogged with cases. Consequently, the balance sheets of financial and operational creditors will be squeezed and may be forced to seek regulatory forbearance on capital and provisioning requirements. Despite these institutions being negatively impacted by the suspension of bankruptcy claims, the finance minister claims that “the existence of companies must take precedence over the resolution of stressed assets.”

Lockdown restrictions are being eased in parts of India with essential businesses being permitted to return to work, such as the agricultural and infrastructure industries as well as their associated supply chain services. Appropriate social distancing measures are being enforced within these sectors to ensure that the safety of individuals is prioritised. A stimulus package of 21 trillion rupees (AUD$430 billion) has been announced to help businesses get back on track after the nationwide lockdown. Fortunately, a further 400 billion rupees are being spent on a rural jobs guarantee program and state governments are eligible to borrow an additional 4.28 trillion rupees to help them meet funding needs. Meanwhile, as of 18 May 2020, there are more than 95,000 recorded cases in India with 3,025 deaths.

India has the world’s second-largest population, being more than 1.38 billion, therefore maintaining a humanitarian approach is vital for national security purposes. These legislative changes will prolong the tidal wave of bankruptcy claims and potentially reduce the economic pain for micro, small and medium enterprises while India’s economy reopens. Reassessing the spread of COVID-19 in India will take place on 18 May 2020 as part of the third phase of the national lockdown, with the aim of reopening the economy even further based on the findings.

By Caroline Wong 

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