In the first half of 2020, the Indian economy witnessed an unprecedented slowdown owing to the global impact of the COVID-19 pandemic and enforcement of one of the world’s strictest lockdowns. With a deep contraction in its economic activity, India moved into a technical recession for the first time in its history and the Government of India (GoI) undertook a series of measures to alleviate the strain on stakeholders and provide temporary flexibility and relief.
Some of the notable developments included amendments to the Insolvency and Bankruptcy Code, 2016 (IBC) to protect corporate entities defaulting on payment obligations during the COVID-19 pandemic from being dragged into insolvency process. On its part, the Reserve Bank of India (RBI) issued circulars permitting banks, NBFCs and other lending institutions to grant a loan moratorium for payments on term loans. The period of moratorium was initially three months and, thereafter, extended by a period of another three months, i.e., from 1 March 2020 to 31 August 2020.
The year also marked the resolution of distress under the IBC for the first-ever Non-banking Finance Company (NBFC), Dewan Housing Finance Limited (DHFL). In 2019, DHFL was referred by the RBI (using its special powers under the IBC), to the National Company Law Tribunal (NCLT) for initiation of the corporate insolvency resolution process. The year 2020 saw this process unfold with a host of bidders, with the final round of the bidding being submitted in December 2020 and the committee of creditors of DHFL evaluating the bids received. The process was finally concluded in January 2021, with the committee of creditors finally approving the resolution plan submitted by Piramal Capital and Housing Finance Limited.
Supreme Court directs waiver of interest-on-interest during the loan moratorium period declared by the RBI on term loans
With the onset of the pandemic, the RBI issued circulars permitting banks, NBFCs and other lending institutions to grant a moratorium for payments from term loan borrowers due to COVID-19 (Loan Moratorium Circulars). The period of moratorium was initially three months and, thereafter, extended by a period of another three months, i.e., from 1 March 2020 to 31 August 2020. However, during the moratorium period, interest-on-interest would accrue.Aggrieved by the Loan Moratorium Circulars, several stakeholders filed writ petitions seeking directions from the Supreme Court on whether the loan moratorium period could be extended further and if a complete waiver of interest and interest-on-interest during the loan moratorium period could be granted. The Supreme Court also considered whether the government can be directed to grant additional sector-wise relief packages. Interestingly, the government had announced an ex-gratia scheme waiving interest-on-interest on loan moratorium for borrowers who have borrowed up to INR two crores / up to INR twenty million.
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