IBC Threshold increased: Implications
Vexatious initiation of insolvency process as arm-twisting tool, merely for recovery of dues has been a cause of concern since long due to low threshold of default of Rs.1 Lakh prescribed under the Insolvency and Bankruptcy Code, 2016 (IBC). While there was long outstanding demand for raising the threshold limit for initiating insolvency process, the notification has come in the wake of recent outbreak of the Coronavirus disease (COVID –19). The minimum default requirement under IBC now stands increased hundred times; from Rs.1 Lakh to Rs. 1 Crore.
Ministry of Corporate Affairs vide notification no. S.O. 1205(E) dated 24 March 2020 1 has amended Section 4 of the Insolvency and Bankruptcy Code, 2016 (IBC) vide which it has raised the threshold of default for filing of an insolvency petition under the Insolvency and Bankruptcy Code, 2016 (IBC) from Rs.1 Lakh to Rs. 1 Crore.
It is pertinent to mention here that Rs.1 Crore is the maximum threshold which the Central Government can prescribe under section 4 of IBC. The Central Government has exercised this power vide its notification dated 24 March, 2020 and therefore, petitions under the IBC cannot be filed in respect of payment defaults below Rs.1 Crore.
The said notification is ad-verbatim produced below:
“In exercise of the powers conferred by the proviso to section 4 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), the Central Government hereby specifies one crore rupees as the minimum amount of default for the purposes of the said section.”
This is a welcome move and good step for protection of the interest of medium, small and micro enterprises (MSME) during this COVID 19 outbreak and prevent such small and medium enterprises from trigging insolvency proceedings when there is already a financial distress in the industries
However, this amendment might have multiple ramifications. I have made a humble attempt to analyse its implications from a broader perspective.
Triggering Insolvency
Section 4 of IBC earlier prescribed minimum default of Rs.1 Lakh to file an application under IBC. However, the proviso to Section 4 conferred upon the Government the right to tweak the said amount at its own discretion and to specify the minimum amount of default of higher value which shall not be more than one crore rupees by issuing a notification.
While this threshold seemed to be creditor-friendly during the initial stages of IBC but as the time progressed, it started signaling otherwise. Taking advantage of low limit, more and more creditors, mostly operational, dragged companies into insolvency only with a motive of recovery of claims. The amount of Rs. 1 Lakh, being a small amount from a commercial viewpoint, gave the creditors an upper-hand, and in some cases gave the creditors the liberty to misuse the process of the Code.
Hence, the Central Government, exercising the powers conferred upon it and at the same time keeping the maximum limit in mind, raised the minimum default threshold to its maximum capacity, i.e., Rs.1 Crore.
Positive side of the increased threshold:
- It will help in the survival of many MSMEs facing financial distress due to Covid-19 outbreak.
- It will be a boon for companies facing pressure tactics made by operational creditors for recovery of claims.
- It will increase the efficiency in the working of NCLT as number of cases being filed in NCLT will be reduced.
Flip side of the increased threshold:
- Operational creditors who are not able to meet the increased threshold will now have to resort to previously setup debt recovery mechanisms available under Civil Procedure Code, MSME Act etc which may be quite time consuming.
- Employees/workmen may not able to file insolvency petition against their employers as seldom the salary outstanding crosses Rs.1 Crore and they will have to seek other recovery options.
- As per Section 7 of IBC, a financial creditor either by itself or jointly with other financial creditor can file an insolvency petition in order to meet the new enhanced threshold limit. But, no such remedy is available to the operational creditors under Section 9 of IBC and each operational creditor has to meet individually the increased threshold.
- With no intention to hurt the sentiments of any profession, in my personal opinion, many lawyers who had set up their practice primarily around filing insolvency petitions for recovery of claims as a arm-twisting tool, will have to rework their strategy.
Moot point:
It is imperative to note that, the question most commonly arises, whether the amendment has a retrospective or a prospective effect i.e. is it applicable to all the already pending cases or onto the cases for which demand notice under Section 8 of the code has been issued.
Conclusion:
My liberal interpretation is that this notification does not specify that the increased threshold is for defaults occurring during the ongoing lockdown period and therefore, from the date of notification i.e 24 March, 2020, IBC proceedings cannot be initiated for cases where the default amount is less than Rs.1 Crore irrespective of the date of default (the limitation period for IBC applications is 3 years from the date of default).
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