Implications of Increased threshold under the Insolvency and Bankruptcy Code 

Introduction

On 24-03-2020, the Government of India (‘the Government’) released a Notification[1] in exercise of its powers under Section 4 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) wherein the minimum amount of default for the initiation of Corporate Insolvency Resolution Process (‘CIRP’) is increased multifold from the previously existing threshold of Rupees one lakh to Rupees one crore .The notification has effectually amended Section 4 of the IBC which earlier stood as follows:

4. (1) This Part shall apply to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of the default is one lakh rupees:

Provided that the Central Government may, by notification, specify the minimum amount of default of higher value which shall not be more than one crore rupees.”

Henceforth, the minimum amount of default under the IBC will now be one crore rupees by the implication of the above mentioned notification.

Notification and its intricacies

It is noteworthy, that the Hon’ble Finance Minister, Mrs Nirmala Sitharaman indicated that the notification forms part of the several important relief measures taken by the Government because of COVID-19 outbreak[2]. The Government stated that the threshold is being increased to protect the Micro Small and Medium Enterprises (‘MSME’) that are facing the threat of insolvency in the wake of this outbreak. However, the subsequently released Gazette Notification reflects no such objective.

More so, there have been reports[3], in the media that the Government is mulling plans to ramp up the threshold for initiating CIRP under IBC. The 3rd Annual Insolvency Law Committee Report[4] which was released on 20-02-2020 also recommends increasing the threshold from the existing Rupees one lakh to Rupees fifty lakhs. The primary reason which was put forth by the Committee to increase the threshold was to reduce the pressure upon the judicial infrastructure i.e. the National Company Law Tribunal (‘NCLT’).

Ramifications on the stakeholders

The nature of the notification calls for a threefold analysis that would categorically concern all the stakeholders, namely, NCLT, companies, and the creditors.

Firstly, the move may be welcomed if we adopt the perspective that the change in the threshold would substantially reduce the number of cases before the NCLT and will effectively increase the efficiency of the Tribunal in speedy disposal of the matters as time is of the essence in the IBC proceedings[5]. Also, it is pertinent to mention that initially NCLT was established to deal with company law matters. However, with the introduction of the IBC, the forum now seems to be dominated by proceedings related to it and therefore it is functioning far beyond its capacity[6].

Be that as it may, altering the threshold never appeared to be the only viable alternative for addressing the issue of burden upon NCLTs. The same could be improved by providing better infrastructures, expediting and increasing the appointment of members, and increasing the number of Benches of the NCLTs rather than increasing the threshold under IBC.

Secondly, while the change in the IBC is hailed by the Government as a supportive measure for the MSME, the same may attack it  back with greater intensity. The operational creditors of corporate debtors in most of the cases are companies themselves. Ergo, they become susceptible to becoming prospective corporate debtors if their existing dues are not recovered due to the increased threshold. The amendment, therefore, will run counter to the objectives of the IBC.

Thirdly, the entities that are affected most are the operational creditors. The operational debt is more often than not, low in figures and unsecured at the same time[7]. Therefore, the operational creditors would largely be barred to proceed under the IBC and will have to resort to the previously setup mechanisms of debt recovery which were time taking and ineffective. Such mechanisms may further be stalled by way of moratorium if a CIRP is initiated against the corporate debtor by virtue of an application filed by any other creditor. The Supreme Court in Committee of Creditors, Essar Steel India Ltd. v. Satish Kumar Gupta[8], has emphasised the role of operational creditors. In such circumstances, eliminating them from the scope and protection of the IBC without any requisite consultation and reasoning in that regard is not appreciable.

Also, the notification would have a detrimental effect on the cases of employees and workmen, who are allowed to make an application to the NCLTs in  cases of default[9]. But now the threshold stands modified at Rupees one crore, a large segment of employees would have no option for recovery other than going through the tedious and elongated court processes.

Possible alternative solution

Rather than altering the threshold for every class of creditors, the Government could have provided different thresholds for financial and operational creditors respectively. The said practice also has the approval of the judiciary[10], as the Supreme Court unequivocally held that there is an ”intelligible differentia” in the classification of financial and operational creditors.

Also, as the purpose of the amendment is to protect the companies from the economic slowdown due to the outbreak of COVID-19, the Government could have increased the threshold for a company having a relatively low annual turnover. It could have also prescribed similar qualifications as provided under the Micro Small and Medium Enterprises Development Act, 2006 for the classification of enterprises[11].

Alternatively, if the objective of the Government was to protect the MSME, it could have simply notified a different threshold for MSME as it has already done in the case of the particular type of creditors like the creditors of real estate companies[12].

Conclusion

The notification, as discussed above, is a significant change under the IBC regime. More so, there are ongoing proceedings wherein the amount of default is less than Rupees one crore  and therefore, the notification requires a clarification concerning pending applications for initiation of a CIRP. Moreover, the amendment can unsettle the scheme and object of the Code which was to promote entrepreneurship and availability of credit in the commercial fora. There is also no clarity as to the duration of operation of the notification. While the Government has stated that it’s a temporary measure[13], the same was not reflected in the Amendment Notification and thus it is yet to be seen if it gets rolled back in future or gains permanence.


*Akshay Sharma and Kunwar Surya Pratap, 5th and 3rd year law students respectively at National University of Study & Research in Law, Ranchi.

[1]. Notification No. REGD. NO. D. L – 33004/99, Ministry of Corporate Affairs, The Gazette of India, 24-3-2020. Source: <https://www.ibbi.gov.in/uploads/legalframwork/48bf32150f5d6b30477b74f652964edc.pdf>

[2]  Govt raises default threshold to Rs 1 crore for invoking insolvency proceedings against firms, Economic Times, 24-3-2020. Source:https://economictimes.indiatimes.com/news/economy/policy/govt-raises-default-threshold-to-rs-1-cr-for-invoking-insolvency-proceedings-against-firms/articleshow/74796076.cms?from=mdr

[3] Govt. ramps up capacity of NCLT Benches to boost decision-making, Business Standard, 16-3-2020.

Source:<https://www.business-standard.com/article/economy-policy/govt-ramps-up-capacity-of-the-nclt-benches-to-boost-decision-making-120031601566_1.html>

[4]  3rd  Report of The Insolvency Law Committee, Ministry of Corporate Affairs, Government of India, 20-2-2020. Source: http://www.mca.gov.in/Ministry/pdf/ICLReport_05032020.pdf>

[5] Surendra Trading Co. v. Juggilal Kamlapat Jute Mills Co. Ltd., (2017) 16 SCC 143.

[6] Gavel to the block: An overburdened NCLT is a drag on the new Bankruptcy Code, Economic Times, 12-2-2019. Source: <https://prime.economictimes.indiatimes.com/news/67951567/corporate-governance/gavel-to-the-block-an-overburdened-nclt-is-a-drag-on-the-new-bankruptcy-code>

[7] Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 SCC 17, para 50.

[8] 2019 SCC Online SC 1478.

[9] Sections 5(21) & 9, Insolvency and Bankruptcy Code, 2016.

[10] Swiss Ribbons Pvt. Ltd. v. Union of India, 2019 SCC OnLine SC 73.

[11] S. 7, The Micro Small and Medium Enterprises Development Act, 2006.

[12] The Insolvency and Bankruptcy Code (Amendment) Ordinance, Ministry of Law and Justice, The Gazette of India, 28-12-2019. Source:<https://www.ibbi.gov.in/uploads/legalframwork/d6b171ec9b9ea5c54f7423bc36f92977.pdf>

[13] IBC: Increase in threshold to trigger insolvency may not be a temporary measure, Experts say, Payaswini Upadhyay, BloombergQuint, 24-3-2020. Source: <https://www.bloombergquint.com/law-and-policy/ibc-increase-in-threshold-to-trigger-insolvency-may-not-be-a-temporary-measure-experts-say>

Join the discussion

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.