On 24-3-2020, the threshold for initiation of Corporate Insolvency Resolution Process (‘CIRP’) under the Insolvency and Bankruptcy Code (‘IBC’) against the erring companies was increased from Rupees 1 lakh to Rupees 1 crore, vide MCA Notification No. S.O.1205(E). The decision was made in view of the lockdown announced by the Prime Minister to prevent the widespread of COVID-19. The announcement made in a press conference was convened by the Union Finance Minister subsequent to which the notification was published in the Official Gazette.
The MCA Notification No. S.O. 1205(E) dated 24.03.2020, reads as follows:
“S.O. 1205(E).— 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.”
The increase in the trigger amount will supposedly benefit small companies and particularly the MSMEs (medium, small and micro enterprises) which are struggling during this lockdown period. This action will save a lot of businesses which are already facing a threat of default and thus avoid large scale insolvencies. In addition to this announcement, the Finance Ministry has also issued a statement that it might consider suspending Sections 7, 9 and 10 of IBC, if the lockdown continues beyond 30-4-2020.
The notification was published in exercise of the powers conferred to the Central Government under the proviso to Section 4 of IBC. Section 4 of the IBC provides as under:
“4. Application of this Part.: 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.”
The proviso to Section 4 of the IBC empowers the Central Government to issue notification to specify the minimum amount of default of higher value which shall not be more than Rupees one crore. This is the first time the Central Government has exercised this power. These measures adopted by the Government, in the guise of the financial stress caused due to COVIV-19 mayhem, may not be a temporary amendment. If this increase of minimum amount of default, which is a prerequisite for both operational creditors and financial creditors for initiation of insolvency against a corporate debtor, is a permanent increase, then this measure is supposed to benefit the MSMEs even after the lockdown period, as there are various instances where a small private limited company’s default is more than its nominal share capital and paid-up share capital itself. In such cases insolvency also does not lead to a meaningful end.
However, this amendment is at the cost and detriment of the operational and financial creditors, who most often than not, are also MSMEs, and the amount of loan or default would also be less in comparison to the debt in case of an MNC or a bank. Therefore, raising the minimum amount of default to Rupees one crore will hamper the rights of these Operational and Financial creditors, especially during the times when the country is going through a financial crisis. There are a lot of companies which were in a distress even before the lockdown. These measures are against the purpose and objective of the Insolvency and Bankruptcy Code itself, the Preamble of the IBC reads as follows:
“An Act to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders…”
The object of the IBC cannot be read unilaterally to protect the defaulters and to restrict the growth and survival odds of small entrepreneurs. The Supreme Court in Swiss Ribbons (P) Ltd. v. Union of India , while discussing the purpose and objective of the IBC, has held that the provisions and the Preamble of the IBC ensures maximum recovery for all creditors, while preserving the corporate debtor as a going concern during the insolvency process. The rights of a creditor will supersede any interest of a defaulter.
Relying upon the Bankruptcy Law Reforms Committee Report of November, 2015 and in particular Para 3 of ‘Box 5.2 – Trigger for IRP’ which discuss the threshold and triggers for initiation of insolvency against a corporate debtor by a creditor. This Committee Report, which subsequently led to the enactment of the IBC, is an important guide in understanding the provisions and the objective of the IBC. It is pertinent to note that the threshold limit to trigger the Code was purposely kept low — at only Rupees one lakh , making it clear that small individuals/companies may also be able to trigger IBC as operational and financial creditors, along with banks and big financial institutions to whom crores of money may be due. Thus, preserving the rights of a small creditor, and eventually creating a system of checks and balances for the big companies while taking loans or availing services from these small entrepreneurs.
Further, the Central Government failed to establish whether these amendments are prospective or retrospective in nature. Currently, the applications before the Adjudicating Authority (NCLT) can be divided into 3 heads:
- where applications are yet to be filed by the operational and financial creditors for initiation of corporate insolvency proceedings of corporate debtors (specifically in the case of an operational debt, where a demand notice under Section 8 of the IBC has already been sent),
- where applications already filed, but not admitted by the Adjudicating Authority against the corporate debtor,
- where applications admitted for initiation of corporate insolvency proceedings against the corporate debtor.
A bare perusal of the Notification dated 24-03-2020 and the statements issued by the Ministry, does not clarify if the increase in the threshold, will affect all the three heads (retrospective applicability) as mentioned above, or only the first (prospective applicability).
The notification does not explicitly or implicitly state whether the applicability of the increase in threshold amount will be prospective or retrospective. The Supreme Court of India in S.L. Srinivasa Jute Twine Mills v. Union of India , has held that: (SCC para 18)
“18. It is a cardinal principle of construction that every statute is prima facie prospective unless it is expressly or by necessary implication made to have retrospective operation…But the rule in general is applicable where the object of the statute is to affect vested rights or to impose new burdens or to impair existing obligations. Unless there are words in the statute sufficient to show the intention of the Legislature to affect existing rights, it is deemed to be prospective only.…”
Therefore, even though the notification will be deemed to be prospective, there still remains scope for interpretation of the notification, and thus a subsequent scope for judicial interference. Further, the notification was a subordinate or delegated legislation, and not a legislative amendment of the IBC itself, thereby increasing scope for judicial interference especially in regard to its applicability.
More changes to the IBC i.e. suspension of Sections 7, 9 and 10 for six months, as indicated by the Finance Minister, may be in the pipeline, if the lockdown continues beyond April 2020. If Section 7 is suspended, it will tremendously affect the home-buyers and the erring real estate developers will get further time to alienate their assets. Further, suspension of Section 10 might not be the most pragmatic move either. If a company itself wants to file for insolvency, and if the provisions of Section 10 are suspended, it will inevitably lead to consequences which will harm the interests of the various stakeholders of that incorrigible entity.
During the current financial stress, these amendments will not resolve any immediate purpose towards solving the financial condition of the MSMEs and of the entire country. Moreover, due to the lockdown, the Courts and Tribunals have also restricted its functioning, and the Supreme Court on 23-3-2020 passed a general order extending the limitation, whether condonable or not, for filing in all Courts and Tribunals, until further orders.
Therefore, in the midst of a public health and economic crisis, a lopsided approach to amend the IBC is not the most ideal and pragmatic way forward, which in turn will severely affect various stakeholders throughout the country. The system of checks and balances has to be utilised in a balanced manner with the primary objective of accelerating economic growth rather than suspending its growth by doubting the constitutional efficacy of the Insolvency and Bankruptcy Code at the threshold itself.
*Udian Sharma is a practicing advocate in Supreme Court of India, Delhi High Court and various Tribunals including NCLT and NCLAT, having an expertise in Dispute Resolution practice, with a focus on insolvency laws and restructuring. The author can be reached at email@example.com.
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