In an unprecedented move the Central Government through official Gazette notification dated March 24, 2020 signalled the move of raising the threshold limit to file any insolvency proceedings under IBC from Rs. 1 Lakh (1,00,000) to Rs. 1 Crore (1,00,00,000). This move comes in the backdrop of Covid-19 pandemic and is seemingly geared towards protecting the Micro Small and Medium Enterprises (“MSME”) and small businesses which operate at the lower spectrum of economic chain and which might face the threat of higher defaults owing to the lockdown and temporary slowing down of economy.
The aforementioned move which act as measures which have the potential to boost the productivity of small businesses and enterprises. With the Government announcing the lockdown and the economy virtually going down there are certainly going to be disturbances in the business cycle for time bound transactions. We are surely going to see several instances of parties being unable to perform their contractual obligations due to the nationwide shutting down of economic activities. The Government specifies the changes in exercise of the powers conferred by the proviso to section 4 of the Insolvency and Bankruptcy Code, 2016 (“IBCode, 2016”)-
“the Central Government hereby specifies one crore rupees as the minimum amount of default for the purposes of the said section.”
The change is announced for the welfare of the small businesses that are facing threats of being exposed to insolvency due to non-functioning of their businesses due to the lockdown worldwide. Also from a practical stand point the limit of Rs 1 lakh was considered a low threshold leading to frivolous initiation of CIRP proceedings.
Recovery is incidental under the IBC. Its primary objective is rescuing companies in distress. Therefore in the said scenario, the raising of the threshold will positively have a certain curative impact inasmuch as it will ensure that the delay and default in the payment of minor amounts will not push a company to insolvency due to the defaults that will arise because of the pandemic lockdown.
The significant move will prove to be a
safe haven for the MSMEs and small companies who have loans of small quantum as
compared to big Multi-National Corporations.
Meanwhile the debt owed by the debtor to the ‘Financial Creditor’ is
monetary in nature in the form of loans, whereas the operational creditors who
themselves are small companies lend the operational debt to the debtor in small
amount which will prove unfavourable to them. It is detrimental to the
operational creditor in some way because now the operational creditors will not
be able to bring in the actionable claim against the default that would have
previously been qualified under the previous threshold limit i.e. 1 Lakh. So,
raising the amount of default in such case would by and large restrict the
right of operational creditors to solicit the Code. In this context it is assumed that the debt
owed to financial creditors especially Banks and Financial Institutions is
generally above Rs. 1 Crore hence they may be least impacted. It can also be assumed that default cases
may rise due to overall impact of Corona Virus on the economy and sectoral
default are expected for sectors most impacted.
Moot Questions for Consideration
- What will be happen to all existing cases filed before Adjudicating Authorities i.e. NCLT and which are under consideration vis-a-vis the change in default limits to Rs 1 Crore on 24.03.2020 as the Government notification fall short of clarifying the same.
- Will reserved orders as on 24.03.2020 be retested for the enhanced limit of default ? Hopefully it is expected that Adjudicating Authority will take a pragmatic view and may allow all pending cases which are already filed as otherwise it will lead to substantial and irreparable loss to the applicants, taking away their vested rights.
- What will happen to cases where demand notices has been issued but somehow the application remained to be filed with NCLT. These cases may face the wrath of the amended limit and suitable clarifications should be issued in this regard.
- Another scenario to evaluate is that the default limit of Rs 1 Crore will only be considered basis the prinicipal sum of default or can nominal interest charges (not specified in contract) for delayed period could also be included for the purpose of computation of threshold limit
- Whether default sum of Rs 1 Crore can be computed jointly for:
- Financial Creditors; or
- Operational Creditors (and its sub-category being employees/ workman) – Both Hon’ble Supreme Court in Re: JK Jute Mill Mazdoor Morcha v. Juggilal Kamlapat Jute Mills Company Ltd. and NCLAT in Re: Mr. Suresh Narayan Singh vs. Tayo Rolls Limited, have allowed workers/ employees to file joint applications duly represented by their authorised representatives.
The answers to these can be found in judisprudence evolved over a period of time under the IBCode, 2016 and related laws.
It is pertinent to note that the recent amendment to IBCode, 2016 has already placed individual Home Buyers i.e. class of Financial Creditors outside the scope of IBCode, 2016 to a large extent by increasing the threshold number of real estate allottees to file the application for initiation of CIRP. For the Financial creditors meeting specified conditions as per section 21(6A) (a) and (b) of IBCode, 2016 or who are Allottees under a real estate project under section 5(8)(f), an application for initiating CIRP against the corporate debtor shall be filed jointly by satisfying any of the below conditions:
- not less than 100 number such financial creditors or such allottees under the same real estate project; or
- notless than 10% of the total number of such financial creditors or such allottees under the same real estate project.
The said amendment to IBCode, 2016 is already under challenge in writ petitions before the Hon’ble Supreme Court.
Forthwith the move of raising the threshold default limit to Rs 1 Crore to invoke the Code, it was also inevitably mentioned that in the light of the present situation due to Covid-19, section 7, 9 and 10 of IBCode, 2016 may be suspended for 6 months if the situation further aggravates. This will mean that neither the financial creditors, operational creditors nor the borrowers themselves can file application for initiation of corporate insolvency under IBCode, 2016 and the Government expect that it will positively stabilise the business ecosystem.
The IBCode, 2016 compared to other remedies available in law has proved to be rapid remedy to the Creditors and overall a cost effective one. Also the IBCode, 2016 has always been a divine sanction for the MSMEs and small companies who do not have backing to wage long drawn battle.
In the said circumstances if the raise in the threshold limit for invoking the CIRP is followed, then the directive will be that only those companies who have defaulted with amount more than 1 crore lay claim to insolvency.
What one of MSME Association Said
While this threshold seems to show explicitly that it is protecting the MSMEs and its interest but it signalled otherwise as there are issues being represented by The Indian Industries Association, (IIA) Uttar Pradesh representing hundreds of micro, small and medium enterprises (MSMEs). The IIA has written a letter raising concern over the amendment to IBCode, 2016 saying it is against the interest of the MSME. It claimed that amending the minimum monetary limit of default from Rs. 1lakh to 1 Crore to protect the MSMEs is abhorring. Voicing the facts, they stated that Corporate and Government entities get protected to the extent the limit has been raised while the MSMEs have lost a strong leverage that could be used to make the powerful one settle cases of amount due to MSMEs. Another line of thought shared is that the Amendment has been basically done to please the large industries so that MSME cannot file cases in NCLT.
However the question is the revision of such threshold limit would have been a boon to one or proves as crisis for the other. The latest data shows that the operational creditors are on the rise comparing to the numbers of applications being filed, who naturally have a lower quantum of claims against the corporate debtor as compared to the financial creditor. So, with the increase in threshold limit, the numbers of cases with low quantum are expected to be curbed. In that event the corporate debtor may remain in peace for some time. In concert some operational creditors may have to swallow some pills of deep agony. But now with the AII letter of concern, the question arises as to whether the revision in threshold would have anyway helpful to the MSMEs?
With much praise being showered for such move by the Government to ensure protection to small businesses, it can also be pointed out that more fair and logical mechanism has to be evolved and limit should be reconsidered after the effect of Corona Virus diminishes otherwise the small scale creditors will be left with no practical legal remedy.
The author – Pankaj Jain, is partner with Veda Legal, Advocates and Solicitors based at New Delhi with inputs from associate Tia. Views expressed are personal.