On 24th march 2020 the Central Government thorough the gazette Notification[1] raised the threshold limit for default as prescribed under Section 4 of the Insolvency and Bankruptcy Code, 2016 (Code) to from Rupees One Lakh to Rupees One Crore for initiation of insolvency proceeding under the Code. This major step of the government was taken in the view of effect of the outbreak of the COVID-19 pandemic on the Micro, Small and Medium Enterprises (MSME) and the economy of the country which is going thought the tough times.
The increase in the threshold of 100 times the statutory amount was published with the immediate effect with the objective of preventing the MSME’s against triggering of the Corporate Insolvency Resolution (CIRP) in case of default. Thus, step taken by the government may deemed to be justified in the view of the present situation of the COVID-19 outbreak and the lockdown of the entire country where all the contractual obligations will be suspended till further orders. In the notification Ministry of Finance (Department of Expenditure Procurement Policy Division) had issued an office memorandum dated 19.02.2020 stating that the outbreak of the corona virus is a natural calamity and Force Majeure Clause[2] can be invoked if the contractual obligations are not fulfilled. This will help the debtors which have not completed their contractual obligations or was not able to process the business duties due to the international outbreak of the COVID-19 thus putting them under debt. Therefore, the raising of the threshold value will definitely give the advantage to the MSME’s as the small default value will not trigger the insolvency proceedings against them where the default was the result of the global outbreak of the COVID-19.
UNDERLYING OBJECTIVE OF KEEPING THRESHOLD ;
Section 4 of O & B Code reads as below;
“Section 4: This part shall apply to matters relating to the insolvency and liquidation pf corporate debtors where minimum amount of 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 Legislator has kept the threshold limit to one lakh rupees and provided that Central Government may increase the threshold upto rupees one crore. It is pertinent to note that vide the notification dated 24.03.2020 the threshold limit has been increased threshold limit from the minimum level i.e. One Lakh to the maximum level i.e. One Crore.
Keeping the default amount at rupees one lakh was one of the major factors of filing of numerous applications under Section 9 of the I & B Code and increasing of the workload of the NCLs. Moreover, most of the Section 9 applications are withdrawn after mutual settlement between the parties. Which reflect the objective of filing of the section 9 applications as a recovery tool rather to seek resolution of the stressed assets. Thus, burdening of the NCLTs with applications seeking recovery rather resolution is a major factor leading to increase of the threshold limit from the minimum level to directly the maximum level.
DRAWBACKS OF KEEPING LOWER THREHOLD LIMIT OF DEFAULT;
The SBI Ecowrap report[3] dated 25.11.2019 recommended the increase in the threshold limit of initiation of the insolvency proceedings. It is noted in the report that the low threshold limit of Rs. 1 lakh, the operational creditors seems to be more aggressive in dragging the corporate debtor to the Adjudicating Authority under the code thus overburdening and delaying the resolution of the bigger cases. It is highlighted in the Report that “It seems even small creditors are preferring IBC rather than SARFAESI, DRT etc. and using the platform more as a recovery tool. This must be avoided. For such Government should first significantly increase the minimum threshold limit of Rs 1 lakh and second, increase the number of NCLT benches in the country.” As per the IBBI newsletter (October-December), 2019 out of total number of 3312 admitted cases, 49.21% of the cases were initiated by the Operational Creditor as compared to 43.44% initiated by the Financial Creditors. The figure evidently shows the misuse of the Code where the ulterior motive of the creditors are the recovery of the debt rather than resolution of the corporate debtor.
One of the major hurdles faced by the Interim Resolution Professional appointed in a lower debt default, is recovery of CIRP expenses and fees of the IRP. In Sh. Amit Kumar Malik Vs. M/s Kindle Developers Pvt. Ltd[4] the operational creditor did not release payment of expenses and professional fees of the Resolution Professional. The IRP is duty bound to perform his statutory functions but he needs funds to take necessary steps in order to successfully take all steps. However, in many cases the IRPs / RPs had to use initial funds from their own pockets because of reluctance to release the CIRP expenses by the Applicants as per Regulation 33 of the CIRP Regulations, 2016. The NCLAT in State Bank of India Vs. SKC Retails Ltd. through IRP & Anr.[5] was faced with a situation wherein the CoC did not ratify the expenses and fees of the IRP. The majority stakeholder of CoC, who did not file the Application vide which CIRP was triggered, refused to reimburse the fees and expenses stating that the CIRP of the Corporate Debtor is a futile exercise as there are no assets of the Corporate Debtor and operations of the Corporate Debtor had already been closed. Hence, the Applicant should have been cautious before filing the Application seeking triggering of the CIRP of such an entity. The NCLAT held that as per Regulation 33 of CIRP Regulation, the applicant is bound to pay the cost and fees of the IRP. During the short span of period, by taking advantage of lower default amount, several frivolous applications have been filed before the NCLT to initiate CIRP with an ulterior motive of recovery of debt rather to seek resolution of the Corporate Debtor.
The Hon’ble Supreme Court has time and again held that the objective of the code is rescuing a company in distress. The second objective is maximising value of stressed assets of the company and the third objective is promoting entrepreneurship, availability of credit and balancing the interests of all stakeholders.[6] The code provides for the resolution rather than recovery but with the effective and powerful mechanism it has been continuously used as a recovery mechanism against the resolution thus defeating the objective and purpose of the Code. The increase in threshold limit to Rupees One Crore would certainly limit the filing of frivolous application against a well-functioning company and to use it as a tool for recovery of the handful amount of debt. .
EFFECT OF INCREASE OF THRESHOLD LIMIT UPON PENDING CASES;
The threshold limit is enforceable with the immediate effect and it will not have any effect on the admitted application for triggering of the CIRP even though the default amount was less than Rs. 1 Crore. The application in which the order for initiation of the CIRP has been passed by the adjudicating authority will continue to follow the resolution process. The applications, which are pending for consideration and wherein the default amount is less than Rupees One Crore are not maintainable.
The increase of pecuniary limit of default is a welcome move and it would certainly pave way towards making the I & B Code a tool for resolution of stressed assets. It would reduce filing of frivolous applications filed with sole intent of threatening the Corporate Debtor and bypassing the dispute resolution mechanism.
[1] https://taxguru.in/corporate-law/threshold-limit-initiation-insolvency-proceedings-raised-rs-1-crore.html
[2] https://taxguru.in/corporate-law/disruption-supply-chain-due-spread-corona-virus-china-natural-calamitiy.html
[3] https://sbi.co.in/documents/13958/14472/25112019_Ecowrap_20191125.pdf
[4] CA 712/2019 New Delhi bench
[5] CA 08 & 43 of 2018
[6] Committee of Creditors of Essar Steel India Limited Through Authorised Signatory Vs. Satish Kumar Gupta & Ors. [Civil Appeal No. 8766-67/2019 Diary No. 24417/2019 with other Civil Appeals and WP(C)s]
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| Authors : Rajendra Beniwal,
Founding Partner, Karma Law Associates |
Saksham Solanki,
Para – Legal, Karma Law Associates |
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