Indian Government during the pandemic situation of COVID 19 came up with various resolution, reforms, amendments, notifications, orders and press release keeping a note of interest of various industries, organizations and businesses. Therefore considering the coronavirus outbreak condition Central Government on 24th March, 2020 via Ministry of Corporate Affair notification S.O. 1205 (E) in exercising its power conferred under proviso to Section 4 of Insolvency Bankruptcy Code, 2016 (31 of 2016) (hereinafter referred as “Code” or “IBC”)” enhanced the “ minimum default threshold from INR One Lakh to INR One Crore (hereinafter referred as “notification”). That the said notification came into motion post Finance Minister announcement made by the Finance Minister on 24th March, 2020, wherein the Ministry highlighted the amendment as a measures 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.
The Finance Minister during the announcement of relief measures also referred to suspend the applicability of Section 7, 9 and 10 of the code for the period of 6 months to block the initiation of insolvency proceeding where default must have caused due to incitation of force majeure.
From the said announcement of the Finance Minister, the motive and objective behind the IBC notification, was comprehended as two folded, first to provide the relief to the industry which would face deep financial difficulties in meeting their obligation during the crisis resulting from COVID-19 outbreak and second to safeguard the interest of MSME, sector.
Interestingly, the said amendment by way of notification was primarily recommended by the Insolvency Law Committee (“Committee”), in third report dated 20th February, 2020 (“Report”). That the Committee’s recommendation for said amendment was for smoother functioning of the Code. The projection for increasing the threshold limit was specifically notified in the report to eliminate the adversely affected if the system remains burdened ensued from value destructive delays. The report reflected the Committee’s need for such notification, was to prevent the mechanism under the Code from sub-optimal outcomes, otherwise it is likely to lose credibility amongst investors. Given this, the Committee agreed that there is a need to review the minimum default threshold for admitting a case under Section 4 of the Code. In the light of the same Committee recommended that it would be appropriate to notify a higher default threshold of INR 50 Lacs.
The Committee also noted the significant success of the Code has been that it has made debt enforcement more credible, especially for the major occupants category of operational creditors which is MSME in our Indian economy that are empowered to initiate CIRP under the Code. In the shadow of this mechanism, operational creditors have the bargaining power to reach out-of-court settlements with large corporate debtors. Given this, the Committee agreed that operational creditors should be allowed to have recourse to CIRP on a minimum default of INR 5 lakh only.
Though the notification for increasing threshold limit was announced during the present outbreak situation, but from Committee Report it is evident that the increase was preferred for streamlining the Code and relive the overburdened Adjudicating Authority. Therefore, to a certain extend it is also apprehended that amendment is to be retained for a long time.
These relief and measures are introduced as proclaimed benefits, however the same needs to be evaluated in terms of real time benefit if they are actually being attained from the same or not.
The amendment of Section 4 for increasing the threshold limit has its direct implication on the Section 7, 9 and 10 of the Code which specifically discuss about filing of the application before the Adjudicating Authority. This in clear terms means that the threshold limit to contemplate default amount has now been increased to INR 1 Crore without any rider or exception. From now all the applications of respective financial creditor or operational creditor or even by Corporate Debtor can only be entertained if filed with a cumulative default amount of more than or equal to 1 Crore.
Everything has a twofold effect as a nature of law and so as this amendment. On one side, the increase of the threshold as stated above, was to relieve the overburdened Adjudicating Authority and to protect the MSME’s and industry from the default arose due to present epidemic. However the other side remained unaddressed where it has adverse implication of debt enforcement mechanism provided by the Code, to the MSME or to operational creditor.
It is imperative to note that, the question most commonly arises, whether the amended 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. The Committee already enlightened the same in its report and stated that a “grace period may be provided within which such creditor in a class may modify and file its application in accordance with the above-stated threshold requirements. However, if the creditor is unable to fulfil the threshold requirements to file such modified application within the grace period provided, the application filed by such creditor would be deemed withdrawn.”
Presently in the notification pertaining to increase in threshold limit to 100 times from pervious limit has not being introduced with any exception or specific exemption for MSME Creditor and further the ministry is silent on its retrospective effect onto the cases which are already pending with Adjudication authority with the previously notified threshold. Therefore, present amendment would be applicable only on the fresh application not on pending application.