Revision of threshold of default under the Insolcency and Bankruptcy code, 2016: Detrimental towards the interest of the small entities?

This article highlights the changes brought in the provision regarding the minimum amount of default to trigger insolvency proceedings under the Insolvency and Bankruptcy Code, 2016.

The Central Government on the 24^th March 2020, by a gazette notification specified Rupees one croreas the minimum amount of default for the commencement of insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (‘IBC’). It represents a straight hundred-fold increase from the previous level of Rupees one lakh. The Gazette notification issued to this effect states, “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 measure which immediately came into effect, was announced by the Finance Minister Nirmala Sitharaman while speaking on various relief-oriented steps being taken by the Central Government in view of the lockdown brought about in the country following the spread of the Novel Corona virus (COVID-19) pandemic.

This measure has been taken in view of the economic downfall being faced by our country today due to the COVID-19 pandemic and in order to protect Micro, Small & Medium Enterprises (‘MSMEs’) from being pushed into insolvency during these times. The Finance Minister has also made a declaration that if the prevailing circumstance extends beyond the 30^th of April 2020, then the Government might consider the suspension of the Sections 7, 9 and 10 of the IBC.

In view of the nationwide lockdown being imposed leading to a closed economy, the above mentioned step appears appropriate as the cases of parties being unable to discharge their contractual obligations will certainly shoot up owing the shutting down of economic activities.

It can be inferred that the augmented threshold would have a positive impact and it would assure that a delay or default in the payment of relatively lower amounts will not push a company into insolvency in the current scenario which has popped up due to the spread of the COVID-19 pandemic.

The IBC has been especially effective for startups, small vendors and businesses which do not have the financial capacity to wage long-drawn legal battles. The nature of the proceedings under the IBC reduces the legal costs involved and at the same time there is a high likelihood of quick settlement of claims, as upon admission of the proceedings, the control of the corporate debtor is taken away from the managing board of the corporate debtor. Regardless that IBC is not intended to be a mechanism for recovery, as witnessed, the object of small businesses has been to get the corporate debtor to settle the matter and recover their dues which normally do not cross the threshold of Rs. one crore.

However, there are reports stating that the modification of the threshold may not be for a temporary span but might be permanent. If made permanent, it will have an adverse impact on startups, small vendors and businesses. As compared to other remedies available in law, the IBC has been a relatively speedy mechanism for MSMEs to seek redressal.

If this raise in the threshold is made permanent for the commencement of the Corporate Insolvency Resolution Process (CIRP), then it would be communicated that if companies make any kind of default on payments to small scale vendors and businesses where the default does not generally amount to more than Rs one crore, then the creditors would be prevented from forcing the corporate debtor into insolvency unless the default amount is Rs. one crore and above.

Such a measure would be injurious to the interests of the smaller entities. The threshold should either be revised once the situation comes back to normal or a new mechanism should be set up for dealing with undisputed debts ensuring justice to the small scale enterprises.