Knowledge Center

THRESHOLD OF DEFAULT INCREASED 100-FOLD –ALTERNATIVES TO INSOLVENCY AND BANKRUPTCY CODE, 2016
REVISION UNDER THE INSOLVENCY AND BANKRUPTCY CODE, 2016
While the Ministry of Corporate Affairs, Government of India, vide a notification dated 24th March 2020, increased the threshold for filing claims under the Insolvency and Bankruptcy Code, 2016 (‘Code’) by 100 times i.e. from a previous threshold of Rs. One Lakh to the present threshold of Rs. One Crore, the same has caused an unrest among the creditors previously considering to initiate insolvency proceedings under the Code. Now, unless the default sum is Rs. One crore and above, the creditors cannot initiate insolvency proceedings against corporate defaulters.

Though the Code was not meant to be a tool for recovery, insolvency proceedings have proven to be one of the most effective and expedient modes of recovery of debt. Therefore, corporate defaulters, especially the Micro Small and Medium Enterprises (‘MSME’s’) that would have failed to repay their debts owing the present situation, were prone to end up in Insolvency in a short span. The downfall of MSME’s in these trying times would have most certainly had an adverse effect on the economic stability of the working class, as a result of which all the other mechanisms adopted by the State to control the spread of the Corona virus pandemic (‘COVID-19’)would have failed. In view of the nationwide lockdown being declared, the abovementioned raising of threshold to initiate insolvency proceedings appears to be a short respite for such entities, who would have been unable to discharge their contractual obligations owing to the shutting down of economic activities.
ALTERNATE REMEDY TO PROCEEDINGS UNDER THE CODE
As the aforementioned amendment brought an ambiguity and confusion in the minds of creditors, there is a general notion that the creditors feel left without any remedy for their respective claims.
Even though seeking a remedy from the National Company Law Tribunal (‘NCLT’) for a claim under the previous threshold (i.e. Rs. One Lakh) is no longer available, there exists multiple avenues that can be explored.
It is thus essential that the creditors educate themselves of the other modes of dispute adjudication mechanisms for their respective claims.

MICRO, SMALL AND MEDIUM DEVELOPMENT ACT, 2006 (“THE MSME ACT”):
As per the MSME Act, in lieu of any goods or services supplied or rendered to the buyer, the buyer must make payment thereof on or before the date agreed or in case there is no agreement within fifteen (15) days from date of acceptance of the goods or service, failing which the dispute between the parties is resolved through conciliation and arbitration governed by the MSME Act and the award has to be passed within ninety (90) days of reference.
Further, no application for setting aside the decree or award can be made without depositing 75% of the award with the Court and pending the disposal of the Application the Court shall order that such percentage of the amount deposited shall be paid to the supplier, as it deems necessary to impose.
ARBITRATION PROCEEDINGS:
In the event that there is an Arbitration clause in the agreement, work order invoice, promissory note or any other document through which the creditor is owed a debt, the best way to realize the debt would be to institute arbitration proceedings under the Arbitration and Conciliation Act, 1996 (‘the said Act’).
As per the said Act, an award in the Domestic Arbitration proceedings have to be passed within 12(twelve) months with permission for reasonable extensions.
With the help of such time-bound mechanism, expenditure incurred in arbitration proceedings is very much reduced and adjudication of claims are secured in an effective manner.
SUMMARY SUIT:
A summary suit is a legal procedure instituted by the Plaintiff i.e. the claimant party only to recover a debt or liquidated damages arising out of a written contract, bill of exchange, hundis, invoices and promissory notes.
The purpose of a summary suit is to decide the claim in an expedient manner wherein the defendant i.e. the defaulting party is not allowed to file his defense as a matter of right, unless the court grants the leave for the same. In successful cases, the courts have directed the defendant to pay interest on the outstanding amount, being calculated from the date of filing of the summary suit, till the receipt of the money.
If the defendant does not appear or is not able to show a prima facie defense the matter is heard ex-parte i.e. in the absence of the defendant.
A summary suit can be instituted in Civil Courts, as per the value of the claim and local jurisdiction to entertain the case.
CONCLUSION
It is important to consider that the aforementioned amendment in relation to the Insolvency and Bankruptcy Code, 2016 has been passed in extra-ordinary circumstances to safeguard the larger economic interest of the corporate sector of India, the same does not necessarily imply that the creditors with legitimate claims under the previous threshold are left with no recourse.
Time is the essence of any contract and therefore the various dispute adjudication methods such as proceedings under MSME Act, arbitration proceedings, and summary suits are equally effective and are also made time bound in nature, thereby facilitating a much-required speedy remedy for contractual disputes.
Vis Legis Law Practice, Advocates