IMPACT OF REVISION OF THRESHOLD OF DEFAULT UNDER IBC ON OPERATIONAL CREDITORS – Eshwars
Call Us +91 44 42048335

IMPACT OF REVISION OF THRESHOLD OF DEFAULT UNDER IBC ON OPERATIONAL CREDITORS

Authored by Aanchal M. Nichani

On 24th March 2020, the Central Government by notification, revised the threshold limit of the amount of default for the applicability of the provisions of the Insolvency and Bankruptcy Code, 2016, from Rs. 1 Lakh to Rs. 1 crore.

The said revision in the threshold has come in the wake of the on-going crisis and battle with the Covid-19 outbreak. The intention of the said notification is to ease out the pressure on small sized companies and MSME and not drive them into insolvency and bankruptcy.  In this article we examine the impact of the revision in threshold of default.

Brief analysis of the notification:

The notification has been passed by the central government in exercise of the powers conferred by proviso to Section 4 of the IBC whereby the minimum amount of default has been increased from Rs. 1 lakh to Rs. 1 crore.

It is a settled law that any amendment to a legislation shall be prospective and not retrospective unless specified. Thus, the said revision in the threshold of the amount of default under IBC that has been given effect to by a notification dated 24.03.2020 shall only be prospective and not retrospective. The said notification shall not affect any pending applications filed before the NCLT. The notification shall impact only those applications that have not been filed with the NCLT as on 24.03.2020.

However, given the threat of Covid-19 and the resultant lockdown, circulars have been passed with respect to closing of filing counters and subsequent closing of NCLT. However, what happens in a scenario wherein the Operational creditor had issued the demand notice and was ready to file the application under Section 9 of the IBC but was unable to do so owing to the closure of the filing sections and NCLT, is yet to unfold.

Impact of the notification on revision of threshold under IBC on operational creditors:

The apparent impact on operational creditors is that most operational creditors may not have an outstanding operational debt of Rs. 1 crore or more and thus, the main criteria for applicability of IBC provision is not met. Further, it is unlikely that there would be any employee who is yet to receive an outstanding from his employer that equals to Rs. 1 crore or more and thus, such employee (operational creditor) also does not find recourse under the provisions of IBC.

As per Section 7 of the Code, a financial creditor may file an application by itself or jointly with other financial creditors against a corporate debtor which means that the amount of default shall include not only that of the applicant but also any other financial creditor. Thus, a financial creditor may satisfy the minimal requirement of threshold of amount of default either individually or along with defaulted debts of other financial creditors.

However, the scenario is very different with respect to filing of an application by an operational creditor. Under the Code, an operational creditor is required to meet the threshold of amount of default individually as there is no provision for operational creditors to file a joint application of combined debts against the corporate debtor. Given the nature of debts due to operational creditors, it is unlikely that individual operational debts would equal or exceed Rs. 1 crore and thus, the said notification in effect wipes out majority of this class of creditors from seeking resolution under the provisions of the IBC.

Operational creditors are already on a weak footing in case their application is admitted by the National Company Law Tribunal owing to their position/rank in the waterfall mechanism and thus, their main attempt at filing an application is to arrive at a possible settlement with the corporate debtor and recover part of their dues, if not the entire amount.

Given the revised threshold, operational creditors may have to consider options that were available pre-IBC period:

a. Refer the matter to arbitration if the agreement permits the same; or

b. pursue remedy through civil courts, which are already having a backlog in disposing off cases

c. Refer the matter to be dealt with under the dispute resolution mechanism provided under Section 18 of the MSMED Act, provided the body/entity has obtained a registration under the said Act.

Conclusion:

Nevertheless, the effort of the government to assist and support small-sized companies and MSME in this troubled hour, is commendable as the said revision of threshold on the amount of default shall not only ease out the pressure on small sized companies and MSME who are already in economic distress but also reduce the applications that are filed by operational creditors as a mere pressure tactic and in hope of a possible settlement with the corporate debtor in order to recover their dues, which goes against the basic tenet and objective of the Code. Needless to say that, as a result of the aforesaid filing of frivolous suits, the National Company Law Tribunals are clogged and this notification shall in all probability de-clog the tribunals of the overwhelming number of applications being filed under the provisions of the Code.

Leave a comment

Your email address will not be published. Required fields are marked *

Eshwars | House Of Corporate & IPR Laws,
Chennai | Delhi | Bengaluru | Mumbai | New Jersey

Board: +91 - 44 - 42048335
+91 - 44 - 42048235