Analysis of Minimum amount of default under Section 4 of Insolvency and Bankruptcy Code 2016 (IBC)

CIRP
CIRP Application and withdrawal

Analysis of Minimum amount of default under Section 4 of IBC

 

Section 4 provides minimum threshold limit of default to file application to initiate Insolvency Resolution and Liquidation for Corporate Persons under the Code. The status wording is as under:

“The Insolvency and Bankruptcy Code, 2016
PART II Insolvency Resolution and Liquidation for Corporate Persons
CHAPTER I Preliminary & Definitions

4. (1) This Part shall apply to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of the 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.”

Section 4 applicable to Part-II of Code only, which contains section from 4 to 77.

The Union Finance & Corporate Affairs Minister Smt. Niramla Sitharaman on 24th March, 2020 announced several important relief measures taken by the Government of India in view of COVID-19 outbreak, especially on statutory and regulatory compliance matters related to several sectors. It is announcement that due to the emerging financial distress faced by most companies on account of the large-scale economic distress caused by COVID 19, it has been decided to raise the threshold of default under section 4 of the IBC 2016 to Rs 1 crore (from the existing threshold of Rs 1 lakh). This will by and large prevent triggering of insolvency proceedings against MSMEs.

In line with the above announcement, notification has been issued on 24.03.2020 which is reproduced here:

S.O. 1205(E) dated 24.03.2020. 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.

 

Notification to section 4 of IBC, increased minimum amount of default, shall be considered as prospective and not retrospective

NCLT Kolkata Bench in Foseco India Limited Vs. Om Boseco Rail Products Limited [2020] ibclaw.in 12 NCLT held that it is a well settled law that a statute is presumed to be prospective unless it is held to be retrospective, either expressly or by necessary implication. When the amendment to section 4 of IBC was, inserted a proviso enhancing the pecuniary jurisdiction for filing applications as against small and medium scale industries nowhere in the notification mentioned that its application will be retrospective. Therefore, it appears to me that the amendment shall be considered as prospective and not retrospective.

The above judgment is upheld by NCLAT reported in (2020) ibclaw.in 294 NCLAT dated 12.10.2020 and clarified that MCA Notification dated 24.03.2020 is prospective in nature & will not apply to the pending applications filed before the NCLT (waiting for admission), prior to the issuance of the notification.

In the matter of M/s P E Analytics Pvt. Ltd. Vs. Skylark Mansions Pvt. Ltd. [2020] ibclaw.in 37 NCLT, NCLT Bengaluru Bench held that in reference to increased limit to Rs. 1 crore under Section 4 of the Code, Courts/Tribunal will have to examine the issue with reference to cause of actin arise in particular cases, and to decide the case by applying Law as available at the time of admission of a particular case.

NCLT Chennai Bench held that the Limit under Sec. 4 of IBC, can be considered only as prospective, (i.e.) applicable from 24.03.2020, applicable on the date when the main Company Petition was filed, proceeded with and when the matter was finally heard and reserved, not on the date of order. It was held in the matter of M/s Arrowline Organic Products Pvt Ltd.  Vs. M/s Rockwell Industries Ltd [2020] ibclaw.in 18 NCLT.

The purpose of the notification under Sec. 4 of IBC, increasing limit to Rs. 1 cr. was to ensure that SMEs and MSMEs are not subjected to Insolvency proceedings during the lockdown or immediately thereafter – Pankaj Aggarwal Vs. Union of India And Ors

High Court of Delhi held that the notification dated 24th March 2020 has changed the `minimum amount of default’ from one lakh rupees to one crore rupees in respect of `Insolvency Resolution and Liquidation for corporate persons’ in Part II of the Code. The proceedings in the present case have been commenced under Section 9 of the IBC which is in Part II of the Code. The purpose of the notification was to ensure that Small and Medium Enterprises viz., SMEs and MSMEs are not subjected to Insolvency proceedings during the lockdown or immediately thereafter. The present writ petition accordingly deserves consideration. Prima facie, this is an error by the NCLT, as the notification dated 24th March 2020 was clearly applicable. Subject to the Petitioner depositing an amount of Rs.10 lakhs with the ld. Registrar General of this Court, the order of the NCLT dated 29th May, 2020 shall remain stayed till the next date of hearing. The deposit shall be made within two weeks. The Company – VMA Enterprises Pvt Ltd. is permitted to carry on its day to day operations. However, the IRP is given liberty to approach this Court in case he deems fit for any further directions. [Pankaj Aggarwal Vs. Union of India And Ors [2020] ibclaw.in 17 HC].

 

Recommendation of Insolvency Law Committee, Report published in Feb’20

2. THRESHOLD FOR CALCULATING DEFAULT
2.1. Section 4 along with Sections 7 to 10 of the Code enable a financial creditor, an operational creditor or a corporate applicant to initiate a CIRP under the Code on a single-day default of at least INR 1 lakh only. However, the Central Government is empowered to notify “the minimum amount of default of higher value which shall not be more than one crore rupees.”1 Till date, the Central Government has not exercised its power to notify a higher value.

2.2. The Committee noted that due to the low threshold of default, a large number of applications were being filed for initiation of CIRP. This large number of applications is adding pressure on judicial infrastructure, which is causing delays both at the stage of admission and during litigation in the CIRP. These delays cause uncertainty for investors and have the potential to hinder a value maximizing insolvency resolution. Further, due to the low threshold for default, there is a chance that solvent debtor companies would be pushed into the CIRP. This may entail significant costs, especially since “it will usually be far less costly to provide mechanisms outside corporate insolvency law for the resolution of disputes over debts and for the enforcement of undisputed debts on default2 for solvent debtor companies. Thus, in such cases, the initiation of CIRP may result in sub-optimal outcomes.

2.3. The Committee agreed that the success of the Code should be measured in terms of its ability to resolve distress in a value-maximizing manner for all stakeholders. This will be adversely affected if the system remains burdened, and value destructive delays ensue. The Committee also felt that if the mechanism under the Code results in sub-optimal outcomes, it is likely to lose credibility amongst investors, which would be further value destructive for the assets under the Code. 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.

2.4. In this respect, the Committee recommended that it would be appropriate to notify a higher default threshold of INR 50 lakhs. This would significantly ease the burden on the Adjudicating Authorities while ensuring that cases that require recourse to the Code continue to have access to it.

2.5. MSMEs have special position in the Indian economy, as key drivers of employment, growth & financial inclusion and forms major part of operational creditors alongwith employees and trade creditors. For creation of a robust and inclusive economy and special needs of operational creditors, the Committee considered whether the threshold should be revised in a modified manner in cases where operational creditors file applications under the Code. The Committee was conscious that one of the successes of the Code has been that it has made debt enforcement more credible, especially for operational creditors 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, and appropriate actions may be taken to revise the threshold accordingly.”

 

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