Increased minimum amount of default under Section 4 of IBC-Recommendation of Insolvency Law Committee

Finance Minister Smt. Nirmala Sitharaman Speech on IBC-Notification under IBC Section 4

(Speech Date 24.03.2020)

The Union Finance & Corporate Affairs Minister Smt. Niramla Sitharaman today 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. While addressing the press conference through video conferencing here today, Smt. Sitharaman announced much-needed relief measures in areas of Income Tax, GST, Customs & Central Excise, Corporate Affairs, Insolvency & Bankruptcy Code (IBC) Fisheries, Banking Sector and Commerce.

Following are the decisions with respect to Insolvency and Bankruptcy Code:

1. 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. 

Notification: 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. [S.O. 1205(E) dated 24.03.2020]. Read  amended section.

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.”

 

2. If the current situation continues beyond 30th of April 2020, we may consider suspending section 7, 9 and 10 of the IBC 2016 for a period of 6 months so as to stop companies at large from being forced into insolvency proceedings in such force majeure causes of default.

References   [ + ]

1. Insolvency and Bankruptcy Code, 2016, Section 4
2. Ministry of Finance, Interim Report of The Bankruptcy Law Reforms Committee (2015) p. 6
<https://www.finmin.nic.in/sites/default/files/Interim_Report_BLRC_0.pdf&gt; accessed 26 November
2019

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