A Primer On The Increase In Threshold For Invoking The Insolvency And Bankruptcy Code
by Saurabh GANDHI B.Com(Hons),LL.B.,LL.M.
The object of this article is to analyze the implication of the increase in threshold for invoking The Insolvency and Bankruptcy Code (IBC). It further looks into some of the burning legal questions that have emerged in the aftermath of the increase and how Tribunals and Courts across the country have decided upon them.
The soul and substance of the Insolvency and the Bankruptcy Code, 2016 is resolution of insolvency of a firm. This is evident from the Preamble of the Code, which states that the Code seeks to maximize the value of assets of the firm while balancing the interests of all stakeholders. The purpose of bringing in a mechanism for dealing with the increasing cases of insolvency and bankruptcy in the country was to ensure that the resolution process is completed in a time bound manner. However, it was noticed that the Code was being increasingly used as a recovery tool even in cases where the question of insolvency did not arise. The Supreme Court in the case of Mobilox Innovations Private Limited vs. Kirusa Software Private Limited1, held that:
"......IBC is not intended to be substitute to a recovery forum. It is also laid down that whenever there is existence of real dispute, the IBC provisions cannot be invoked."
Threshold for invoking IBC
Section 4 of the Code lays down that the minimum amount of the default by a corporate debtor is one lakh rupees. It is this lower threshold that has made it easier for creditors to use the Code as an alternate recovery mechanism. However, the proviso to Section 4 states that the same can be increased by the Central Government to an amount which cannot be more than one crore rupees.
4. Application of this Part.
(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.
In the exercise of this power of delegated legislation, the Central Government via a notification dated 24th March, 20202 specified one crore rupees as the minimum amount of default for the purposes of the said section.
This increase in threshold was a decision that was long expected from the Central Government but the occurrence of the Covid-19 pandemic expedited the process. Though the Government calmed the nerves of the corporate world by announcing a suspension of IBC during the pandemic period (which continues till the date of writing this article), it went one step ahead and increased the threshold to one crore rupees.
Impact on Operational Creditors
It was seen that the lower threshold of one lakh rupees favored the operational creditors as they could initiate the corporate insolvency resolution process (CIRP), it is now expected that the new threshold will discourage the use of IBC as a recovery mechanism and only genuine cases of default will make their way to the Adjudicating Authority (National Company Law Tribunal - NCLT).
Further, this move has been touted as a savior of the small and medium enterprises (SMEs) in the turbulent business environment impacted by the pandemic. This remains to be seen because while it is true that SMEs that are corporate debtors will benefit from this move, this might reduce the opportunities for SMEs which are operational creditors from initiating the CIRP even in genuine cases of default.
Burning Legal Question - New Threshold is Prospective or Retrospective?
In the aftermath of the above notification, a substantial question which has emerged is whether the new threshold will be applicable prospectively or retrospectively. Applying the rule against retrospectivity laid down in Dena Bank Vs. Bhikhabhai Prabhudas Parekh & Co.3, wherein it was stated that retrospectivity cannot be inferred unless expressly or necessarily implied in the legislation, especially when it concerns substantive rights and obligations, it can stated that since the IBC does not expressly or impliedly refer to retrospective application, the new threshold would be effective prospectively. Like all legal questions, this also reached the Tribunals and Courts across the country. Let us look at some of the important decisions which expound upon the issue.
NCLT Chennai in Arrowline Organic Products Pvt. Ltd. Vs. Rockwell Industries Limited has held that the power of delegation in the hands of the Central Government under Section 4 of the IBC does not include the power to issue a notification with retrospective effect.
NCLT Kolkata in Foseco India Limited Vs. Om Boseco Rail Products Limited has interpreted the notification as being prospective in nature by virtue of the simple fact that retrospectivity is not specifically mentioned in the said notification,
The Appellate Authority, National Company Law Appellate Tribunal (NCLAT) has affirmed the above decision of NCLT Kolkata in Madhusudan Tantia Vs. Amit Choraria.
Confusion as to date of applicability
While both the matters before NCLT Chennai and Kolkata benches were related to applications filed before 24th March, 2020 (date of notification), in a matter before the Delhi High Court4, a confusion was up for litigation w.r.t the date from when the amount, as amended by the notification under Section 4, would be applicable? Whether it would be from the date of filing of the petition before the NCLT or the date of admission of the petition. While the matter is yet to be decided, the Learned Additional Solicitor General (ASG) submitted in the same matter that the 24th March, 2020 notification will not have a retrospective effect.
Another interesting development has happened down south. In December, 2020, the Kerala High Court in a writ petition has ordered a stay of all proceedings in the order of NCLT Kochi in the case of M/s Tharakan Web Innovations Pvt Ltd vs Cyriac Njavally which held that the said notification would only apply prospectively. 5
While the jury is still out if the suspension of IBC and increasing the threshold of invoking the Code is going to be an effective way of reducing economic burden on SMEs, it can be stated that litigation over the notification refuse to subside. The submissions made by the Ld. ASG in Delhi High Court surely give an insight into the Government's intention to make it effective prospectively but detailed clarifications regarding the applicable date are necessary, which may come only from the courts.
1 2017 AIR (SC) 4532
2 Notification dated 24.03.2020 S.O. 1205(E)
3 (2000) 5 SCC 694
4 Pankaj Agarwal Vs. UOI W.P. (C) 3685/2020 & CM APPLs. 13194/2020, 13195/2020, 13196/2020