The Ministry of Corporate Affairs, Government of India vide its Notification dated 24.03.2020 offered a huge relief to various sectors of the Indian economy which were facing enormous losses due to the nation-wide lockdown owing to the global pandemic COVID-19. The Notification increases the minimum threshold limit or minimum amount of default, under Section 4 of the Insolvency and Bankruptcy Code, 2016 from Rs. 1 lakh to Rs. 1 crore. This minimum amount of default – only defaulted by Corporate Debtors and not Personal Debtors – is necessary for the initiation of the Corporate Insolvency Resolution Process under the IBC.
Recently, NLCAT vide an order dated 12.10.2020 has further clarified the applicability of the aforesaid Notification and has held that the same is prospective in nature and it is not retrospective or retroactive in nature. Further, it was held that the said notification will not apply to the pending applications filed before the concerned ‘Adjudicating Authority’ (Authorities), under IBC (waiting for admission), prior to the issuance of the aforesaid notification.
However, in this article, we will discuss some of the benefits as well as the implications of the aforesaid notification.
BENEFITS OF THE NOTIFICATION:
The aftermath of this Lockdown due to COVID 19 will certainly push companies particularly, MSME (Micro, Small & Medium Enterprises) through a very rigorous economic phase where their business would be severely hit because of the lack of options which can generate revenues for them.
Moreover, due to the closedown of business outlets, factories, and establishments, it will be an arduous task for the employers to be able to pay salaries and wages to their employees. The above-mentioned notification provides them a huge relief by increasing the amount of default to Rs. 1 Crore and this will prevent them to face the stringent process of insolvency under Insolvency & Bankruptcy Code 2016.
Further, frivolous applications for initiation of insolvency process merely for recovery of dues owing to the lesser threshold limit resulted in increased pendency before the Adjudicating Authorities. Thus, by increasing the pecuniary jurisdiction, the notification also effectively decreases the workload on the Judiciary by discouraging abuse of the insolvency process during the COVID times. Also, by way of the ordinance dated 05.06.2020, the application for the Insolvency Resolution process cannot be filed by the operational and financial creditors for a minimum period of 6 months and not exceeding 1 month on or after the date of 25.03.2020. This means that there will be a considerable halt in the filing of applications where, in the meantime, the judiciary shall be able to resolve and adjudicate on the pending cases effectively.
It has been vividly settled that in case of an amendment in legislation, the law shall be prospective in nature unless otherwise specified such as in the cases of S.L. Srinivasa Jute Twine Mills (P) Ltd. v. Union of India and Anr.[1] and Director General of Foreign Trade and another v. Kanak Exports.[2] Taking these case laws into consideration which was decided by the Hon’ble Apex Court, the inevitable conclusion one can draw is that this notification will also have prospective effect and will not operate retrospectively and it can have implications that may result in ad-hoc applicability of the current notification in times of cases in which notices have been issued by the Operational Creditor but the application (for the insolvency resolution process) is not filed prior to the notification and in cases where the application is filed but is pending admission.
However, the same has been resolved by the NCLT in the case of Arrow Line Organic Products Private Limited v. Rockwell Industries Limited[3] wherein the Tribunal clarified that the increase in the threshold limit is prospective in nature. It applies only to new filings and does not, in any way, affect the matters that were already filed, being heard, or have been reserved for orders prior to the Notification dated 24.03.2020. Similarly, as also mentioned above, NCLAT in the case of Madhusudan Tantia v. Amit Choraria [4] has affirmed that the Notification is prospective in nature and it is not retrospective or retroactive in nature and the same will not apply to the pending applications filed before the concerned ‘Adjudicating Authority’ (Authorities), under IBC (waiting for admission), prior to the issuance of the aforesaid notification.
IMPLICATIONS OF THE NOTIFICATION:
At the outset, it is pertinent to note that this move will not be welcomed by the operational creditors. This is because, by virtue of Section 9 of the Insolvency and Bankruptcy Code, 2016, the operational creditors are required to meet their threshold individually.
Also, as per the latest data of the Insolvency and Bankruptcy Board of India, a total of 3,312 cases were filed out of which 1,630 (49.21%) cases were filed by operational creditors. This implies that the cases filed by operational creditors are likely to reduce significantly as the claims pursued by any operational creditor against any Corporate Debtor is generally low in number as compared to the claims pursued by Financial Creditor. It is relevant to point out that owing to the language of Section 9 of the Insolvency and Bankruptcy Code, 2016, the operational creditors are required to meet their threshold individually unlike the financial creditors who can file the application when he meets the threshold either individually or along with the defaulted amounts of other financial creditors by virtue of Section 7. Thus, by virtue of this notification, the Operational Creditors are heavily barred to seek remedy under IBC wherein they will have to resort to other mechanisms for recovery of debt that are cumbersome and ineffective such as civil courts of law which are infamous for their perpetuity of case proceedings and the plethora of appellate levels.
One can look at an example where a consortium of four financial lenders has provided loan facility to a corporate debtor by disbursing him Rs. 30 Lakhs each. Now, in this case this notification still gives them a way to avail their remedies because under Section 7, Financial Creditors can initiate CIRP either individually or jointly. But considering a case where an employee who is earning Rs. 50,000 per month would not be able to avail his remedies, unless the aggregate of non-payment of his salary becomes 1 Crore, which in most cases will not happen soon enough and the employee being an Operation Creditor cannot initiate CIRP jointly with other employees.
This move appears contrary to the view expressed in the case of Pioneer Urban Land and Infrastructure Ltd. &Anr. v. Union of India &Ors.[5] wherein the Apex Court lucidly interpreted that the threshold amount, under the Insolvency and Bankruptcy Code, 2016, was intentionally kept low so as to enable the small individuals to trigger the code to whom large sums of money remain due. Thus, the role of operational creditors, as emphasized in Committee of Creditors, Essar Steel India Ltd. v. Satish Kumar Gupta,[6] is seriously undermined if this notification is looked in its entirety.
Another implication is that of the principle and the interest amount. The notification has failed to state that the principal amount claimed should be a minimum of Rs. 1 crore. This enables the creditors to add interest to the principal amount till the date of filing and then ensure that the final defaulted amount is above the threshold limit that allows them to file the Application at NCLT. This implication arises because such adding of interests to the principal amount is not illegal or arbitrary if the same has been agreed between the parties at the time of the transaction.
Since the notification applies only for Corporate Debtors and as no update has been given regarding the Personal Guarantors, it means that the application can still be filed against personal guarantors based on the original limit of Rs. 1,000. It is likely that the burden of Corporate Debtor's creditors would be borne by the Personal Guarantors and in such cases, there can be a possible spike in the number of insolvency proceedings against personal guarantors which still remains to be in its nascent stage.
CONCLUSION:
It is pretty much evident that due to the ongoing pandemic the corporate world has been facing immense pressure, and a prudent thought will be, that the increased threshold limit under Section 4 of IBC has allowed the companies, especially small and medium, to cope up with these difficult times, since the wrath of creditors will be unprecedented in the ongoing financial crisis. Further, the increase of pecuniary limits will ensure that the insolvency process under IBC is not abused.
However, the said notification is set to de-limit the operational creditors from seeking relief under IBC, who naturally have a lower quantum of claims against the corporate debtors as compared to the financial creditors.
[1] S.L. Srinivasa Jute Twine Mills (P) Ltd. v. Union of India and Anr., (2006) 2 S.C.C. 740.
[2] Director-General of Foreign Trade and another v. Kanak Exports, (2016) 2 S.C.C. 226.
[3] Arrow Line Organic Products Private Limited v. Rockwell Industries Limited, IA/341/2020 in IBA/1031/2019.
[4] Company Appeal (AT) (Insolvency) No. 557 of 2020.
[5] Pioneer Urban Land and Infrastructure Ltd. &Anr. v. Union of India &Ors., 2019 S.C.C.OnLine S.C. 1005.
[6] Committee of Creditors, Essar Steel India Ltd. v. Satish Kumar Gupta, 2019 S.C.C.OnLine S.C. 1478.
(This article is authored by Mr. Pushpit Singh, Intern at S&D Legal Associates)
(Image Source: forbes.com)