This article is written by Uma Shankar Mishra, pursuing a Certificate Course in National Company Law Tribunal (NCLT) Litigation from Lawsikho.com.

Introduction 

The corporate insolvency resolution process (“CIRP”) which was helpful in resolving debts of creditors faced a challenge due to the emerging financial distress faced by most companies on account of the large-scale economic distress caused by COVID 19. As a result of COVID-19 induced disruption in the economy in many industries, companies were unable to perform their obligations, payments and faced difficulties in honouring their contracts. As the promoters would face liquidity crunch in this situation it would be natural that Insolvency and Bankruptcy Code, 2016 (“IBC”) proceedings i.e. section 7 – application for default against financial creditor, section 9 – application for default against operational creditor could be initiated against defaulting Borrowers. The Central government in order to provide relief to traders, industries and MSME’S from the economic hardship caused by COVID -19  and to de-clog the National Company Law Tribunal (“NCLT”) and  National Company Law Appellate Tribunal (“NCLAT”) through powers granted to it by way of proviso to Section 4 of IBC  passed a notification  No.  SO 1205(E) dated – 24/03/2020 under which it has increased the minimum amount of default for CIRP under IBC, from a sum of Rs. 1,00,000 (Rupees One lakh only) to Rs. 1,00,00,000 (Rupees One Crore only). This notification states that w.e.f. 24/03/2020 creditors cannot file an insolvency application against borrowers for default of value less than 1 crore.

Reason for increasing the threshold

We need to see the intention of the government for increasing the minimum amount of default for initiating CIRP under IBC to Rs. 1,00,00,000 (Rupees One Crore only). There can primarily be two reasons:

1. For granting relief to industries, companies, businesses, traders who would have been affected by COVID -19 pandemic and subsequent economic downturn which have dried up sales and in turn capital. Union government main intention behind this notification is to provide relief to industries from low value Section- 7 and Section- 8 applications which mostly serve the purpose of recovering money and are not aimed at resolution.
2. There could be a larger issue beyond this pandemic related disruption, i.e. the de- clogging of NCLT and NCLAT.  NCLT in addition to Insolvency law matters has also been entrusted with matters relating to oppression and mismanagement and other disputes and matters arising out of Companies Act, 2013. By increasing the threshold for initiating insolvency against corporate debtors to Rs. 1 crore the Union government might have achieved the objective of freeing the burden of NCLT from cases involving claims of less than 1 Crore. This notification would lead to the lessening of burden from NCLT and NCLAT in addition to Insolvency Law and Company Law Appeals also handles appeal from Competition Commission of India (“CCI”) and National Financial Reporting Authority (“NFRA”). 
3. The Union government in November 2017 constituted an Insolvency law reform committee to suggest reforms in insolvency law. The committee submitted its report in the month of February 2020. The Committee had recommended to increase the threshold for initiating insolvency against a corporate debtor to Rs.50 lakh with a view to curb trivial litigation. The Union government as per recommendations of committee and as per situation created by COVID -19 has taken the decision to increase the threshold to Rs. 1 Crore to protect the interest of companies and economy.

Impact of raising the threshold for invoking application under IBC

Though the government has announced the increase in the amount of default for the purpose of maintainability of an application for initiation of the CIRP under IBC  in a way to support businesses, one of the pertinent questions to be asked is – Whether the increase in the threshold for initiating application under section 7, section 9 is a temporary or permanent measure? Is the measure to increase the threshold a temporary COVID mandated relief, or is it a permanent measure to reduce the burden on NCLT.  It could be more of a permanent measure as the Union government would definitely want to de-clog NCLT by reducing the burden of low claim cases.

Now we come to the application for the notification. As law is prospective in nature, therefore notification should affect only fresh application for initiating insolvency proceedings and not the applications filed before 24/03/2020. This was confirmed by NCLT Chennai bench on 02/06/2020 in the case of  Arrowline v. Rockwell, where NCLT Chennai stated that:

1. The March 24 Notification issued by the Central Government enhanced the minimum threshold of Rs 1 crore for initiation on insolvency proceedings is prospective in nature. 
2. The NCLT bench held that in the absence of notification providing that application of notification is retrospective in nature it would deem to be prospective. Moreover, it stated that applications under section 7,  section 8 and section 10 of IBC which have been filed before 24 March but are pending for admission by NCLT or were admitted by NCLT after 24/03/2020  would not be covered under the notification. 
3. NCLT Chennai Bench while arriving at these conclusions used the concept of vested rights, which is explained by the Supreme Court in the case of  Karnail Kaur v. the State of Punjab.  According to the concept of vested Rights, a right is vested upon a party only after an application is in the process of being filed. Therefore the right will be vested only to fresh applicants as for applicants filing prior to 24/03/2020, their Right has been extinguished, and they now cannot take advantage of notification.

Impact on Operational Creditors

The impact of raising the threshold would be felt most by operational creditors due to following reasons:

1. When viewed from the commercial standpoint operational creditors have dues of smaller value than 1 crore and thus were getting benefitted from the threshold limit of 1 lakh.
2. As the exposure of operational creditors was of lower value than financial creditors they were easily recovering money from the corporate debt due to lower value of their claims in NCLT.
3. It is also important to note that unlike financial creditors, operational creditors do not have the right to file a joint application for recovering of their debts from corporate debtors in NCLT. This closes the option of 2 or more operational creditors jointly teaming up to reach the threshold of 1 crore to file an application under section 9 of IBC.

Impact on Financial  Creditors

There would be minimal impact on increase in threshold to 1 crore on financial creditor for following reasons:

1. The financial creditors mostly have large exposures to corporate debtors which are more than 1 crore.
2. Even if a financial creditor has dues which are less than 1 crore, two or more financial creditors are permitted to file a joint application under section 7 of IBC which would help creditors to cross the threshold limits.

Case scenarios 

Illustration 1:

PQR Pvt. Ltd. is a private limited company, has committed default in repayment of loan of Rs. 2 crores, taken from a bank- J  Ltd. Can another financial creditor B, who owes Rs. 10 lakhs from PQR, which is not yet defaulted, file an application against PQR?

Yes. Section 7 of the IBC  states  that a financial creditor can file an application towards its own claims or aggregated claims of financial creditors.  This point has been explained in para  5.2.2 of the final report of the Insolvency Law Reforms Committee where it is given that The default can be to any financial creditor to the entity, and not restricted to the creditor who triggers the IRP.

 Hence, in the given case creditor B can approach the NCLT since the PQR as an entity has defaulted claims exceeding Rs. 1 crore, and thus satisfied the revised threshold under section 4 of the Code.

Illustration 2:

PQR Pvt. Ltd. has defaulted Bank J Rs. 30 Lakhs and other financial creditors a total of Rs 60 Lakhs. In addition, this company has debt due to operational creditors worth Rs. 90 Lakhs.  Can Bank J still approach NCLT?

No, Bank J cannot approach NCLT  as section 7  only allows financial creditors to file joint applications towards financial debts and the joint application should not include operational debts. As in this case, the total financial debt is Rs. 90 lakh therefore J cannot file an application before NCLT as threshold as per section 4 is not met.

Illustration 3:

DEF has dues from operational creditors worth Rs. 30 Lakhs, Rs. 60 lakhs and Rs. 5 crore from M, N and O respectively. 

 (a) Who can file application in individual capacity-

Section 8 and 9 of the IB which deals with operational creditors do not allow for joint filing for applications by operational creditors.  Joint filing for applications is not allowed by operational creditors therefore the threshold of 1 crore as specified under the new section 4 of IBC should be met by individual operational creditors. As per figures given in in the illustration this threshold is only met by O.

(b) Can an application be filed by two or more operational creditors for combined debt?

The IBC does not allow operational creditors to file joint applications. Therefore even if joint operational debt exceeds Rs. 1 crore, an application for the same cannot be filed. 

Conclusion 

In light of things mentioned above what could be the remedy for operational creditors or financial Creditors who have exposure less than Rs. 1 crore. Though IBC should not be used for recovery but as a tool to rejuvenate the company but practically it was used for recovery. Now, these creditors need to go back to remedies which were available prior to the enactment of Insolvency and Bankruptcy Code (“IBC”)  some of which are listed below:

1. Proceeding under the SARFAESI Act, 2002 and the RDDBFI Act, 1993.
2. Commercial Suits under the Commercial Courts Act, 2016 and ordinary suits under the Code of Civil Procedure, 1908.
3. Arbitration proceedings can be initiated based on the agreement between the parties.
4. Statutory arbitration under Section 18 of the MSME Act, in case the creditor is registered as an MSME.
5. Remedies available under various other labour laws may be considered for recovery of wages.
6. Creditors such as home buyers can initiate actions against builders under Real Estate (Regulation and Development) Act, 2016 (RERA) and the Consumer Protection Act, 1986.

The Union government has taken this step in the interest of the economy, and therefore it needs to be seen how the Situation unfolds in the near future.

LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join: