This article is written by Atif Rahman. He is a practising lawyer in New Delhi.

The third quarter of the second decade of the 21^st century had just witnessed the Lok Sabha (Lower House) passing the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019, wherein certain changes were brought about, namely:^[i] 

• Insolvency commencement date,
• Threshold for initiating resolution process,
• Corporate debtors entitled to make application,
• Liabilities for prior offences and,
• Licenses and permits not to be terminated due to insolvency.

Consecutively, during same period a deadly pandemic named as the ‘Novel Covid-19’ out-broke, infecting more than 2,240,000 people globally. Its cursory wide-spread had left businesses around the world counting costs. Having largely ignored Covid-19 as it spreads across the global, financial markets reacted strongly in the past weeks stoking fears of a global pandemic. There is no doubt that financial markets now ascribe significant disruptive potential to Covid-19, and those risks are real. But the variations in asset valuations underline the significant uncertainty surrounding this epidemic, and history cautions us against drawing a straight line between financial market sell-offs and the real economy.

In the midst of the on-going disarray, the Ministry of Finance and Corporate Affairs, as a measure to counter the emerging financial distress, raised the threshold for initiating Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor under the Insolvency and Bankruptcy Code, 2016 (IBC) from the current Rs. 1 lakh to Rs. 1 Crore. The threshold limit for initiating insolvency under the IBC is given under Section 4, which reads as “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.” And, the said clause has not seen any changes despite the recent Amendment.

The amendment of raising the threshold for initiating CIRP against the Corporate Debtor from Rs. 1 lakh to Rs. 1 Crore by the Ministry of Finance and Corporate Affairs came as a measure of relief to counter the emerging financial distress faced by most companies on account of the large-scale economic distress caused by Covid-19. However, while proceeding with the press release the Ministry expressed its intention to prevent triggering of insolvency proceedings against micro, small and medium enterprises (MSMEs), in order to aide and assist their subsistence and growth.^[ii]

It is emphatically pertinent to mention that such abrupt steps taken by the government in view of defending the emerging financial distress faced by most companies on account of large-scale economics distress caused by the outbreak of the virus is arbitrary and against the very principles of equity and natural justice. The same are also enshrined in the Constitution of India.

Principles of Natural Justice deal with two major aspects:

• Duty of the dominant party to act fairly
• Rights of the other party

In the given circumstance, the government is indeed acting in a biased manner and not acting fairly, and curbing the right of the other party, i.e. the Creditor, in the given case.

It is very well agreed that MSMEs have special position in the Indian economy, as key drivers of employment, growth & financial inclusion, and forms major part of operational creditors along with employees and trade creditors and the same are to be supported and backed in a situation like this, however, the same cannot come at the cost of others. Meaning thereby, that the MSMEs, which are the Corporate Debtor of either the Operational Creditor or Financial Creditor, cannot be given an unreasonable advantage over the Creditor and ought not be made good at the cost of such Operational or Financial Creditor. Such Operational Creditor or Financial Creditor who have already lend operational debt, in form of services rendered or financial debts, in form of financial lending. Having said, there can also be a case where the Operational Creditor or Financial Creditor may also be an MSME. And, in a situation like this, the Creditors will have a duel battle to fight, viz. the growing competition and the other is growing requirement of funds. Any irrecoverable debt, in a situation like this, will have considerable and irrecoverable strain on the business of the Creditor, which in the given situation might be a MSME. One of the key economic reforms of the IBC is that the balance of power has been shifted to the Creditor, thereby instilling better sense of credit discipline. 

Mr. Bahram N Vakil, founding partner of law firm AZB & Partners, in an interview with Reena Zachariah and MC Govardhana Rangan, editors at ‘The Economic Times’, when asked about increasing the threshold limit of triggering IBC, from the existing 1 lakhs – had very categorically stated: “I don’t think so. The discussion is from Rs 1 lakh up to Rs 1 crore. Our rationale is that 80% of India has MSEs in terms of GDP and employment. Those guys wouldn’t even get an appointment.”^[iii] 

Furthermore, the success rate of companies under several regulations prior to 2016 was abysmally low and varied from 16 per cent to a maximum of 25 per cent. In contrast, the success rate of companies under the IBC in terms of a closure is already at 41 per cent and increasing. The recovery rate is 43 per cent, up from 12 per cent in Financial Year 2015 through other mechanisms with defaulting promoters losing control of the company.

CRISIL, an Indian analytical company providing ratings, research, and risk and policy advisory services and is a subsidiary of American company S&P Global, had also published that:- “The recovery rate for the 94 cases resolved through IBC by fiscal 2019 is 43%, compared with 26.5%² through earlier mechanisms. What’s more, the recovery rate is also twice the liquidation value for these 94 cases, which underscores the value maximisation possible through the IBC process.”^[iv]

Thus, by stating the aforementioned statistics and instance – it will not be out of place to state that the low threshold limit of the IBC is one of its key drivers to epitome of success that the IBC currents sees. Primarily in a situation wherein, out of the 48 lakhs registered MSMEs^[v], 43.18 lakhs are registered as Micro enterprise and 5 lakhs as Small enterprise. Thus, if the threshold limit is increased, it will impact in a large chunk of enterprises standing no chance to approach the NCLT under the IBC, as also rightly pointed by Mr. Bahram N Vakil.

	Manufacturing Sector
Enterprises	Investment in plant & machinery
Micro Enterprises	Does not exceed twenty five lakh rupees
Small Enterprises	More than twenty five lakh rupees but does not exceed five crore rupees
Medium Enterprises	More than five crore rupees but does not exceed ten crore rupees.
	Service Sector
Enterprises	Investment in equipment
Micro Enterprises	Does not exceed ten lakh rupees.
Small Enterprises	More than ten lakh rupees but does not exceed two crore rupees.
Medium Enterprises	More than two crore rupees but does not exceed five crore rupees.

According to the United Nations Commission on International Trade Laws (UNCITRAL) Legislative guide on Insolvency Laws, Insolvency should be addressed and resolved in an orderly, quick and efficient manner. Achieving timely and efficient administration will support the objective of maximizing asset value, while impartiality supports the goal of equitable treatment. The entire process needs to be carefully considered to ensure maximum efficiency without sacrificing flexibility. At the same time, it should be focused on the goal of liquidating non-viable and inefficient businesses and the survival of efficient, potentially viable businesses.   

The IBC has had been a big sigh of relief for MSMEs, which would ensure the faster debt recovery or liquidation process. The IBC Law has brought forward the objective to ensure that ease of doing business greatly improves in India. This law has simplified the winding-up process in respect of companies, which was earlier fragmented due to multiplicity of statutes as well as forums. One of the main purposes of IBC is to empower the creditor wherein he or she can get back the dues through the CIRP or through liquidation of defaulting debtor entity. It had already been noted 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. And, due to the low threshold of default, a large number of applications were being filed for initiation of CIRP. And, the entire success of the IBC is wholly and solely anchored on the low bar of triggering the CIRP against a debtor, i.e. the low pecuniary/monetary jurisdiction.

Also, the Hon’ble Supreme Court, benched by RF Nariman and Navin Sinha, JJ, in the landmark judgement of Swiss Ribbons Pvt. Ltd. vs. Union of India[vi] had categorically upheld the validity of the IBC in its entirety as the provisions contained therein pass the constitutional muster. And, noticing that in the working of the Code, the flow of financial resource to the commercial sector in India has increased exponentially as a result of financial debts being repaid, the bench said:

“The defaulter‘s paradise is lost. In its place, the economy‘s rightful position has been regained.”

The bench proceeded and further stated:

“preserving the corporate debtor as a going concern, while ensuring maximum recovery for all creditors being the objective of the Code.”

In addition to raising the threshold limit in view of defending the emerging financial distress faced by most companies on account of large-scale economics distress caused by the outbreak of the virus, the government has also stated that 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.

As a precautionary measure against the coronavirus outbreak, the National Company Law Appellate Tribunal (NCLAT) has restricted itself to hear only “urgent matters” till April 1, 2020 and has extended operation of all interim orders and stay passed in the pending matters till their next hearings. All the matters listed for hearing during the aforesaid period “shall stand adjourned and date of hearing would be notified later,” said the latest notice from NCLAT. Alongside, all the Benches of the National Company Law Tribunal will hear only urgent matters from March 16 to March 27.

The Notification issued by the National Company Law Tribunal reads as:

“All NCLT Benches may take up matters which require urgent hearings on request made by the concerned parties.

To rest of the matters, from 16.3.2020 to 27.3.2020, keep giving adjournments.“

The notice also stated, 

“The Insolvency matters fixed between March 17, 2020 to March 31, 2020 may be taken up but the Bench will rise at 01:00 PM on each day during the said period. Filling will be accepted up to 01:00 PM and the office will be closed at 02:00 PM.” 

When the aforementioned precautionary steps were/are already been taken by the Tribunal, then restricting and barring the pecuniary jurisdiction does not per se suffix any material purpose, i.e. the matters pertaining to the MSMEs could have been filed with the NCLT, however, adjudication could have been stalled for a given period.

It is opined that raising the pecuniary limit for triggering the initiation of CIRP in order to safeguarding one side of coin (the Corporate Debtor) and putting the other (Operational or Financial Creditor) at stake would not only be highly unreasonable and arbitrary but also ineffective in safeguarding the financial distress likely to come-up on enterprises, specifically MSMEs and more specifically MSEs. And, like the title suggests, the arrangement made by the Ministry is only intellectually pretentious, but is rather immature. Perhaps, in a force majeure situation like this, the ever-thoughtful government could and should have bring forth an equitable, efficient and protracted arrangement with a bona fide intention to improvise the prima facie concerns of both the parties.

References

[i] https://www.livelaw.in/news-updates/lok-sabha-clears-ibc-amendment-bill-2020-read-bill-153546

[ii] https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1607942

[iii] https://economictimes.indiatimes.com/markets/expert-view/nclt-is-a-resolution-and-not-a-recoverymechanism-bahram-n-vakil/articleshow/62276801.cms

[iv] Stated by the President of CRISIL Ratings

[v] https://pib.gov.in/Pressreleaseshare.aspx?PRID=1539110

[vi] Writ Petition (Civil) no. 99/2018; https://main.sci.gov.in/supremecourt/2018/4653/4653_2018_Order_25-Jan-2019.pdf

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