If implemented, the move will offer substantial relief to stressed sectors
In a bid to avoid frivolous applications under the IBC, one of the amendments to the insolvency law passed in Parliament on March 13 — the Insolvency and Bankruptcy Code (Amendment) Act, 2020 — put in place a minimum threshold for certain class of creditors to initiate insolvency proceedings.
According to the amendment to Section 7 of the Code, in the case of real estate allottees and security or deposit holders represented by a trustee or agent, the insolvency application should be filed jointly by at least 100 such creditors or 10 per cent of their total number, whichever is less.
Given the growing fears of a widespread impact of Covid-19 on the economic growth of the country — with some segments and sectors appearing more vulnerable — a similar threshold may have to be put in place to include a wider set of cases, to prevent large-scale applications under IBC.
According to lawyers and market experts, the existing low criterion of default of just ₹1 lakh in any case needs a review to de-clog the bankruptcy process. In the coming months, with several sectors and MSMEs likely to feel the heat of the virus outbreak, it has become important to proactively review the low criterion of ₹1 lakh default to initiate insolvency proceedings.
“Amendment to Section 7, which was brought into force recently, does not appear to apply to multiple banking arrangements or consortium arrangements,” says KS Ravichandran, Managing Partner, KSR & Co Company Secretaries LLP. “However, it is desirable to introduce a simple majority joint application so that outside the IBC framework itself resolution of issues could be made. The number requirement is good since there could be cases where the problem may not necessarily relate to insolvency.”
Low trigger point
Under the Code, aside from a financial creditor, an operational creditor — supplier, employee or workman, for instance — can also initiate insolvency proceedings on a default of just more than ₹1 lakh. Of the 3,312 cases admitted under the National Company Law Tribunal (NCLT) for insolvency proceedings, about half have been initiated by operational creditors.
With operational creditors mostly keen on recovery rather than on resolution, the ₹1-lakh criterion for initiating insolvency proceedings has led to cluttering of cases under the IBC. Sometime back, the Prime Minister’s Office had flagged this issue, saying that loan defaults below ₹200 crore should not be referred to the IBC.
MSMEs being pushed into insolvency owing to the ongoing downturn — which could worsen with the pandemic — and, subsequently, into liquidation, could be disastrous for the economy, leading to substantial job losses. Of the 3,312 cases under the IBC, liquidation has been ordered in 780 cases so far, indicating the difficulty in resolution of many cases.
There is thus an urgent need to review the low threshold of ₹1 lakh. Instead of a fixed amount, the trigger point could also be defined as a per cent of overall dues (say, 10 per cent of debtor’s total liabilities).
The amendment made recently to the Code in respect of certain class of creditors, such as home buyers, to initiate an insolvency plea, can be extended to specific sectors or cases that are more vulnerable to the weak economic environment.
“Recently, before NCLT-Chennai, in the Syndicate Bank vs Bhadreshwar Vidyut (case), even though the application was made only by a financial creditor with just 1.64 per cent of total financial debt, insolvency process was ordered merely because the amount due exceeded the monetary threshold. This is a very technical approach. This order is under appeal before the NCLAT (National Company Law Appellate Tribunal),” adds Ravichandran.