Increase In Threshold For Commencing Insolvency Proceeding

The Central Government's power to specify such increase is found in Section 4 of the Code :

"4. (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."

(emphasis supplied)

Prior to this afternoon's notification, the Insolvency Law Committee's 3^rd report published in February, 2020 recommended an increase in the threshold for initiating insolvency proceedings in its Preface which reads :

"Threshold for calculating default-due to the low threshold of default of INR 1 lakh that is currently required under the Code for initiation of CIRP, a large number of applications were being filed for initiation of CIRP. This has led to an increased burden on the AA. Therefore, a need to review the minimum default threshold for admitting a case under Section 4 the Code was felt, and in this respect, it is recommended that it would be appropriate to notify a higher default threshold of INR 50 lakhs. However, it was considered necessary to provide certain exemptions to the MSME sector and accordingly, modified threshold limits have been specifically recommended for MSMEs."

(emphasis supplied)

The reasons cited by the Committee for its recommendation read :

"THRESHOLD FOR CALCULATING DEFAULT

2.1.Section 4 along with Sections 7 to 10 of Code a financial creditor, an operational creditor or a corporate applicant to initiate a CIRP under the Code on a single-day default of at least INR 1 lakh only. However, the Central Government is empowered to notify "the minimum amount of default of higher value which shall not be more than one crore rupees." Till date, the Central Government has not exercised its power to notify a higher value.

2.2.The Committee noted that due to the low threshold of default, a large number of applications were being filed for initiation of CIRP. This large number of applications is adding pressure on judicial infrastructure, which is causing delays both at the stage of admission and during litigation in the CIRP. These delays cause uncertainty for investors and have the potential to hinder a value maximizing insolvency resolution. Further, due to the low threshold for default, there is a chance that solvent debtor companies would be pushed into the CIRP. This may entail significant costs, especially since "it will usually be far less costly to provide mechanisms outside corporate insolvency law for the resolution of disputes over debts and for the enforcement of undisputed debts on default" for solvent debtor companies. Thus, in such cases, the initiation of CIRP may result in sub-optimal outcomes.

2.3.The Committee agreed 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. This will be adversely affected if the system remains burdened, and value destructive delays ensue. The Committee also felt that if the mechanism under the Code results in sub-optimal outcomes, it is to lose credibility amongst investors, which would be further value destructive for the assets under the Code. Given this, the Committee agreed that there is a need to review the minimum default threshold for admitting a case under Section 4 of the Code.

2.4. In this respect, the Committee recommended that it would be appropriate to notify a higher default threshold of INR 50 lakhs. This would significantly ease the burden on the Adjudicating Authorities while ensuring that cases that require recourse to the Code continue to have access to it."

Various operational creditors with an outstanding under Rs.1,00,00,000/- would file applications before the Adjudicating Authority seeking commencement of insolvency of a debtor solely with a view to pressurise debtors to repay their dues. The intent of such applications being recovery of debt. This was far from the intent of the Code. As has been repeatedly held, the Code is a beneficial legislation intended to revive / resolve a Corporate Debtor. The Code was never intended to act as a legislation to aid creditors in recovering their dues.

Quite often, in the event a debtor failed to repay such creditor during the pendency of the application, the creditor would withdraw its application as the initial costs to be borne by the creditor upon admission of an application, were far in excess of its claim itself. This would include the costs of appointing an interim resolution professional etc. Most hearings before the Adjudicating Authority would result in an adjournment and; a suggestion falling from the Adjudicating Authority to settle the matter and a word of caution to the creditor that its claim is unlikely to bear any result in the forthcoming insolvency resolution process for such (operational) creditor would not as much as form part of the Committee of Creditors and fall far behind in the prescribed waterfall mechanism in the event of liquidation. This process would consume considerable judicial time which would otherwise be spent on resolving insolvency processes.

The notification is therefore a welcome change and will certainly improve the efficacy of Adjudicating Authorities across the country. It is further possible that in the event arrears before various Adjudicating Authorities are in fact reduced, the Central Government may once again reduce the threshold exercising its powers under Section 4 of the Code if the situation so demands.

Author is an Advocate Practicing In Bombay High Court

Views are personal only.