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Corona effect: Increasing the threshold to file insolvency application before NCLT- A needless chang

A brief history of the minimum threshold to invoke insolvency proceedings bring out that in the year 2003, an amendment to Section 271 of Companies Act, 1956 was made, whereby minimum requirement to trigger winding up proceedings against a company was made to have atleast Rs. 1 lakh default by the corporate debtor. In 2015, the first interim report by the Bankruptcy Law Reforms Committee (BLRC), the Vishwanathan committee suggested to raise the threshold from 1 lakh to a higher amount.

However, the Parliament, while passing the Insolvency Bankruptcy Code, 2016 (Code hereinafter) consequent to Vishwanathan Committee, chose to keep threshold to invoke the code against debtors/defaulters One Lakh. Again in 2018, Vishwanathan Committee formed to suggest changes in the Code for better implementation suggested to raise minimum threshold to 10 lakh from then current one lakh.

However, even though the parliament brought an amendment subsequent to Vishwanathan committee report 2018, but it again chose to keep the threshold to Rs. 1 Lakh. There has been suggestion to raise the minimum threshold of one lakh several times including PM Office suggesting to keep it near to 200 Crore.

Similar consideration led courts previously to make all previous method of resolution and liquidation cumbersome. As per section 271 of Companies Act, 1956, insistence on the requirement to prove ‘inability of the debtor' additionally subsequent to the non payment of defaulted amount made recovery for the creditors frustrating.

This presumption that one Lakh is too low an amount to force liquidation is time and again countered by several facts. Even Section 8 of the Code gives window of 10 days after notice to debtor before initiation of Insolvency Resolution Process which includes further time to the debtor to settle the matter till admittance of the Application.

Section 8(2) of the IBS, 2016 provides as follows:
Section 8(2): The corporate debtor shall, within a period of ten days of the receipt of the demand notice or copy of the invoice mentioned in sub-section (1) bring to the notice of the operational creditor:

  1. existence of a dispute, 1[if any, or] record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute;
  2. the 2 [payment] of unpaid operational debt-
    (i) by sending an attested copy of the record of electronic transfer of the unpaid amount from the bank account of the corporate debtor; or
    (ii) by sending an attested copy of record that the operational creditor has encashed a cheque issued by the corporate debtor.

Furthermore, in Re Advent case, the Hon'ble Bombay High Court rightly observed that the fact that the company was solvent was not extenuating circumstance but rather is further proof of the company's neglect to pay. Further fact of willful avoidance to pay back the defaulted amount by the debtor hidden behind industry concerns as ‘too low an amount to initiate liquidation' is not well founded as per facts available on record. It was merely ten days ago when IBBI (insolvency and Bankruptcy Board of India) Chairman wrote triumphantly for an English Newspaper daily that.

The next myth is that the IBC is resulting in huge job losses through liquidation. It is misconstrued that 600 companies-for which data are available and which have proceeded for liquidation – have assets (and consequently employment) at least equal to the aggregate claim of the creditors-4.6 lakh crore.

Unfortunately they have assets on the ground valued only at Rs. 0.2 lakh Crore.....the IBC process would realise the idle or underutilised assets valued at Rs. 0.2 lakh Crore, which would have dissipated with time...and the job being created by these companies, post rescue .

However, today, the Minister of Finance raised the limit to invoke Insolvency and Bankruptcy Code (Code hereinafter) from one Lakh to 1 Crore, which is way above of the requirement of 10 lakh which parliament refused to accept in 2018 only, basically to keep debtors having or going to have liability below than one crore out of the scope of rescue within time.

Taking extraordinary situation of instant time into account, does it sound right remedial measure to support business look untenable, As per ministry of finance statement after passing of the Code in 2016, When lenders are un-confident, debt access for borrowers is diminished (PIB GoI, Ministry of Finance) In today's time when credit is urgently needed to keep business floating, employees working and poor moving and when state seems incapable to handle this economic crisis for all, would this give confidence or rather take away the confidence in creditors to lend any money.

Did Finance Minister imply that the Code results in Job losses, or real purpose of the Code is not rescuing but recovery, which must be ceased in light of extra ordinary circumstances?, it seems Yes.

However, as per Swiss Case it is not intention of the Code. In these troubled times, Government Could have brought measures without diluting confidence of the creditors when it is needed the most. Government. could have stalled liquidation process till certain period during economic crisis, meanwhile keeping threat of triggering of the code alive. As according to Bankruptcy Law Reform Committee 2015 itself, precursor of the code, its threat of invoking insolvency rather than liquidation which compels wilful defaulters to pay to the creditors. 

  2. Indian Express Article dated 14th March 2020)

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