NEW THRESHOLD IN IBC- AN IMPACT ANALYSIS
The Insolvency and Bankruptcy Code, 2016 was introduced as one stop solution for resolving insolvency and has acted as a beacon of hope to the creditors which the earlier laws could not offer such as economic viable agreement owing to lengthy procedures. The Code has seen several changes since its inception. There is no doubt that the economic impact of corona virus pandemic has been largely disruptive, the code too could not be left untouched in such a situation.
India has entered in the fourth phase of lockdown. To save the economy major amendments has been made to the code. The first amendment relates to post-Covid pandemic situation that is in terms of initiating an application under section 7 and another amendment which was introduced during this pandemic in terms of the increase in threshold for triggering the code. The impact of the aforesaid amendments has been discussed briefly below.
- Impact Analysis of the Amendments
- Increase in the minimum threshold for certain class of financial creditors to initiate CIRP
On 24th December 2019, the Union Cabinet approved the promulgation of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 and on 28th December 2019, the same received the approval of the president. On 13th March 2020 amendments were made by the way of addition of provisos under section 7 vide the Insolvency & Bankruptcy (Amendment) Act 2020 after which an application for initiation of insolvency proceedings in relation to a real estate project can only be filled by a minimum of 100 allottees or not less than 10% of the total number of allottees of the same real estate project, whichever is less.
Due to its nature and the very object with which it has been brought in the said amendment has been a topic of debate. The same was challenged before Supreme Court in the matter of Sanjib Kumar Vs Union of India & Ors wherein the constitutional validity of the amendments was challenged and whereby the court had ordered to maintain Status quo on pending applications. These provisions were introduced with the object of preventing frivolous applications under the code but collation of 100 buyers would be an impossible task and would cause difficulties to the creditors who are already suffering due to the non-delivery of their property and would mean depriving the homebuyers of their hard earned money which they had invested also there is no guarantee that after passing all hurdles their petition would be accepted as NCLT has a right to reject the application.
In the light of the above the proceeding before Hon’ble NCLT are pending and decision of the Apex Court is awaited. The creditors and lawyers would face difficulties to gather 100 buyers or constitute 10%, the computation of which is unclear. Inadvertently the said amendment seems to be hazy. The impact of the aforesaid amendment cannot be ascertained clearly firstly owing to the operation of status quo order and the current covid outbreak which has limited the functioning of the tribunals to the matters of utmost urgent nature only. Having said that it can be said that the present covid outbreak has provide a lease of life to the Real estate developers as the government has provided six months extensions to the builders registered under RERA increasing the chances of disposing section 7 application relating to real estate.
- Threshold under Section 4
To save the economy government felt right to increase the minimum threshold for triggering insolvency under the code. The Government of India vide notification dated 24.03.2020 has increased the minimum amount of default from Rs 1 Lakh to Rs 1 Crore under the code to help small companies from the threat of defaults during the covid-19 pandemic. Any amendment to the procedural/substantive law raises several issues specially related to interpretation and applicability. The general rule is that procedural laws would be applicable retrospectively whereas substantive laws are applicable prospectively, unless otherwise provided. The Hon’ble Supreme Court in Keshvan Vs State of Bombay held that it is a cardinal principle of construction that every statute is prima facie prospective unless it is expressly or by necessary implication made to have a retrospective operation.
The said notification no doubt was a debatable topic amongst the lawyers and many of us even presumed the laws to be prospective keeping in mind the object with which it was introduced and assuming it as a measure to protect the MSME’s during this pandemic the author too felt that the aforesaid amendment was either for time being until the situation normalizes or deemed to have prospective effect. Having said that the confusion admist this notification was clarified by Hon’ble NCLT, Kolkata Bench in Foseco India Limited Vs Om Boseco Rail Products Ltd being the first judgment after the issuance of notification which was decided through video conferencing whereby NCLT vide its order held that nowhere in the notification it is mentioned that the threshold would apply retrospectively and therefore the amendment shall be considered prospective in nature and not retrospective.
The amendment has dual impact as on one side the intention of the legislature was to protect small and medium sized companies and on the other hand it would adversely affect the rights of creditors who now might not be able to proceed against the very same companies who would have defaulted save except meeting the new criteria. Also due to the enhanced pecuniary limit the operational creditors would on large be ousted from triggering insolvency under the code whose claims would not be as high as one crore.
After having answered the issue of applicability of threshold, another question which remains untouched is as to its applicability as to whether the said criteria has to be met independently or jointly by the creditors. This question remains unanswered and is interpreted based on mere assumptions and possibilities. As per step 5 of Atma Nirbhar Bharat Economic package it can be presumed that the said threshold is mainly for MSME’s only, thereby default of rupees one crore must be against companies registered as MSME and not otherwise.
 Writ Petition(Civil) No.53/2020
 AIR 1951 SC 128
 CP(IB) No. 1735/KB/2019