NEW THRESHOLD IN IBC- AN IMPACT ANALYSIS

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
  1. 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[1] 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[2] 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.

  1. 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[3] 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[4] 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[5] 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[6] 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.

 

PARUL SACHDEVA

Associate

[1] Available at https://ibbi.gov.in/uploads/legalframwork/d36301a7973451881e00492419012542.pdf

[2] Writ Petition(Civil) No.53/2020

[3] Available at https://www.ibbi.gov.in/uploads/legalframwork/48bf32150f5d6b30477b74f652964edc.pdf

[4] AIR 1951 SC 128

[5] CP(IB) No. 1735/KB/2019

[6]Available at https://static.pib.gov.in/WriteReadData/userfiles/Aatma%20Nirbhar%20Bharat%20%20Presentation%20Part%205%2017-5-2020.pdf

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Krishnamohan K Menon

Krishna is one of the the Founding Partners of Mimansa and is also an Advocate on Record of the Supreme Court of India. Apart from a robust Supreme Court practice in different subjects, Krishna enjoys an expertise in the areas of taxation (including GST) and Commercial/Company litigation (including Insolvency) wherein he has successfully advised and handled the thousands of disputes of multifarious Domestic and International clients before various fora including the Supreme Court, various High Courts, Central Excise and Service Tax Appellate Tribunal and Company Law Tribunal/Appellate Tribunal. One of the pioneers of the idea of ‘Strategized Litigation’, Krishna has been instrumental in increasing the litigative efficacy of various clients with an analytical approach towards past data, closure of defunct proceedings and weighed choices of mode and forum of litigation in tune with the dynamic Indian legal system. Krishna’s litigative endeavors have enabled him to assist the Hon’ble Courts to lay down the law in many of the unexplored legal areas of Financial, Service and Taxation Laws. Krishna is a prolific speaker and has multiple industry and professional addresses to his credit.

Krishna traces his career back to a meritorious graduation from Pune University, execution of Code Drafting Projects in association with the Law Commission of India and handling of High-Stake litigations with a tier 1 taxation firm in addition to association with the Chambers of the Additional Solicitor General of India.

Krishna has been a professional cricketer and has also co-founded one the biggest youth volunteer networks operating for the education of underprivileged children. He is a fitness enthusiast, yoga practitioner and enjoys a keen interest in the subject areas of theology, macroeconomics and astronomy. His hobbies include philately and nature walks.

Email: krishna@mimansalaw.in

Santosh Kumar Singh

Mr. S.K. Singh handles the tax advisory and revenue litigation portfolio at Mimansa. A Retd. IRS Officer and an Advocate, Mr. Singh brings in over 4 decades of experience through the ever-changing Financial Law regimes. Mr. Singh has successfully advised diverse Manufacturing and Service Sector clients through his in-depth experience of the regulatory hurdles of the taxation segment. Mr. Singh has been at the forefront of educating various Industrial Associations of the benefits and perils underlying the GST Regime. Mr. Singh’s dual segmental experience enables him operate as a bridge between the Regulator’s expectations and the Trade’s needs.

Mr. Singh’s academic proficiency and integrity was duly honored vide a Presidential Award for distinguished services to the Govt. of India.

A deeply spiritual person, Mr. Singh spends a substantial time reciting Vedic Mantras and reading Vedantic Philosophy.

E: sksingh@mimansalaw.in

 

Bhishma Ahluwalia

Bhishma, a holder of the dual qualifications of an Advocate & Chartered Accountant, is one of the founding partners of Mimansa, who vests his expertise in the subject area of Indirect Taxation. Having over a decade’s experience in Indirect Taxation, Bhishma has successfully advised various clients during the erstwhile Indirect Tax regime and transitioned them into the GST regime with enviable ease. Bhishma’s expertise with the operations of the domestic heavy manufacturing Sector has earned him considerable repute particularly in the Iron & Steel, Automotive and Electronic Segments. Bhishma’s foresightedness (as regards potential litigative risk exposures) has been instrumental in Mimansa’s success in Strategized Litigations, many of which prosecutions he was a part of. Bhishma is also an ardent speaker who has enlightened Industrial audiences with his various addresses.

Bhishma traces his career back to coveted Financial Law Advisory portfolio’s in Big 4 entities and tier 1 law firms.

Bhishma is a sports biker by passion and part of many cross country biking groups. He is a voracious reader and maintains his keen interest in the day to day developments in the automotive industry.

Email: bhishma@mimansalaw.in

Gautam Dhamija

Gautam handles the General Commercial litigation practise at Mimansa. A segmental expert in Commercial litigations, Arbitrations and Debt Recovery, Gautam has been instrumental in successfully prosecuting/defending litigations before various fora for multifarious clients including FMCG manufacturers, Builders, International Traders, Chemical Industries, Film producers etc. Gautam also enjoys a robust practice before the Statutory forums under Company Law, Debt Recovery Laws and the High Court. Gautam has advised various clients through the erstwhile Debt Recovery and Financial Restructuring regimes into the current Insolvency Law regime.

Gautam is a law graduate from Delhi University and has gained considerable experience in the segments of financial restructuring and recovery litigations during the course of his erstwhile association with various reputed law firms.

Gautam is a long-distance cyclist, tennis player and a passionate traveler. He is also a spirited student of the Vedanta Philosophy.

Email: gautam@mimansalaw.in

Chaitanyashil Priyadarshi

Chaitanya enjoys specifications in the Company Law and Insolvency Litigation Domain with a specific focus on recovery litigations and Builder-Consumer disputes. In addition to litigating & mediating through the Insolvency processes, Chaitanya has maintained close professional nexus with various Insolvency Resolution Professionals and assisted many in taking the resolution process to logical ends, thereby maximizing value for the Company’s investors as well as creditors. Chaitanya has spearheaded multiple litigations before National Company Law Tribunal and Appellate Tribunal and earned considerable repute as an effective practitioner in the domain.

A Pune University Graduate, Chaitanya has an illustrious past with Senior Supreme Court Lawyers where he handled general commercial litigations and appended dispute.

Chaitaniya is an avid traveller and also maintains a keen interest in macroeconomic policy making.

Email: Chaitanya@mimansalaw.in