Amendments Amid Lockdown: Analysis And Aftermath
Insolvency and Bankruptcy Code is, indisputably, a judicious,
well-thought-out, and creditor-friendly piece of legislation. It has transformed
and evolved in the manner that has made it crystal clear that the objective of
the code is to give primacy to the revival of the company over the recovery of
The IBC has been universally recognized to have brought about a fundamental
shift in India's existing insolvency laws. Bearing in mind, the notion of
advocating maximization and avoiding the destruction of the value of assets, the
insolvency and bankruptcy code was put forward and it has been flourishing ever
Inception Of The New Set Of Rules And Regulations
The Union Finance & Corporate Affairs Minister Smt. Nirmala Sitharaman on
24th March 2020 set out several relief measures to be taken up by the government
to successfully deal with the economic catastrophe that has arisen due to the
outbreak of the COVID-19 pandemic.
In view of the emerging financial distress caused to the companies, one of the
measures taken was to raise the threshold of loan default amount under Section 4
of IBC, 2016 from existing Rs 1 Lakh to Rs 1 Crore. This recourse was taken to,
by and large; prevent the triggering of insolvency proceedings against micro,
small and medium enterprises (MSMEs). The reform, so introduced is praiseworthy
and clearly elucidates the intention of the government to aid the small business
owners and protect them from constant threats of default owing to lockdown
The Finance Minister further recommended that if the current state of affairs
continues going downhill, then the government will consider suspending few other
provisions (Section 7, 9, 10) of Insolvency and Bankruptcy Code, 2016 for the
next six months.
Section 4 of Insolvency and Bankruptcy Code, 2016 states that: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
However, the proviso to the section bestows power on the government to raise the
threshold to its maximum capacity at its own volition.
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
From the commercial frame of reference, the amount of Rs 1 Lakh is so derisory
that it accorded creditors absolute supremacy and liberty to misuse the code as
various operational creditors filed applications solely with a view to badger
debtors to repay their dues and drag the solvent debtor companies into
insolvency proceedings. The squeeze play of operational creditors had made life
tougher for financial creditors as they are coerced to participate in the
A large number of frivolous applications are filed for the initiation of CIRP
and that is the genesis of increased pressure on judicial authorities which has
resulted in incessant delays in the resolution of insolvency cases. An
inordinate delay in the resolution process leads to value destruction. This is
contrary to the purpose and objective of the Code, which is perceived to have
created a system that provides maximum value to all its stakeholders.
The Insolvency Law Committee has also 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”. Hence,
notifying a higher default threshold would significantly scale down the excess
baggage on the Adjudicating Authority.
Are Operational Creditors In Dire Straits?
Albeit, “IBC Notification” is a welcome change and a laudable move, however, the
repercussions of the relief measures, one brought into effect and others which
are yet to be brought might be unfavorable. The change brought into existence
appears to be detrimental to the plight of Operational Creditors.
Needless to say, the amount of loans received by MSMEs and other small companies
is significantly minuscule in comparison to other multinational organizations.
Clearly, in such a scenario, it won't be irrational to reckon that the quantum
of operational debt is, even more, less vis-a-vis financial debt. The debt owed
by companies to financial creditors is easily discernible as “FC`s are, from the
very beginning, involved with assessing the viability of the corporate debtor.
They can, and therefore do, engage in restructuring of the loan as well as
reorganization of the corporate debtor's business when there is financial
stress, which are things operational creditors do not and cannot do.” The
predominance of financial creditors over operational creditors has been
challenged on numerous occasions. However, this state of quandary eventually
waned out with the pronouncement of several judgments by the Apex Court who
established the supremacy of FCs over OCs.
As operational creditor's debt claims are usually smaller; hence raising the
existing threshold would whittle away an entire class of creditors from bringing
forth an actionable claim under the Code. It is unjustifiable to burden them
with overly inhibitory conditions just to drive out the bottlenecks and
ameliorate the corporate insolvency process. This is transforming into an
iterative process which, if not redressed straightaway will end up destroying
the economy of the country as operational creditors are themselves SMEs to large
business organizations who also play a pivotal role in employment generation.
As such actions are detrimental to the rights and interests of the small-scale
enterprises, therefore, a different yet synchronized approach is required to
protect their concerns. Either the threshold should be revised once the emergent
situation has been resolved or a new and equally effective mechanism under the
law has to be evolved for debts which have not been disputed, which provides for
swift and cost-effective justice particularly for small scale enterprises,
otherwise such small-scale creditors may be left with no practical legal
Parochialism is a can of worms in the global business world. The recent decision
taken by the government has queered the pitch for operational creditors seeking
to bring about legitimate claims against companies with the ultimate aim of
recovery of dues. The notification will certainly augment the efficiency and
attenuate the burden on the adjudicating authority.
On the contrary, the operational debt so provided to the medium and small scale
enterprises will never be able to meet the raised threshold, thereby hampering
the rights of the operational creditors.
Things have not yet completely gone haywire. The suspension of a few provisions
of IBC (section 7, 9, 10) instead of lifting the threshold to Rs 1 crore was
lesser of the two evils which should have been adopted by the government. The
need of the hour is to strike a harmonious balance among all the stakeholders in
question. A more sensible and realistic approach is required as “drastic times
call for drastic measures”.
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