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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 dues.

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 since.

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 situation.

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 lakh rupees:
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 rupees.

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 insolvency proceedings.

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 recourse.

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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