IMPACT OF INCREASED THRESHOLD FOR INITIATION OF PROCEEDINGS UNDER IBC ON MSMEs

Source : Business Standard

This article is written by Anusha Mohapatra from Symbiosis Law School, Hyderabad

Introduction

Micro, Small and Medium enterprises are small sized units, which are defined based on the amount of investment undertaken for them. These enterprises, called MSMEs collectively, are classified into either manufacturing enterprises or service enterprises. For terming any MSME as small or large, an upper limit is set so as to ascertain the range of investment undertaken for the same. Micro enterprises could be ranging between any figure amounting to less than 25 lakhs rupees, while more than the same would be Small enterprises, definitely ranging less than 5 crores. These are the limits set for manufacturing units. For service units, the ranges vary, wherein for micro enterprises the range shall remain not above 10 lakhs, for small between 10 lakhs to 2 crores , and for Medium enterprises between 2 crores to 5 crores.

Increase in threshold under IBC

In lieu of the lockdown imposed due to COVID-19, the threshold to file insolvency proceedings was raised to 1 crore rupees vide MCA Notification No. S.O. 1205(E) dated 24.03.2020, thus altering the minimum amount of default as under Corporate Insolvency Resolution Process (‘CIRP’). This move was justified for the fact that a lockdown causing the economy to virtually shut down and in shambles, the aftereffects are bound to render parties unable to fulfill their contractual obligations. The said notification, went onto, in exercise of the powers vested in the Central Government under Section 4 of the Insolvency and Bankruptcy Code, 2016, relating to insolvency and liquidation of corporate debtors where the minimum account was set to be one lakh rupees; to set one crore rupees as the minimum amount of default necessary for the purposes of the said section. Under this section’s proviso, the government is empowered to issue notifications, and hence in its exercise of the same, has set an upper limit to Rs. One crore.

In November 2015, the Bankruptcy and Law Reforms Committee Report, mentioned in depth about the triggers and thresholds for IBC, for initiation of insolvency against a corporate debtor by creditor. This report has been an important guide for IBC proceedings. Herein, it is important to note, the threshold had previously been placed lower, with Rs. 1 lakh as limit to trigger the code, whilst big companies would incur debts as high as Rs. One crore, small individual companies would also be included under this ambit, since the debts so incurred by them range lower than Rs. One crore. Whilst analyzing the Annual Insolvency Law Committee Report released on 20th February, 2020, the reason for such an increase in the threshold from one lakh to fifty lakhs was put forth to be the amounting pressure upon judicial bodies such as the National Company Law Tribunal (‘NCLT’).

Impact on MSMEs

The stakeholders categorically remain, NCLT, the companies, and the creditors. This increase in the threshold is said to benefit the MSMEs, which have been affected by the imposition of the Covid-19 lockdown, and to protect them from being pushed into insolvency.

Further, any coronavirus related debt would be excluded from the definition of “default” under the Insolvency and Bankruptcy Code (IBC). This increase in a minimum amount of default is said to be beneficial for MSMEs post the lockdown period as well, as in small private limited companies, their default amounts are higher than their share capital. In such cases, even insolvency doesn’t seem to be the right resort. Despite this, the move is said to also be financially burdening the creditors; both operational and financial, who also form a part of MSMEs. Since enterprises such as MNCs or Banks operate with more debts than defaults and loans. Thus, it vitiates the conceptualization of the Insolvency and Bankruptcy Code, which sought to protect the defaulters, whilst also restricting the odds that small entrepreneurs may face.

The speculations regarding the permanent nature of this move have profound implications on one of the key stakeholders of the IBC, namely the unpaid workman and employee. Thus, seeking recourse under the same has become tougher than usual.

Suggestions

The Central Government is yet to clarify the applicability of the said notification, whether prospective or retrospective. The NCLT being the adjudicating body in such proceedings, has three broad categories of applications derived; One being those, wherein applications for initiation of insolvency proceedings remain pending, Second, those where applications have been filed against the corporate debtor, Third, where applications have been admitted for initiation of insolvency proceedings. Thus, the scope for interpretation as to whether it shall be deemed to remain solely prospective must be ascertained, as to whether the construction of this given statute shall be prima facie prospective but whether it is to be construed as having retrospective application as well is to be shown.

Secondly, it must be ascertained whether the change in such threshold significantly impacts the number of cases put forth in the NCLT which may increase both the disposal of cases and the efficiency at large. This is so, because the large number of proceedings initiated w.r.t. the Insolvency and Bankruptcy Code. It is to be proved that the alteration in the threshold amount truly is the most and sole viable alternative, rather than other measures, per se, like infrastructure, appointment of more members etc.

Thirdly, rather than formulating such a threshold, formulating an intelligible differentia so as to alter the threshold for each class of creditor, financial and operational is necessary. The government, also having given the reason to be Covid-19 could perhaps deduce such a threshold based on the annual turnovers of companies. Such qualifications could also be further classified under the Micro Small and Medium Enterprises Development Act, 2006. There further remains hopes for the implementation of a special insolvency framework under Section 240A of the IBC.

Thus, it is imperative that in the midst of such an unprecedented public health crisis, affecting the financial capabilities all over, the IBC must be amended and implemented in accordance with the objectives and interests of the various stakeholders.