It's common knowledge that The Insolvency Law Committee (“Committee”), in their 3rd report dated 20th February 2020, recommended certain amendments in the Insolvency and Bankruptcy Code (IBC), also mentioning the object of the amendments recommended. The Committee’s recommendations for said amendments were an attempt to make the functioning of the Code smoother.

Main recommendations made

1. To increase the threshold limit of the amount of default from Rs. 1 lakh to Rs. 50 lakh, for admitting a case under Section 4 of the Code.

Reasons behind recommendation: The committee noted that

• Because of the threshold being low, a huge number of applications were being filed for initiation of CIRP (Corporate Insolvency Resolution Process). This large number of applications thus adds pressure on the judicial infrastructure, which causes delays, both at the stage of admission and during litigation in the CIRP.
• further, due to the low threshold of default amount, there is a chance that even solvent debtor companies would be pushed into the CIRP.
• the Committee agreed that the aim of the Code should be to resolve distress in a value-maximizing manner for all stakeholders. This aim will be adversely affected if the system remains burdened, and value-destructive delays ensue.

1. Operational creditors should be allowed to have recourse to CIRP on a minimum default of Rs. 5 lakh only.

Reasons behind recommendation: It was noted that

• the Committee was aware that one of the successes of the Code is that it has made debt enforcement more credible, especially for operational creditors that are empowered to initiate CIRP under the Code.
• in the shadow of this mechanism, operational creditors have the bargaining power to reach out-of-court settlements with large corporate debtors.

1. Suspending section 7, 9 and 10 of the IBC 2016 for a period of 6 months, to stop companies at large from being forced into insolvency proceedings in such force majeure causes of default.

Reasons behind recommendation: it was noted that

• due to the emanating financial distress faced by most companies, on account of the large-scale economic distress caused by COVID 19

The Central Government, on 24th March 2020, via Ministry of Corporate Affairs, in exercising its power conferred under proviso to Section 4 of Insolvency Bankruptcy Code, 2016, enhanced the “minimum default threshold from INR One Lakh to INR One Crore”.

The said notification came into motion post the announcement made by the Finance Minister on 24th March 2020, wherein the Ministry highlighted the amendment as a measure for the protection of the interest of medium, small and micro enterprises (MSMEs) during this pandemic, and prevent such enterprises from sinking into insolvency proceedings when there is already financial distress in the industries.

Section 4 of the Code earlier stated that the prima-facie threshold to file any application under the Code was a minimum default of Rs 1,00,000/-. However, the proviso to the section conferred upon the Government the right to alter the said amount at its discretion. The proviso is ad verbatim produced below:

“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.”

The amendment of Section 4 of the Code for increasing the threshold limit has its direct implication on Section 7, 9 and 10 of the Code, which specifically discusses the filing of the application before the Adjudicating Authority.

Impact of the Amendment by said Notification:

No doubt, the aforementioned amendment to Section 4 will relieve the overburdened Adjudicating Authority. It will also protect the MSMEs and other industries from the default that has arisen due to the present epidemic, but it is an adverse implication of debt enforcement mechanism provided by the Code, to the MSME or operational creditor.

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 inserts Section 10A, by which Sections 7, 9 and 10 of the Code have been temporarily suspended for filing the fresh application before the Adjudicating Authority.

It was mentioned in the ordinance that this has been done to prevent corporate persons, who are experiencing distress on account of the unprecedented situation, being pushed into insolvency proceedings under the Code for some time.

Moreover, it is also mentioned that it is difficult to find an adequate number of resolution applicants to rescue the corporate person who may default in the discharge of their debt obligation.

Section 10A, along with its proviso and explanation reads as under:

The ultimate result of the said ordinance is

• No application for initiation of CIRP shall be filed for any default arising on or after 25th March 2020 for a period of 6 months or such further period not exceeding 1 year.
• No application shall ever be filed for initiation of CIRP for defaults occurring during the said period.
• This suspension of Sections 7, 9 and 10 shall not apply to any default before March 25, 2020.