The proposed measures can only be one of the packages of measures that the Government is considering for the industry.
- Gaurav Gupte
The Government of India has announced several measures to alleviate the hardships caused or likely to be caused to Indian companies due to COVID 19. Amongst these, is the decision to increase the minimum amount of the default required to initiate the insolvency resolution and liquidation processes against companies from one lakh rupees to one crore rupees. This means that a corporate insolvency resolution process can be commenced for a company only if there is a non-payment of debt of one crore or more, whether such process is to be commenced by a financial creditor, an operational creditor or by the debtor company itself.
The measure has been effected by issuing a notification under Section 4 of the Insolvency and Bankruptcy Code, 2016 (“IBC”). While the notification has the effect of raising the threshold for all companies, the stated intent is to prevent micro, small and medium enterprises (“MSMEs”) from being pushed into insolvency. While the data for the number of cases admitted into the corporate insolvency resolution process where the amount of default is greater than one lakh rupees but less than one crore rupees is not readily available, as per the data published by the Insolvency and Bankruptcy Board of India (“IBBI”), until December 31, 2019, out of the 135 cases that were withdrawn from the corporate insolvency resolution process with the consent of financial creditors and the applicant, in 52 cases the amount of claims admitted was less than one crore rupees.
The amount of default would be even smaller. The number of cases that have been filed for defaults less than one crore rupees and are settled before admission, will be several times more. It is such companies that will most benefit from the announcements.
In addition, the Government has the option of resorting to its powers under Section 240A of the IBC to further exempt MSMEs from the application of other provisions of the IBC. These measures have not yet been taken.
Further, it is understood that the Government is considering suspending Sections 7, 9 and 10 for a period of six months. This would mean that corporate insolvency resolution processes cannot be initiated against any company for such a period. The Supreme Court has, by an order passed on March 23, 2020, ordered that the period of limitation prescribed under any law shall stand extended with effect from March 15 until further orders. The period for which the Sections remain in suspension will also have to be excluded from the period of limitation.
It goes without saying that the proposed measures can only be one of the packages of measures that the Government is considering for the industry. Corresponding measures for creditors will also have to be taken, including relaxations from strict provisioning requirements. This will give creditors and debtors an opportunity to restructure their debt and reorganise their affairs.
Gaurav Gupte is Partner, Cyril Amarchand Mangaldas. Views expressed are the author’s personal.