IBC in the COVID-19 Era: An Impact
– Shruti Chaudhary
The COVID-19 outbreak has forced the governments around the globe to come to their knees to combat the situation regarding not only the limited medical infrastructure but to revive the economy from dire financial consequences.
In these demanding times, the Government of India has by way of latest guidelines in the gazette notification pushed up the fiscal amount for commencement of proceedings under the Insolvency and Bankruptcy Code, 2016 (“IBC” or “the Code”) to Rs. 1 Crore as the minimum amount of default from the existing threshold of Rs. 1 Lakh. It can be understood from the address of the Finance Minister on 24.03.2020, the current notification has been instituted to prevent and protect the Micro, Small & Medium Enterprises (‘MSMEs’) from being compelled into insolvency resolution process during this challenging era. The Finance Minister also hinted towards the probability of adjournment of several clauses of the legislation for a period of 6 months if the situation does not improve.
Though the IBC legislation is fixed on the provision that any amendment to the law shall be prospective in character unless stated as has been adjudged in the cases of S.L. Srinivasa Jute Twine Mills (P) Ltd. v. Union of India and DG of Foreign Trade v. Kanak Exports, although the obscurity of the far overarching consequences of the notification would disclose themselves with time and application in the various frameworks. One such evident ambivalence is the series of cases in which notices have been furnished by the Operational Creditors under the IBC before the notification came into being however, not registered due to the supervening COVID-19 pandemic and the cases registered but awaiting acceptance.
Such pecuniary restrictions are being embraced because they lessen the strain on the National Company Law Tribunals (NCLT and NCLAT) across the nation and liberate the organizations from insolvency suits filed for meagre amounts. Nonetheless, the repercussions of this enigmatical rise in pecuniary restriction are wide and out of the way.
The IBC was the preferable method of resolution due to the summary character of proceedings and universal efficacy. With the considerable rise in fiscal jurisdiction to protect MSMEs, the same MSMEs might be severely prejudiced as Operational Creditors as the pecuniary jurisdiction for the debt might not be within the bounds of their outreach being Micro, Small & Medium Enterprises. This is a ground for distress since the issue of slowing down payments stands unresolved despite amendments to the Micro, Small & Medium Enterprises Development Act, 2006 owing to the dearth of accessibility of infrastructure and the substance that the law needs. The other solution available for the MSMEs would be the civil courts of law which are well-known for the lastingness of the litigation and the manifold appellate levels.
This perspective has been resonated in the case of Pioneer Urban Land and Infrastructure Ltd. & Anr. v. Union of India & Ors. in which the Hon’ble Supreme Court (“SC”) while shedding light on the Code made it clear that the threshold to set off insolvency resolution proceedings was deliberately kept low so that small organizations may also stimulate the Code accompanied by banks and financial institutions to whom huge chunks of money may be owed. It is thus irresolute whether the rise in threshold essentially serves the objective for the sake of MSMEs that the Ministry is pursuing to accomplish.
Because of the increase in limit for initiating proceedings under the IBC, it uncovers the susceptibility of the MSMEs wherein the bigger players in the corporate world would be invigorated to default in their payments and force them to sort out measly sums which would be counter-effective to the whole spirit of the notification. The notification additionally detriments other Operational Creditors such as employees and other workmen, whose claims are usually much lower than the new threshold, who would be unable to institute any proceedings under the Code owing to the increased pecuniary limits.
Instinctively, because of the vagueness, it seems that the eventual beneficiaries of the notification would be the Financial Creditors such as Banks and other Financial Organizations which are better positioned and would have the requisite debt to fulfil the increased pecuniary threshold.
A probable replacement to safeguard the MSMEs from these issues and the reverberations of COVID-19 is composing the notification to be pertinent only for the stipulated time of emergency as has been settled by Singapore in their crucial legislation introduced into instant effect termed COVID-19 (Temporary Measures) Act, 2020. A second practicable option may be that the Ministry elucidates that the increased pecuniary threshold is appropriate only to cases where the Corporate Debtor is an MSME. On the other hand, in implementing its authority by way of Section 240A (2) of the Code, the Ministry may by Notification administer that the provisions of the IBC would appertain to MSMEs contingent to some amendments, as may be stated. These concerns need swift explanation by the Ministry so that the inherent legal enigma can be taken into notice and the contentions of genuine and legitimate creditors are not neglected.
This article is authored by Shruti Chaudhary. She is a student of law at Dr. Ram Manohar Lohiya National Law University, Lucknow.