PANDEMIC PRIORITIES: INCREASED INSOLVENCY THRESHOLD ANDITS ECONOMIC IMPACT - ICSI IIP
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INTERNATIONALJOURNAL OF MULTIDISCIPLINARYEDUCATIONALRESEARCH
ISSN:2277-7881; IMPACT FACTOR :6.514(2020); IC VALUE:5.16; ISI VALUE:2.286
Peer Reviewed:VOLUME:9, ISSUE:5(7), MAY:2020
PANDEMIC PRIORITIES: INCREASED INSOLVENCY THRESHOLD
ANDITS ECONOMIC IMPACT
Dr. Binoy J. Kattadiyil
ICSI IIP, IPA of IBBI, New Delhi
Introduction
Unprecedented times require unprecedented measures, and as the world markets are
grappling in the wake of COVID-19, the Indian Government made a bold move in
March 2020 in a bid to save the economy, particularly MSMEs, from capsizing due to
the pandemic waves.In exercise of its powers conferred by section 4 of theInsolvency
and Bankruptcy Code, 2016 (31 of 2016), the Central Government increased the
minimum amount of default required to initiate CIRP from INR 1 lakh to INR 1
crore.1Presumably applicable from the date of notification, the step has been widely
recognised to provide relief in the midst of the crunching nation-wide lockdown, which
begun in the last week of March 2020 and has single-handedly halted or majorly
impacted the economic supply chain of millions of businesses in India in every sector.
As India is touted among the leading economic powers of the world and envisions for a
5-trillion-dollareconomy in the next few years2, the role of the Micro, Small and
Medium Enterprises (MSME) sector becomes crucial. Trade, manufacturing, and other
services are the three sub-sectors of MSME sector and account for around one-third of
total employment, estimated at 11 crores in 2016,3 by absorbing surplus agricultural
labour in rural areas. MSMEs also contribute to 48 percent of India’s merchandise
exports4 and are complementary to large industries in the secondary and tertiary sector,5
which supports the fact that the products and services provided by Indian MSMEs are
globally competitive.
This increased threshold notification is, thus, aimed to bolster the dwindling MSMEs
which are considered the backbone of the Indian economy and are financially distressed
due to the Coronavirus outbreak following nation-wide and global lockdowns. In this
article, we will analyse the implications of the Notification and discuss the impact it
carries on the future of the economy in a post-lockdown world.
Analysis of the Threshold Notification
Since 2016, the introduction of Insolvency and Bankruptcy Code has been widely
considered a game-changer in the Indian bankruptcy and insolvency matters, with a
43% debt recovery rate on stressed assets amounting to INR 75,000 crores by March
1
The Gazette of India, Part II, Section 3, Sub-section (ii), March 24, 2020.
2
We will definitely achieve the goal of $5-trillion economy, says Gadkari. March 19, 2020. LiveMint.
3
Key Indicators of Unincorporated Non-Agricultural Enterprises (Excluding Construction) in India. National
Sample Survey Office (NSSO), Ministry of Statistics and Programme Implementation.
4
Ministry of Micro, Small and Medium Enterprises, Government of India, July 2019
5
Micro, Small and Medium Enterprises: Challenges and Way Forward. Shaktikanta Das. Apr 13, 2020.
www.ijmer.in 11
INTERNATIONALJOURNAL OF MULTIDISCIPLINARYEDUCATIONALRESEARCH
ISSN:2277-7881; IMPACT FACTOR :6.514(2020); IC VALUE:5.16; ISI VALUE:2.286
Peer Reviewed:VOLUME:9, ISSUE:5(7), MAY:2020
20196, but it also seemed to insinuate a barrage of insolvency initiation process, merely
for recovery of outstanding payments even by a single-day default, due to the low
threshold of INR 1 lakh, which created an undue pressure on the National Company
Law Tribunals (NCLTs).7The situation has been aggravated due to the pandemic-
induced economic downturn and the Indian Government with this increased default
threshold ofINR 1 crore is aiming to alleviate the stress on NCLTs from conducting
insolvency proceedings for trivial debt recoveries, while also creating a monetary safety
net for the MSMEs.
Since the new revision has been straightforward without any specifications of its
retrospective applicability, it is presumed to be prospective in nature.8A few ambiguities
dealing with the fate of cases where notices have been issued but not filed by the
Creditors under the IBC prior to the Notification and the cases pending admission have
been addressed by the Insolvency and Bankruptcy Board of India (IBBI) via temporary
amendments suspending the time period of lockdown to be counted towards the
computation of timelines of any task related to any liquidation process9 and CIRP.10
An interesting point to note is that the said amendment was already suggested pre-
COVID 19 lockdown measures by the Insolvency Law Committee in February
2020.11The Report expressed the need to review the minimum default threshold
foradmitting a case, as the low threshold-incited cases may entail significant costs to go
through CIRP, resulting in sub-optimal outcomes.12It recommended a higher default
threshold ofINR 50 lakhs, and with due regard to the MSME sector, suggested a
minimum default value of INR 5 lakh at which the operational creditors can initiate
CIRP.13Thus it seems that the increased threshold notification had been on the back-
burner for sometime unaffected from the COVID-lockdown, and not an impulsive
proposition of the Central Government to rescue the economy, although the coincidence
affects manifold issues of the time.
Impact on the Creditor, Debtor & Guarantor
IBC is often cited as a boon when dealing with the huge conundrum of Non-Performing
Assets (NPAs) which plagued the Indian business ecosystem. It replaced the concept of
“debtor in possession” with “creditor in control,” and imposed a strict time-period to
resolve or liquidate the assets, after the creditor initiates the insolvency proceedings
6
Strengthening the Code. ASSOCHAM- CRISIL Joint Report. May 2019.
7
Report of the Insolvency Law Committee. Ministry of Corporate Affairs. February 2020.
8
A settled law in the cases of S.L. Srinivasa Jute Twine Mills (P) Ltd. v. Union of India and Anr. (2006) 2
SCC 740 and Director General of Foreign Trade and another v. Kanak Exports (2016) 2 SCC 226
9
Insolvency and Bankruptcy Board of India (Liquidation Process) (Second Amendment) Regulations, 2020.
The Gazette of India, Part II, Section 4, April 20, 2020.
10
Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Third
Amendment) Regulations, 2020. The Gazette of India, Part II, Section 4, April 20, 2020.
11
Report of the Insolvency Law Committee. Ministry of Corporate Affairs. February 2020.
12
Ibid.
13
Ibid.
www.ijmer.in 12INTERNATIONALJOURNAL OF MULTIDISCIPLINARYEDUCATIONALRESEARCH
ISSN:2277-7881; IMPACT FACTOR :6.514(2020); IC VALUE:5.16; ISI VALUE:2.286
Peer Reviewed:VOLUME:9, ISSUE:5(7), MAY:2020
subject to the condition of default debt reaching the minimum threshold, set at INR 1
lakh. Consequently, the apprehension of losing control over companies has prompted
debtors to pay their dues in a timely manner, thus improving debtor behaviour.14
Post threshold notification and the amendments to the IBBI regulations concerning
Liquidation Process and CIRP, the creditor and debtor relationship set out in IBC has
completely flipped. The very measures which were introduced to keep the debtor
behaviour in check have been temporarily turned off. While the threshold of INR 1 lakh
was creditor-friendly, it quickly turned into a means of misuse by operational creditors,
the increase in the threshold default limit is a relief for companies (debtors) facing
pressure tactics by operational creditors for recovery of paltry claims.But on the
flipside, many employees may not be able to file insolvency petition against their
employers as the salary outstanding rarely crosses INR 1 crore, and thus they have to
forfeit IBC to seek recourse to the recovery options available under the past legal
regime such as arbitration, civil court actions or dispute resolution mechanism provided
in the MSME Development Act.15
The corporate debtor is clearly benefitting from the increased threshold notification, as
has been discussed in the article above, but the MSMEs are not particularly debtors, but
also operational creditors to the bigger industries to whom they provide ancillary
movement. And the problem of delayed payments to MSMEs is long-standing.16 The
late-2019 Supreme Court judgement in the case of Pioneer Urban Land and
Infrastructure Ltd. &Anr. v. Union of India &Ors.17 Clarified that the low default limit
in IBC was made to allow small individuals to evoke the Code along with large
financial institutions. But the intention now seems to be convoluted with the increased
threshold, as it is now highlighting the susceptible nature of the MSMEs where the
bigger industries would be encouraged to default on their payments to the MSMEs and
coerce them to settle at insufficient amounts.18
Amongst all this commotion, the lack of update regarding personal guarantors opens the
door for corporate debtors’ creditors to initiate insolvency proceedings against them, at
a menial monetary limit of INR 1,000.19 The personal guarantors fall in a high-risk zone
as of now, where if the temporary measures concerning the suspension of time-period
for liquidation process and CIRP are ongoing for months on end with the default limit
set at INR 1 crore, the operational creditors previously flooding the Adjudicating
Authority with insolvency proceedings against debtors will move to seeking the
monetary claims from the guarantors.
14
Decoding The Code: Survey On Twenty One Months Of IBC In India. PricewaterhouseCoopers India.
August 31, 2018.
15
Section 18, The Micro, Small and Medium Enterprises Development Act, 2006
16
Micro, Small and Medium Enterprises: Challenges and Way Forward. Shaktikanta Das. Apr 13, 2020.
17
(2019) SCC OnLine SC 1005
18
The New Threshold of IBC in the Time of COVID-19 – an Impact. IBC Laws. May 7, 2020.
19
IBC threshold raised in Coronatic Disruption: Analysis and Implications. Vinod Kothari Consultants. March
25, 2020.
www.ijmer.in 13INTERNATIONALJOURNAL OF MULTIDISCIPLINARYEDUCATIONALRESEARCH
ISSN:2277-7881; IMPACT FACTOR :6.514(2020); IC VALUE:5.16; ISI VALUE:2.286
Peer Reviewed:VOLUME:9, ISSUE:5(7), MAY:2020
Businesses Pre and Post Lockdown
Pre-lockdown analysisof the MSME sector, including industry and services
sector20indicates that the industry credit growth had plunged between February 2019 to
February 2020 (as seen in Chart 1.a)21, and the services sector seemed to pick up in
January 2020, but weakened by next month(as seen in Chart 1.b).22 The most
noteworthy point is the significantly shrunksectoral share of Industry and Services in
credit flow between February 2019 and February 2020 in Chart 1.b.The credit disbursal
in the MSME sector has always been a challenge, and as of September 2019, the total
credit outstanding from banks and other financial institutionsto the MSME sector was
approximately INR 16.6 lakh crores.23
Chart 1.a Chart 1.b
*Source: Reserve Bank of India
When seen from the perspective of declining credit growth and perennial delayed
payments, the pre-existing condition only becomes more susceptible due to the increase
of default threshold during lockdown, and might see the bigger fish of the corporate sea
legally hold out the payments to the secondary MSMEs.While the MSMEs bear the
brunt of excessive NPAs(Non-Performing Assets) the RBI noted that the NPAs ratio
with respect to the Industry sector has been in decline a year after the IBC came into
force (as indicated in Chart 2).24
20
Empowering MSME for Service Industry. International Chamber for Service Industry.
21
Monetary Policy Report - April 2020. Reserve Bank of India Bulletin. Apr 13, 2020
22
Ibid.
23
Micro, Small and Medium Enterprises: Challenges and Way Forward. Shaktikanta Das. Apr 13, 2020.
24
Monetary Policy Report - April 2020. Reserve Bank of India Bulletin. Apr 13, 2020
www.ijmer.in 14INTERNATIONALJOURNAL OF MULTIDISCIPLINARYEDUCATIONALRESEARCH
ISSN:2277-7881; IMPACT FACTOR :6.514(2020); IC VALUE:5.16; ISI VALUE:2.286
Peer Reviewed:VOLUME:9, ISSUE:5(7), MAY:2020
Chart 2
*Source: Reserve Bank of India
Now if we consider the Lockdown 4.0 commencing from May 18, 202025 with moderate
relaxation and the INR 20 lakh crores economic stimulus package released by the
Central Government on May 12, 202026which been specifically targeted to support
MSMEs, the increased threshold ultimately serves the purpose in the scheme of
measures being taken to protect the MSMEs from solvency risks. The potential
economic loss would vary sector to sector, with IT-powered services, pharmaceuticals,
food and utilities, clothing and furnishings sectors would not as heavily be affected as
the aviation, transport, logistics, textiles, construction, hotel and entertainment sectors
(refer to Chart 3).27
Chart 3
*Source: McKinsey & Company
25
Coronavirus India lockdown Day 50 updates | No new COVID-19 cases in 9 States and UTs in last 24 hours,
says Health Minister. The Hindu. May 13, 2020.
26
Coronavirus: India targets small businesses in economic bailout. BBC News. May 13, 2020
27
Getting ahead of coronavirus: Saving lives and livelihoods in India. Mckinsey& Company. April 9, 2020
www.ijmer.in 15INTERNATIONALJOURNAL OF MULTIDISCIPLINARYEDUCATIONALRESEARCH
ISSN:2277-7881; IMPACT FACTOR :6.514(2020); IC VALUE:5.16; ISI VALUE:2.286
Peer Reviewed:VOLUME:9, ISSUE:5(7), MAY:2020
Conclusion
The economic impact of the enhanced threshold limit is unprecedented post-IBC era and
comes at a time when the global economic recession is imminent. It should be kept in
mind that drastic economic measures are always a double-edged sword, with its merits
and demerits, and it was indeed the need of the hour to save the Indian economy. The
revision of threshold of the default amount shall not only ease out the economic
pressure on MSMEs but also reduce the amount of frivolous insolvencyapplications that
are filed by operational creditors as a mere pressure tactic due recover their dues, and
reduce the stress on the NCLTs working during the stressful pandemic period. The
increased threshold notification came out first in the series of measures to save the
Indian economy, followed by the economic stimulus package of INR 20 lakh crore, with
the suspension of Section 7, 9 and 10 of the IBC in the tow, albeit not officially
announced. MSME sector holds great potential but the small size of individual units and
informal nature of the sector continues to pose challenges.One possible solution to the
challenge would be for the Central Government to clarify that the increased default limit
is specifically applicable to cases where an MSME is the Corporate Debtor, thus
preventing delayed payments.
References
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www.ijmer.in 16INTERNATIONALJOURNAL OF MULTIDISCIPLINARYEDUCATIONALRESEARCH
ISSN:2277-7881; IMPACT FACTOR :6.514(2020); IC VALUE:5.16; ISI VALUE:2.286
Peer Reviewed:VOLUME:9, ISSUE:5(7), MAY:2020
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We will definitely achieve the goal of $5-trillion economy, says Gadkari. March 19,
2020. LiveMint. https://www.livemint.com/news/india/we-will-definitely-achieve-the-
goal-of-5-trillion-economy-says-gadkari-11584632982973.html
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