Consequences of Increasing IBC starting on operational creditors

On 24^th March, 2020, Government of India  decided to increase for the determination of the default from Rs 1 lakh to Rs 1 crore in the light of the recent pandemic outspread of novel coronavirus disease Covid-19, in order to help and aid the functioning of the small companies and MSMEs which might face the threat of defaults owing to the lockdown. This decision has also clarified the intention of the Government to aid the small business owners and companies to survive the economic backlash of the spread of the pandemic. The Finance Minister Nirmala Sitharaman further suggested that if the situations prevailing in the country change for the worse in the near future, the Government will consider suspending Sections 7, 9 and 10 of the Insolvency and Bankruptcy Code (IBC) for next 6 months. This is an appreciable step in the direction of helping the companies being forced into the insolvency proceedings on default of loans.

One of the indispensable requisites for an applicant to invoke the relevant provisions of the code is that there should be a minimum amount of default.  the minimum amount of default was Rs 1 Lac in furtherance of which any creditor could avail the Code. But this amount has been increased to Rs 1 Cr. 

 

The best alternative was more pragmatic of the solutions forwarded by the government at this stage would have been the suspension of provisions dealing with triggering of insolvency. Instead of raising the threshold of the determination of default, which impairs an entire class of creditors from raising a hitherto legitimate claim, the Government could have just suspended the relevant sections of IBC like Section 7, 9 and 10 for time period and could have relaxed the Limitation Period applicable on defaulters and the creditors in the given scenario. 

That would have been a more fair and pragmatic method of ensuring protection to small businesses.