Vide Notification dated 24.03.2020 (Link to Notification), the Central Government has increased the threshold amount from Rupees One Lakh to Rupees One Crore to trigger insolvency proceedings under Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as "the code"). The Central Government derives its power from the proviso of the Section 4 of the Code to increase the threshold amount which provides that:
"4. (1) This Part shall apply to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of the default is one lakh rupees:
"4. (1) This Part shall apply to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of the default is one lakh rupees:
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 notification, inter-alia, is issued in response to the relief measures announced by the Government of India in view of the on going Covid - 19 pandemic.
Therefore the quintessential question that arises is- whether the notification will apply to fresh defaults only or to prior defaults as well which had occurred prior to the date of notification?
To answer this proposition first of all we need to peruse the definition of the term "default" used in the notification. The term "default" is defined under Section 3 (12) of the Code as :
"“default” means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be;"
"“default” means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be;"
Further the code also defines the term "Debt" under Section 3(11) as:
“debt” means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt;
From the above definitions it is clear that default simply means unpaid liability which has arisen at a particular point of time or on a specified date.
A conjoint reading of the above sections along with the notification dated 24.03.2020 would mean that to trigger the Insolvency Proceedings against a Corporate Debtor one crore is the minimum amount of debt which has become due and payable on 24.03.202020 or after that date and is not paid by the Corporate Debtor. After the notification the defaults can be categorized in two categories:
Further the notification dated 24.03.2020 is silent on its retrospective operation and a notification which has been issued by the Central Government by exercising the power of delegated legislation cannot go beyond the provision from which it derives such power, therefore by no stretch of imagination the said notification would not be applicable on the defaults which had been committed before the cut off date of 24.03.2020.
We also cannot lose sight of the fact that the present notification has been issued in view of the emerging financial distress faced by most of the companies (largely MSMEs) on account of the large scale economic distress caused by Covid - 19.
Therefore in my opinion this notification would not be applicable to the old defaults where debt has become due prior to the cut off date of 24.03.2020 otherwise it would cause great injustice to the Creditors whose dues are yet to be paid and are within the limitation period of 3 years. (Link to Press Release)
“debt” means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt;
From the above definitions it is clear that default simply means unpaid liability which has arisen at a particular point of time or on a specified date.
A conjoint reading of the above sections along with the notification dated 24.03.2020 would mean that to trigger the Insolvency Proceedings against a Corporate Debtor one crore is the minimum amount of debt which has become due and payable on 24.03.202020 or after that date and is not paid by the Corporate Debtor. After the notification the defaults can be categorized in two categories:
- Fresh Default (Default on or after 24.03.2020)
- Old Default (Default before 24.03.2020)
Further the notification dated 24.03.2020 is silent on its retrospective operation and a notification which has been issued by the Central Government by exercising the power of delegated legislation cannot go beyond the provision from which it derives such power, therefore by no stretch of imagination the said notification would not be applicable on the defaults which had been committed before the cut off date of 24.03.2020.
We also cannot lose sight of the fact that the present notification has been issued in view of the emerging financial distress faced by most of the companies (largely MSMEs) on account of the large scale economic distress caused by Covid - 19.
Therefore in my opinion this notification would not be applicable to the old defaults where debt has become due prior to the cut off date of 24.03.2020 otherwise it would cause great injustice to the Creditors whose dues are yet to be paid and are within the limitation period of 3 years. (Link to Press Release)
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