Threshold limit under the Insolvency and Bankruptcy Code (IBC) for invoking an application may have been enhanced from ₹1 lakh to ₹1 crore in a welcome move from the standpoint of a corporate debtor, but it could leave many creditors within that bracket without remedy either under the Companies Act (CA) or the IBC.

This is because, with the introduction of the IBC, the Government had deleted Section 271(2) of the CA, 2013, and asked creditors to approach the tribunal under the IBC in case a company is unable to pay its debts. With the enhancement of the limit from ₹1 lakh to ₹1 crore, those falling within that bracket are unable to exercise their rights neither under CA nor the IBC.

The civil court option

“They will have to approach normal civil courts for recovery of their money, which would lead to further delay. The government should either reduce the limit to invoke an application to a lesser amount or reintroduce the deleted clauses of the CA with suitable modifications to end this predicament,” says Bijoy Pulipra, a Company Secretary and Insolvency Professional.

“Even ₹50 lakh is a big amount for a conventional creditor. The option for him is go to a civil court, but ambiguities abound here since it has no jurisdiction over company matters,” Pulipra told BusinessLine . Citing his own experience, he said he had submitted a claim for Rs 50 lakh on behalf of a corporate creditor. “But with the new default threshold in play, I find myself having ended up neither here nor there,” he added.

Floodgates may open

With the pandemic-induced suspension period envisaged under Section 10A of the IBC having ended on Thursday, Pulipra expects the insolvency floodgates to open. Section 10A was introduced to suspend applicability of corporate insolvency resolution process (CIRP) invoking sections such as 7, 9 and 10 with the intent to protect companies from the adverse economic impact of the pandemic.

The suspension was initially for a period of six months from March 25, 2020, which was extended further by six months. Because of this, no fresh insolvency matters could be admitted by National Company Law Tribunals (NCLTs) across the country. No application could be filed for initiation of CIRP for default occurring during the suspension period.

Classification of NPAs

“It is pertinent to point here that banks and financial institutions did not classify any account as non-performing asset (NPA) during the period and hence no default had technically occurred. Most banks/FIs shall start classifying the defaulting accounts in coming days as part of cleaning up their books which will escalate the number of cases being filed under IBC,” Pulipra said.

Apart from the raise in threshold level, the new IBC regime has also announced the concept of ‘pre-pack insolvency’ that will help the corporate debtor to find a resolution plan with the help of investors before approaching the tribunal. The pre-pack insolvency may get better traction with corporate debtors as they get an opportunity to resolve debt before it escalates to the CIRP stage.