Raising threshold for insolvency: Good for NCLT, bad for smaller creditors

The Insolvency and Bankruptcy Code, 2016, (IBC) currently prescribes the threshold of Rs 1 lakh for invoking insolvency proceedings under the law. The Ministry of Corporate Affairs, however, has been for some time considering increasing the threshold requirement to reduce the number of filings before the National Company Law Tribunal (NCLT).

While the Insolvency Law Committee has recommended increasing the threshold to Rs 5 lakh, the government is reportedly looking at raising the bar to Rs 50 lakh. Experts are of the opinion that any increase in threshold needs a twofold analysis. While they agree with the government’s view that the increased threshold will bring in efficiency and help de-clog the NCLT, some experts highlight the adverse impact of the move on businesses where the default amount is usually smaller.

A view within the MCA is that in ca­ses where the amount of bad loan is not significant, lenders should look for other options before invoking the IBC. Experts are of the view that a substantial increase in threshold might affect certain sectors severely. “The impact of this may largely be felt by entities engaged in the manufacturing, trading, and real estate,” says Abhijeet Das, partner at law firm Cyril Amarchand Mangaldas.

Abizer Diwanji, head of financial services at EY, notes that the change will most severely impact operational creditors, who will not have a redressal with the increase in the threshold. “Looking at the empirical evidence, small claims were raised by operational creditors. This will most severely impact them as they do not have any recourse apart from the IBC,” says Diwanji. 

Poornima Advani, partner at The Law Point, too, feels that this move will be discriminatory against small operational creditors as they will be denied the ability to approach the NCLT for resolution.

According to Delhi-based advocate Shreya Prakash, in such cases, debt enforcement may need to be done un­der other laws, such as the Recovery of Debts Due to Banks and Financial Institutions Act (RDDBFI) and the Se­curitisation and Reconstruction of Fi­nancial Assets and Enforcement of Securities Interest Act (SARFAESI Act).

Das, however, takes a contrarian view. He notes this might lead to favourable results for small creditors, who will have to go to existing commercial courts or alternative dispute mechanisms. “This will hopefully provide an impetus for faster disposal of such disputes, without necessarily dragging the corporate debtor into insolvency proceedings,” he adds.

Experts are also divided over to what extent this move will help de-clog the NCLT. “While this is a welcome move to balance various interests at stake, the revised threshold by itself may not lead to significantly fewer filings with the NCLT,” says Das.

But, Advani feels that the increase in threshold might be effective in reducing the number of maintainable cases in the beginning. However, this may not have a significant impact on reducing the backlog in the long run. “There is a high possibility that creditors start inflating their dues so as to qualify under the threshold. Such action would only be detected later on in the proceedings when the NCLT looks into the merits of the matter,” she says.
 

Several corporate law experts are approaching the suggestion to substantially increase the threshold sceptically. Diwanji is of the view that even though clearing the backlog is much needed, increasing the threshold to such a high amount is not the way to do this. “The way to reduce is litigation is for the courts to stop behaving in a liberal manner while granting a stay and actively work towards commercial betterment,” he adds.

Experts fear any substantial in­cr­ease in the threshold of default for initiating CIRP could make the Code lender-oriented. The government nee­ds to ensure that the considerations of all stakeholders are balanced, they add.