Threshold For Bankruptcy Default Increased To INR 1 Cr To Tackle Coronavirus Impact

In the wake of Covid-19 and coronavirus lockdowns and the worst economic slowdown since 2008, the finance minister today (March 24, 2020) came up with a host of immediate measures and announcements to help business communities sustain the long-term slowdown. As part of reforms was extending the monetary threshold for default for bankruptcy.

Speaking to the media, through video conferencing, finance minister Sitharaman increased the threshold for default from existing INR 1 Lakh to INR 1 Cr.

“You are aware that the threshold for default as it exists now is INR 1 Lakh. We are raising the threshold for default to INR 1 Cr, so that we can prevent triggering of insolvency proceedings against MSMEs. This will be implemented straight away”

However, if the situation worsens or continues to remain so, the finance minister assured the startups, MSMEs that more steps will be taken.

“We will watch the situation and if the situation improves, there is no worry, but if the situation continues like this beyond April 30 as well, then we may consider suspending, Section 7,9,10 of the IBC [Insolvency and Bankruptcy Code] for a period of six months so that companies can be stopped from being forced into insolvency proceedings in such forced measure causes of default,” the finance minister added.

Sections 7, 9 and 10 of the IBC deal with the financial creditors, operational creditors and corporate applicants respectively initiating the corporate insolvency resolution process when a default has occurred.

Since 2016, the Indian government has made certain changes in IBC, particularly for the startups MSMEs. It envisaged a fast track corporate insolvency resolution process (F-CIRP) for startups and MSMEs with total assets below INR 1 Cr.

In December 2019, the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019 was introduced and has now been enacted through parliament. The amendment introduces an additional threshold for certain classes of financial creditors, including allottees of real estate projects, for initiating the resolution process.  At least 10% of them or 100 such persons have to jointly initiate the process.

While the amendment empowers the resolution professional to require suppliers to continue providing goods and services, it also states that the company will not be liable for any offence committed prior to the insolvency resolution process, if there is a change in the management or control of the company.

During the press conference, the minister also announced that no interest, penalty, or a late fee will be levied on companies with a turnover less than INR 5 Cr for filing goods and service tax (GST) returns for March, April, and May 2020. The last date for linking Aadhaar with PAN card has also been extended to June 30, 2020.