COVID 19 Effect – Government raised the threshold for default under Insolvency and Bankruptcy Code, 2016 norms from Rs 1 lakh to Rs 1 crore

Recently, the raised the threshold for default under , 2016 norms from Rs 1 lakh to Rs 1 crore by exercising the power under section 4[1]of the Code, 2016. The purpose is to prevent initiating of insolvency proceedings against micro, small and medium enterprises (MSMEs).

“The government may suspend at later stage section 7, 9 and 10 of the Insolvency and Bankruptcy Code (IBC) for 6 months to discontinue companies from being forced into insolvency proceedings in force majeure causes of default,” finance minister Nirmala Sitharaman said in a press conference.

Section 7 of the Reserve Bank of India Act empowers the government to give directions to the central bank on matters of public interest[2]. Section 7[3]states about the initiation of Corporate Insolvency Resolution Process before the Adjudicating Authority when a default has occurred. Section 9[4]of IBC states about Application for initiation of corporate insolvency resolution process by operational creditor. Section 10[5]of IBC states about Initiation of corporate insolvency resolution process by corporate applicant. 

The move was implemented straight away to give some relief to the cash strapped MSMEs sector due to the Covid-19 pandemic. Before the Notification, the default of Rs. one lakh was enough to initiate Corporate Insolvency Resolution Process (CIRP) against the defaulters. The Covid-19 has choked business uncertainly and this move will help thousands of small firms to survive and prevent insolvency proceedings against them[6]. The small business is struggling due to slowing domestic demand over the last few quarters[7]. The present move of government seems to respond to such economic slowdown. 


[1]Insolvency and Bankruptcy Code, 2016 Section 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. 
[2]Reserve Bank of India Act, 1934 Section 7. Management.
(1) The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest…..
[3]Insolvency and Bankruptcy Code, 2016 Section 7. (1) A financial creditor either by itself or jointly with other financial creditors may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred.
Explanation.—For the purposes of this sub-section, a default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor.
(2) The financial creditor shall make an application under sub-section (1) in such form and manner and accompanied with such fee as may be prescribed…..
[4]Insolvency and Bankruptcy Code, 2016 –  Section 9. 
(1) After the expiry of the period of ten days from the date of delivery of the notice or invoice demanding payment under sub-section (1) of section 8, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute under sub-section (2) of section 8, the operational creditor may file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process.
(2) The application under sub-section (1) shall be filed in such form and manner and accompanied with such fee as may be prescribed…..
[5]Insolvency and Bankruptcy Code, 2016 –  Section 10. (1) Where a corporate debtor has committed a default, a corporate applicant thereof may file an application for initiating corporate insolvency resolution process with the Adjudicating Authority.
(2) The application under sub-section (1) shall be filed in such form, containing such particulars and in such manner and accompanied with such fee as may be prescribed……
[6]Covid-19 impact: FM Nirmala Sitharaman raises insolvency threshold of default to Rs 1 crore for MSMEs, THE ECONOMIC TIMES (24, March 2020) https://economictimes.indiatimes.com/small-biz/sme-sector/govt-raises-insolvency-threshold-to-rs-1-cr-to-help-smes/articleshow/74791431.cms
[7]Pranbihanga Borpuzari, Shariq Khan, When is the Government going to respond? Businesses look for assistance as coronavirus starts hurting, THE ECONOMIC TIMES, (Mar.19,2020)https://economictimes.indiatimes.com/small-biz/sme-sector/when-is-the-government-going-to-respond-businesses-look-for-assistance-as-coronavirus-starts-hurting/articleshow/74707616.cms?from=mdr

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