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Tuesday, September 29, 2020

Panel proposes raising default threshold of cos to Rs 50 lakh to initiate insolvency proceedings

The report of the Insolvency Law Committee, which is set be submitted to Finance Minister Nirmala Sitharaman, has also recommended a lower threshold of Rs 5 lakh for initiation of insolvency against micro, small and medium enterprises (MSMEs).

Written by Karunjit Singh | New Delhi | March 9, 2020 1:04:01 am
insolvency proceedings, companies under insolvency proceedings, Insolvency and Bankruptcy Code, IBC, Bankruptcy Code, Nirmala Sitharaman, Indian express Officials said one of the main intentions behind the recommendation is to declog the National Company Law Tribunals (NCLTs), which adjudicate insolvency proceedings under the IBC, to speed up cases. (File Photo)

A high-level government panel has recommended that the default threshold for initiation for insolvency proceedings against companies under the Insolvency and Bankruptcy Code (IBC) be increased to Rs 50 lakh from Rs 1 lakh, government officials said. The report of the Insolvency Law Committee, which is set be submitted to Finance Minister Nirmala Sitharaman, has also recommended a lower threshold of Rs 5 lakh for initiation of insolvency against micro, small and medium enterprises (MSMEs).

Officials said one of the main intentions behind the recommendation is to declog the National Company Law Tribunals (NCLTs), which adjudicate insolvency proceedings under the IBC, to speed up cases.

One of the major criticisms of the insolvency legislation, brought into force in 2016, has been that most cases have taken longer than the 330-day time limit for resolution notified by the government. “The committee has recommended that the threshold be increased to Rs 50 lakh and Rs 5 lakh in the case of MSMEs,” said an official aware of developments.

Another official noted that this would also help in preventing frivolous insolvency cases.

Experts said that the move would help reduce the case load on NCLTs going forward.

“Any increase in the threshold limit to a more material level is a welcome move that will help reduce the flow of fresh cases and burden on the judicial system and participants,” said Uday Bhansali, president—financial advisory at Deloitte India.

The government official quoted above also said that the panel had made recommendations that the ‘fresh start’ process for personal insolvency, which is intended to discharge the liabilities of individuals with low incomes and assets, be resolved outside of the judicial system.

Provisions under the IBC allow for individual debtors with a maximum annual income of Rs 60,000, total assets below Rs 20,000 and total debts under Rs 25,000 to be discharged of their debts.

The fresh start process, however, only applies to unsecured debt. Insolvency provisions for individuals are expected to be brought into effect within 2020.

“The panel has recommended that the process not include insolvency professionals which may make the process costly, but that such debtors be able to file applications that are handled by administrative officers instead of going through to court,” said the official.

Another official told The Indian Express that the report noted that operational creditors should not be provided voting rights in the committee of creditors (CoC) of a company undergoing insolvency, but that this may be considered in the future if it does not undermine the insolvency process.

Operational creditors including suppliers of goods and services currently do not have a voting right in the CoC, which constitutes of financial creditors.

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