IBC threshold raised in Coronatic Disruption: Analysis and Implications

Megha Mittal & Shreya Jain


Frivolous initiation of insolvency process, merely for recovery of dues has been a persistent concern- catalyst being the seemingly low threshold of Rs.1,00,000/-.While murmurs about  raising the threshold limit for initiating insolvency process have long been in the picture, the notification comes in the wake of recent outbreak of the novel COVID – 19 – the minimum default requirement now stands increased hundred times; from Rs. 1,00,000/- to Rs. 1,00,00,000.

Applicable from 24.03.2020, the Government, in exercise of its powers under section 4 of the Insolvency and Bankruptcy Code, 2016 (“Code”)[1] has specified Rs. 1,00,00,000 (Rupees One Crore) as the minimum amount of default for the purposes of triggering insolvency. Note that Rs. 1 Crore is the maximum threshold which the Central Government can prescribe under section 4.

The step has been widely touted as a relief for MSMEs in this time of crisis, however, this might have multiple implications. The authors have made a humble attempt to analyse its implications from a broader perspective, and if at such increase would be welcomed in absence of the ongoing crisis.

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Companies under IBC-quarantine, get GST-rebirth

-Vinod Kothari 


Resolution is not a re-birth of an entity – it is simply like nursing a sick entity back to health. It is almost akin to putting the company under a quarantine – immune from onslaught of creditor actions, while the debtor and/or the creditors prepare a revival plan. The objective is that the entity revives – in which case, it is out of the isolation, and is back as a healthy entity once again.

This process is not unknown in insolvency laws world-over. However, in India, revival under insolvency framework has taken a completely unique trajectory. First was section 29A, cutting the company from its promoter-lineage for all time to come. The next was section 32A – redeeming the company from the past burden of civil as well as criminal wrongs, thereby giving it a new avatar, with a new management.

Now, the initiation of a CIRP proceeding will be akin to a new birth to the company, at least for GST purposes. Therefore, irrespective of whether the revival process succeeds or not, at least for GST purposes, the entity becomes clean-slate entity. This is the result of the new GST rule announced on 21st March, 2020. However, the new rules do not seem to have envisaged several eventualities, and we opine the intent of giving an immunity from past liabilities might have better been carried out by appropriate administrative instructions, rather than the new registration process.

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-Richa Saraf


The Apex Court, vide its order dated 22.01.2020, in the matter of Maharasthra Seamless Limited vs. Padmanabhan Venkatesh & Ors.[1] held that there is no requirement that the resolution plan should match the maximized asset value of the corporate debtors. Reiterating the principle laid down in the case of Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta[2], the Hon’ble Supreme Court held that once a resolution plan is approved by the committee of creditors (CoC), the Adjudicating Authority has limited power of judicial review.

The judgment of the Supreme Court boldly brings out the object of the Insolvency and Bankruptcy Code, 2016 (“Code”), i.e. “resolution before liquidation”. However, it will be pertinent to understand whether this ruling should be considered as a benchmark? Further, what will be the situation in case of liquidation? Whether sale under liquidation can be done for a value lower than the reserve price?

Below we analyse the ruling, seeking to answer the aforementioned questions.

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Richa Saraf


It is common business practice for group entities to regularly engage in related party transactions such as cross collateralisation, guarantee comforts, tunnelling or significant influence arrangements. While such structures largely respect the separate legal status of the group companies, practice suggests such inter-linkages in business, operations and management often raise significant challenges when any one or more entity in the group become insolvent[1]. In such cases, for maximisation of value to the stakeholders and to enhance the prospects of resolution, creditors may seek for substantive consolidation.

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The ‘net concentrate’ of ‘preference- Key takeaways from the SC ruling regarding preferential transactions

-Sikha Bansal


The Hon’ble Supreme Court’s ruling in Jaypee [Civil Appeal Nos. 8512-8527 of 2019] stands as a landmark for two reasons – first, it deals with an otherwise unexplored periphery of vulnerable transactions in the context of insolvency, and secondly, it will have far-reaching impacts on how secured transactions are structured and the manner in which the lenders lend.

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Recent Developments in Corporate Laws

In its stride to achieve transparency, good governance, and ease of doing business, the Government has time and again introduced amendments, proposed new ideas in the corporate laws. The very recent example of such changes are (a) Changes in RPTs proposed in LODR; (b) Minority Squeeze outs under Companies Act; and (c) introduction of Winding-up Rules, 2020.

In light of the these amendments/ proposed amendments, it becomes important to understand its impact on the already existing set-up. A brief analysis of the aforementioned topics has been discussed here

Limits of the Limitation Law and IBC

-Megha Mittal


The law of limitation revolves around the basic concept of fixing or prescribing the time period for barring legal actions beyond that period. A concept widely acknowledged, in India, the law of limitation is governed by the Limitation Act, 1963[1]. As stated in its preamble, the Limitation Act, 1963 (“Act”) is an act to consolidate the laws for the limitation of suits and other proceedings and for purposes connected therewith.

As observed in the 89th Report of the Law Commission of India[2], the laws of limitation are ultimately based on justice and convenience. An individual should not live under the threat of possible action for an indefinite period, and at the same time, should be saved from the task of defending a stale cause of action, as it would be unjust. The Report states, “all that has been said on the subject can be summarised by stating that the laws of limitation rest upon three main foundations – justice, convenience and the need to encourage diligence.” 

The very crux of having a limitation law in force is that a person cannot sleep over his rights[3] for an indefinite period and seek such remedy at a later stage. That being the tenet on which the law is based, there are several basic principles which the law states. These principles substantively affect the rights of parties. Recently, there has been a lot of commotion around the manner and the circumstances, in which the limitation law can be invoked in the context of the Insolvency and Bankruptcy Code, 2016 (‘Code’), though it is established now that the limitation law is applicable to the proceedings under the Code by virtue of section 238A.

In this article, we have made a humble attempt to analyse the various principles of the Limitation Act and its impact on the Code.

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-Richa Saraf



The Insolvency and Bankruptcy Code, 2016 (“Code”) does not, in general, deal with insolvency of financial service providers (“FSPs”), as FSPs are seen to be systemic and complex structures with unique transactions in their kitty. However, the Dewan Housing Finance Corporation Limited (DHFL) collapse led to notification of the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019[1] (“Rules”) under Section 227 of the Code. The Rules applied the law to FSPs, with certain modifications[2]. The Rules, inter alia, with respect to third party assets, stipulates that the moratorium provisions will not apply to such assets or properties in custody or possession of the FSP, including any funds, securities and other assets required to be held in trust for the benefit of third parties. The Rules further state that the Administrator shall take control and custody of such third-party assets or receivables, but only for the limited purpose of dealing with them in the manner as may be notified by the Central Government.

Pending notification of clear rules with regard to third party assets with the FSPs, there were ambiguities, which demanded judicial intervention (see below). However, now, the Central Government has, vide notification dated 30.01.2020[3] (“Notification”), notified the manner in which third party assets in custody or possession of financial service providers (against whom insolvency proceedings have been initiated) has to be dealt with.


On 30.09.2019, the Hon’ble Bombay High Court passed an ad-interim order, on an application filed by deposit-holders, and injuncted DHFL from making any payments and/or disbursements to any of its unsecured creditors and secured creditors, except in cases where payments made on pro-rata basis to all secured creditors, without the sanction of the Court. Aggrieved by the said order, various banks, including State Bank of India, Bank of Baroda, Union Bank of India, Indian Overseas Bank, Canara Bank, Bank of India, Standard Chartered Bank, filed intervening applications before the High Court seeking modification of the above order to the extent that DHFL is allowed to make payment of amounts due to banks pursuant to securitization and assignment agreements.

Finally, vide order dated 13.11.2019[4], the Bombay High Court allowed DHFL to make payments to banks and NBFCs that have securitisation arrangements with the stressed mortgage financier.

Pursuant to notification dated 18.11.2019[5], DHFL became the first FSP against which the insolvency proceedings were initiated on 02.12.2019,

As the Notification was not issued, the following issues arose in the DHFL case:

  • While DHFL continued to be the servicer of the pool underlying the securitisation transaction, it held that transferring of collections from securitised assets and liquidation of cash collateral by the trustee would be in violation of the NCLT order declaring moratorium, and therefore, refrained from depositing the collections from securitised assets into the respective collection and payout accounts.
  • The accessibility of cash collateral to trustee was, thus, restricted as DHFL informed the trustees that until the Central Government notification related to “dealing with third party assets” is issued, transfer/ appropriation/ enforcement of security or collateral will be in contravention of the Code.


To secure the rights of banks under securitisation agreements for cases, and put an end to the unwarranted circumstances in future as in case of DHFL, the Central Government issued the Notification, which casts the following obligations on the administrator of the FSP:

Dealing with third party receivables:

  1. Where a FSP is contractually obliged, as on the insolvency commencement date, to act as a servicing or collection agent on behalf of third parties, the administrator is required to prepare a statement of such transactions and respective agency contract.
  2. The administrator is required to continue to discharge the obligations of the FSP as a servicing or collection agent.
  3. The administrator is required to ensure that the receivables collected in respect of securitisation transactions are deposited and maintained in a separate account and are not merged with the funds or other assets of FSP.

Dealing with Third Party Assets:

  1. Where the FSP has, as on the insolvency commencement date, in its custody or possession assets owned by third parties, and is under an obligation to return or transfer such assets in accordance with the terms and conditions of the contract, the administrator is required to prepare a statement of such assets and the respective contracts.
  2. Further, the administrator is required to ensure that third party assets are maintained in a separate and distinct manner, capable of identifying them contract-wise, and are not merged with those of FSP.
  3. The administrator is required to return or transfer such assets to the person entitled to receive it in accordance with the terms and conditions of the contract, however, when due to breach of the terms of the contract, the FSP becomes entitled to retain certain assets or dispose of the same, the administrator shall not be required to return such assets.


1.   Appointment of alternate servicer or collection agent:

In securitisation transactions, while the originator of the loan (assignor) is appointed as the servicer or collection agent on behalf of the assignees, the assignees are provided with the sole and unquestionable right to replace the servicer with an alternate servicer, particularly in the case of event of default (insolvency is an event of default in all the cases). In our view, the obligation cast upon the administrator to continue acting as collection agent does not take away/ restrict such right of the assignee in any manner. If the assignees do not avail the option of appointing alternate servicer and is desirous to continue with the services of the FSP, only in such cases, the administrator will act for the FSP. Also, immediately, on termination of the services of the servicer, the servicer is required to transfer to the alternate/ successor servicer, the custody of all loan agreements, underlying documents, electronic payment instruments, cheques including post-dated cheques, drafts, instruments (if any), demand promissory notes, correspondence, records, information and monies held by the servicer with respect to the assets

2.   Operation of collection accounts:

Generally, it is seen that the receivables are first collected and deposited by the servicer in one common account, and thereafter disbursed to the beneficiaries as per the waterfall provided in the assignment agreement. The Notification provides that the administrator will be required to maintain separate collection accounts for each securitisation transaction. The requirement to maintain separate accounts means the administrator, on appointment, will be required to open separate bank accounts for collection of funds received from each assignment, which might result in administrative difficulties.

3.   Commingling of pool of loans:

The Notification provides that the administrator shall prepare a statement of assets and the respective “contracts” and further stipulates that the administrator shall ensure that such assets are maintained in a separate and distinct manner, capable of identifying them “contract-wise”. In securitisation transactions, a pool of loans are transferred to the assignee vide an assignment agreement, the language of the Notification may give rise to a confusion as to whether the term “contract” is used for loan agreement or assignment agreement. In our view, the intent was to distinguish between each securitisation transaction and not individual loans.

4.   Security interest enforced by the administrator on behalf of the assignee:

While the Notification provides that the assets which continue to be in the custody or possession of the FSP as on the insolvency commencement date shall be dealt with in the manner provided in the contract, there may be certain assets which might subsequently come in possession of the FSP/ administrator, the Notification is not clear about the treatment of such assets. We believe that the assets which subsequently come in possession or control of the FSP will also be dealt with in the same manner, i.e. in accordance with the terms and conditions of the respective assignment agreements.


While there seems to be some relief to the financial sector, since the Notification delinks the insolvency of one FSP from affecting the other financial entities, there still exists ambiguity so far as the scope of the term “third party” is concerned. Also, there is a need to clarify the manner in which third party assets is to be treated in resolution plans or in case of liquidation.


[1] https://ibbi.gov.in//uploads/legalframwork/cb1d53c7fe47f8f22ab36a40f441db2c.pdf

[2] See http://vinodkothari.com/2019/11/fsp-insolvency-rules/

[3] http://egazette.nic.in/WriteReadData/2020/215832.pdf


[5] https://ibbi.gov.in//uploads/legalframwork/902f83c01c5698018a07df94bd519c0f.pdf


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Accumulated welfare benefits of employees and treatment under Resolution Plans

Megha Mittal


The preamble of the Insolvency and Bankruptcy Code, 2016 (“Code”) enshrines the principle of balance of interests of all stakeholders. A major part of the stakeholders is represented by employees and workmen. Employees and workmen are one of the most significant pillars on which the economy runs, and hence, it becomes important to understand their footing under the Code and ensure that they have necessary safeguards from being put in a helpless position in a situation where the employer gets into insolvency.

It must be noted that section 5(20) read with section 5(21) includes claims in respect of employment under the ambit of “operational debt”, and as such empowers employees to initiate an application for insolvency against its employer, under section 9 of the Code, that is, as an operational creditor. Further, section 53 of the Code accords priority to the workmen dues at par with secured creditors, and next priority is given to employee dues. Hence, while on one hand their position as an applicant is secured, the position of its claims, especially terminal claims remains a rather unexplored sphere.

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Out-and-Out Ouster of Ineligible Persons- Liquidation Amendment Regulations, 2020 enact Discussion Paper proposals

-Megha Mittal


The Insolvency and Bankruptcy Board of India (“IBBI”/ “Board”) vide Notification No. IBBI/2019-20/GN/REG053, dated 06.01.2020, introduced the IBBI (Liquidation Process) (Amendment) Regulations, 2020 (“Amendment Regulations”) w.e.f. the same day.

In what seems to be an adaptation of the ideas proposed in the Discussion Paper dated 03.11.2019[1], the Amendment Regulations seem to have provided for  “out-and-out ouster” approach towards persons ineligible under section 29A of the Code, in liquidation processes too, thereby imbibing in the Liquidation Process Regulations, the orders of the Hon’ble National Company Law Appellate Tribunal (“NCLAT”) in Jindal Steel and Power Limited v. Arun Kumar Jagatramka & Gujarat NRE Coke Limited (Company Appeal (AT) No. 221 of 2018)[2] and State Bank of India v. Anuj Bajpai (Liquidator) (Company Appeal (AT) (Insolvency) No. 509 of 2019)[3]

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