Answer By law4u team
The Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC), 2016 provides a legal framework for resolving insolvency of corporate debtors in a time-bound manner. One of the key prerequisites to initiate CIRP is that a minimum default amount must be met. This threshold is designed to prevent frivolous or malicious filings, especially by operational creditors, and to streamline the use of insolvency proceedings for serious defaults.
Threshold Default Amount for CIRP Initiation
Original Threshold (2016): ₹1 Lakh
At the inception of the IBC in 2016, the minimum default amount required to trigger CIRP was ₹1,00,000. This was applicable for both financial and operational creditors.
Revised Threshold (March 24, 2020): ₹1 Crore
The Ministry of Corporate Affairs (MCA), via a notification dated March 24, 2020, increased the minimum threshold from ₹1 lakh to ₹1 crore.
Objective: To reduce the burden on the National Company Law Tribunal (NCLT) and protect small and medium enterprises (SMEs) from being dragged into insolvency due to minor defaults during the COVID-19 pandemic.
Applicable To Whom?
Financial Creditors: Can initiate CIRP under Section 7 of the IBC when default exceeds ₹1 crore.
Operational Creditors: Can file under Section 9 only if the claim amount exceeds ₹1 crore, after serving a demand notice and receiving no payment or dispute response within 10 days.
Corporate Applicants: Corporate debtors themselves may initiate insolvency under Section 10 for defaults of ₹1 crore or more.
Exceptions and Special Cases
For cases involving Real Estate Allottees and Homebuyers, the default must meet the collective threshold (at least 100 allottees or 10% of total allottees) under Section 7.
The ₹1 crore threshold does not apply retrospectively to cases already filed before the March 2020 amendment.
Significance of the Threshold
Helps avoid misuse of CIRP for minor or disputed claims.
Reduces pressure on the NCLT system.
Protects MSMEs from coercive insolvency actions.
Encourages settlement or alternative dispute resolution for smaller amounts.
Legal Basis
Section 4 of the Insolvency and Bankruptcy Code, 2016
MCA Notification No. S.O. 1205(E) dated 24.03.2020
Example
Suppose a company defaults on a supplier payment of ₹50 lakhs. The supplier, being an operational creditor, decides to initiate CIRP.
Outcome:
The application will be rejected by the NCLT since the default amount does not meet the ₹1 crore threshold. The supplier may instead consider sending legal notices or seeking arbitration. However, if the default amount were ₹1.2 crores, and proper notices were sent, the supplier could validly file for CIRP under Section 9 of the IBC.
