Answer By law4u team
The Insolvency and Bankruptcy Code (IBC), 2016 provides a legal framework for individuals and corporate entities facing financial distress or defaulting on debt obligations. To trigger the insolvency process, a minimum default amount has been set. This threshold varies for corporate entities and individuals, allowing creditors to initiate proceedings based on the amount of debt owed.
Minimum Default Amount for Insolvency
For Corporate Debtors (Companies and LLPs)
The minimum default amount for initiating Corporate Insolvency Resolution Process (CIRP) under the IBC, 2016 is ₹1 crore (₹10 million).
Section 4 of the IBC defines that a corporate debtor must default on an amount of ₹1 crore or more for creditors to approach the National Company Law Tribunal (NCLT) for initiating the insolvency process.
Creditors (financial and operational creditors) can file a petition with the NCLT when the debtor fails to pay off debts or obligations exceeding ₹1 crore.
Example:
If a company owes ₹1.2 crore to a creditor, the creditor can initiate the CIRP process to resolve the company’s financial issues under the IBC.
For Individuals and Partnership Firms
For individuals and partnership firms, the minimum default amount required to initiate insolvency proceedings is ₹1,000.
As per Section 94 of the IBC, an individual debtor or partnership firm must default on an amount of ₹1,000 or more for creditors to file a petition before the Debt Recovery Tribunal (DRT) or the NCLT.
The process allows for the restructuring of the debtor’s financial obligations, provided the amount in default meets the threshold.
Example:
If an individual defaults on a personal loan of ₹1,500, the creditor can file for insolvency under the provisions set out for individual bankruptcy.
How the Default Amount Triggers Insolvency Proceedings
Corporate Debtors (Companies and LLPs)
When a corporate debtor defaults on ₹1 crore or more, financial creditors (e.g., banks or other financial institutions) or operational creditors (e.g., suppliers or service providers) can initiate insolvency proceedings under the Corporate Insolvency Resolution Process (CIRP).
The process includes appointing an Insolvency Professional (IP) who will oversee the debtor's assets and try to resolve the debt through a resolution plan.
If the resolution process fails, the corporate debtor may be liquidated, and its assets sold off to pay creditors.
Individual Debtors
For individuals and partnership firms, once the minimum default threshold of ₹1,000 is met, they can initiate the Personal Insolvency Resolution Process (PIRP).
The individual or partnership firm may seek relief from creditors by either restructuring their debt obligations or, in the worst-case scenario, liquidating assets to pay off debts.
If the resolution is successful, the individual or partnership firm may be discharged from their debts.
Importance of Minimum Default Amount
The minimum default amount serves as a threshold for initiating insolvency proceedings, ensuring that insolvency procedures are not used frivolously for small defaults. It balances the interests of both debtors and creditors.
For corporate entities, setting the threshold at ₹1 crore ensures that the IBC is used for substantial defaults, which involve significant financial distress, rather than for minor debts.
For individuals and partnerships, the lower threshold of ₹1,000 allows for timely intervention in personal financial crises and ensures that individuals who are genuinely struggling with their debts can seek legal relief.
Example of Default Amount Triggering Insolvency
Example 1 – Corporate Debtor
XYZ Ltd., a manufacturing company, defaults on a payment of ₹1.5 crore to one of its suppliers. The supplier, being an operational creditor, can file a petition before the National Company Law Tribunal (NCLT) for initiating CIRP since the default amount exceeds ₹1 crore. The NCLT will assess the petition and may proceed with insolvency proceedings.
Example 2 – Individual Debtor
Mr. Raghav, an individual, defaults on a personal loan of ₹2,000. The lender can file a petition for insolvency under the Personal Insolvency Resolution Process (PIRP) since the default amount exceeds ₹1,000. The Debt Recovery Tribunal (DRT) will consider the petition and may appoint an Insolvency Professional (IP) to manage Mr. Raghav’s financial affairs.
Conclusion
The minimum default amount to trigger insolvency proceedings under the Insolvency and Bankruptcy Code (IBC), 2016 varies between corporate and individual debtors:
- For corporate debtors (such as companies or LLPs), the threshold is ₹1 crore.
- For individuals and partnership firms, the minimum default amount is ₹1,000.
This ensures that insolvency procedures are used effectively to address serious financial distress, whether it’s at a corporate level or for individuals facing financial crises.
