Threshold Limit Under IBC: Legal Framework and Judicial Interpretations

 

Introduction

The Insolvency and Bankruptcy Code, 2016 (IBC) represents a landmark legislation in India’s commercial law landscape, designed to consolidate and streamline the insolvency resolution process for corporate entities, individuals, and partnerships. Among its various provisions, the threshold limit provision under Section 4 IBC has emerged as one of the most debated and litigated aspects of the Code. This provision establishes the minimum quantum of defaulted debt required to trigger Corporate Insolvency Resolution Process (CIRP) against a corporate debtor, serving as a crucial gatekeeping mechanism to prevent frivolous or vexatious proceedings.

The concept of  threshold limit under IBC serves multiple purposes: protecting debtors from harassment through proceedings initiated for trivial amounts, ensuring judicial resources are utilized efficiently, and maintaining the balance between creditor rights and debtor protection. The IBC’s threshold mechanism has undergone significant evolution since its inception, particularly in response to the COVID-19 pandemic’s economic disruptions.

Historical Development and Legislative Framework

Original Threshold Limit Under Section 4 of IBC

Section 4 of the Insolvency and Bankruptcy Code, 2016, originally established the threshold limit at Rs. 1,00,000 (One Lakh Rupees). The section states: “This Part shall apply to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of 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” [1].

This provision empowered the Central Government to modify the threshold limit through executive notification, subject to an upper ceiling of Rs. 1 crore. The relatively low initial threshold of Rs. 1 lakh was designed to ensure accessibility of the insolvency process to smaller creditors, particularly operational creditors who typically deal with smaller transaction values.

The COVID-19 Pandemic and Emergency Measures

The outbreak of COVID-19 in early 2020 necessitated extraordinary economic measures to protect businesses from insolvency proceedings during a period of unprecedented financial stress. Recognizing that the existing threshold of Rs. 1 lakh could lead to a flood of insolvency applications against businesses facing temporary liquidity constraints, the Central Government exercised its powers under the proviso to Section 4.

On March 24, 2020, the Ministry of Corporate Affairs issued Notification S.O. 1205(E), which increased the minimum threshold limit for initiating CIRP from Rs. 1,00,000 to Rs. 1,00,00,000 (One Crore Rupees) [2]. This notification was issued under the extraordinary circumstances prevailing due to the pandemic, with the objective of providing relief to corporate debtors facing financial distress due to the nationwide lockdown and economic disruption.

The notification stated: “In exercise of the powers conferred by the proviso to sub-section (1) of section 4 of the Insolvency and Bankruptcy Code, 2016, the Central Government hereby specifies the minimum amount of default as rupees one crore in place of rupees one lakh.” This represented a hundred-fold increase in the threshold limit, fundamentally altering the accessibility and scope of insolvency proceedings under the IBC.

Legal Analysis of the Threshold Enhancement

Statutory Interpretation and Scope

The dramatic increase in the threshold limit from Rs. 1 lakh to Rs. 1 crore fundamentally altered the dynamics of insolvency proceedings under the IBC. This change had several immediate implications for different classes of creditors and the overall effectiveness of the insolvency framework.

For financial creditors operating under Section 7 of the IBC, the impact was relatively limited. Financial creditors typically deal with larger loan amounts and often have the flexibility to aggregate multiple defaults or join with other financial creditors to meet the enhanced threshold. Section 7 permits financial creditors to file applications individually or collectively, providing them with strategic options to overcome the higher threshold requirement.

However, operational creditors governed by Section 9 of the IBC faced significantly greater challenges. Operational creditors, including suppliers, service providers, and contractors, typically have smaller individual exposures and cannot aggregate their claims with other operational creditors in the same manner as financial creditors. The requirement that each operational creditor individually meet the Rs. 1 crore threshold effectively excluded a vast majority of operational creditors from accessing the insolvency process.

Impact on Different Classes of Creditors

The enhanced threshold created a dichotomous effect on the creditor landscape. Large corporate creditors and major financial institutions could still effectively utilize the IBC mechanism, while smaller businesses, individual entrepreneurs, and micro, small, and medium enterprises (MSMEs) found themselves largely excluded from the process. This outcome arguably contradicted one of the IBC’s fundamental objectives of creating an inclusive and accessible insolvency resolution framework.

The differential impact on operational versus financial creditors also raised questions about the equitable treatment of different creditor classes under the Code. While the original design of the IBC sought to balance the interests of various stakeholder categories, the enhanced threshold appeared to create an inherent bias favoring financial creditors over operational creditors.

Judicial Interpretation and Prospective Application

The Landmark Arrowline Organic Products Case

The question of whether the enhanced threshold limit would apply retrospectively or prospectively became the subject of extensive litigation across various National Company Law Tribunals (NCLTs). The most significant judicial pronouncement on this issue came from the NCLT Chennai in the case of M/s Arrowline Organic Products Pvt. Ltd. v. M/s Rockwell Industries Limited [3].

In this case, the corporate debtor challenged the maintainability of insolvency proceedings initiated before March 24, 2020, arguing that the enhanced threshold should apply to all pending cases. The NCLT Chennai, however, rejected this contention and held that the notification increasing the threshold limit would apply only prospectively, not affecting cases where defaults had occurred and proceedings had been initiated before the notification date.

Constitutional and Legislative Principles

The NCLT Chennai’s decision was grounded in well-established constitutional and legislative principles governing the retrospective application of executive notifications. The tribunal relied on several Supreme Court precedents to reach its conclusion, establishing important jurisprudential principles for the application of threshold modifications under the IBC.

In the case of Bakul Cashew Co. vs. Sales Tax Officer Quilon, the Supreme Court established the fundamental principle that only the legislature possesses the inherent power to make laws with retrospective effect [4]. When legislative powers are delegated to executive authorities, such powers are limited in scope and cannot ordinarily be exercised retrospectively unless expressly authorized by the parent statute.

Applying this principle to the IBC context, the NCLT observed that the notification enhancing the threshold limit was issued by the Central Government under delegated legislative powers conferred by Section 4. Since the statute did not expressly authorize retrospective application of such notifications, the enhanced threshold could only apply prospectively to future cases.

The tribunal further strengthened its reasoning by referencing the Supreme Court’s decision in Indramaniyarelal Gupta v. W. R. Nath, which held that while the legislature has inherent powers to enact retrospective legislation, executive authorities exercising delegated powers cannot assume such retrospective authority without express statutory authorization [5].

The Kirti Kapoor Precedent

The NCLT Chennai also drew support from the Division Bench decision of the Rajasthan High Court in Kirti Kapoor v. Union of India, which dealt with similar threshold enhancement under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 [6]. Although the Rajasthan High Court did not explicitly term the notification as prospective, it applied the doctrine of conditional legislation to hold that such notifications should apply only to future applicants.

This precedent provided additional jurisprudential support for the prospective application principle, establishing a consistent judicial approach across different insolvency and debt recovery statutes in India.

Practical Implications and Implementation Challenges

Operational Creditor Disadvantage

The enhanced threshold limit under IBC created significant practical challenges for operational creditors seeking to recover debts through the IBC mechanism. Unlike financial creditors who typically maintain long-term relationships with corporate borrowers and have larger exposure limits, operational creditors often deal with smaller, transaction-specific obligations.

The requirement for individual operational creditors to meet the Rs. 1 crore threshold effectively eliminated the viability of IBC proceedings for most supplier and service provider relationships. This outcome was particularly problematic for MSMEs, which form the backbone of India’s industrial ecosystem but typically have smaller individual transaction values with their corporate customers.

Strategic Implications for Corporate Debtors

From the perspective of corporate debtors, the enhanced threshold provided significant protection against frivolous or harassment-oriented insolvency proceedings. Companies facing temporary financial distress, particularly during the pandemic period, could avoid premature insolvency proceedings initiated by smaller creditors for relatively minor defaults.

However, this protection came at the cost of potentially enabling strategic default behavior by corporate debtors who might delay payments to smaller creditors, knowing that individual creditors would be unable to initiate insolvency proceedings. This moral hazard aspect of the enhanced threshold raised concerns about the overall integrity of commercial relationships and payment disciplines in the corporate sector.

Judicial Efficiency and Resource Allocation

The enhanced threshold also had positive implications for judicial efficiency and resource allocation within the NCLT system. By filtering out smaller-value cases, the enhanced threshold helped reduce the caseload burden on NCLTs, allowing them to focus on larger, more complex insolvency matters that have greater systemic importance.

However, this efficiency gain came at the cost of access to justice for smaller creditors, raising fundamental questions about the appropriate balance between judicial efficiency and stakeholder access to legal remedies.

Contemporary Judicial Developments

NCLT Delhi’s Interpretation

Subsequent to the Chennai NCLT decision, other benches of the NCLT have generally followed the prospective application principle established in the Arrowline case. The NCLT Delhi, in the case of Udit Jain (Sole Proprietor of M/s U.J. Trading Co.) vs. Apace Builders and Contractors Pvt. Ltd, further clarified that the Rs. 1 crore threshold must be fulfilled by the applicant on the date of filing the application [7].

This interpretation added an additional layer of complexity by requiring creditors to ensure that their claim amount meets the threshold requirement at the time of filing, rather than at the time of default occurrence. This temporal distinction has important implications for cases involving interest accrual, penalty charges, and other time-dependent components of debt calculation.

High Court Interventions

The Kerala High Court’s intervention in the threshold limit controversy added another dimension to the judicial discourse. In a case involving insolvency proceedings initiated with respect to an alleged default of Rs. 31 lakhs, the Kerala High Court stayed an NCLT order that had applied the prospective application principle [8]. This intervention highlighted the ongoing judicial debate about the appropriate application of the enhanced threshold limit and suggested that the issue may require definitive resolution by higher judicial authorities.

Regulatory Framework and Current Status

Current Threshold Limit Status under IBC

As of 2025, the enhanced threshold limit of Rs. 1 crore continues to remain in effect, despite the gradual normalization of economic conditions following the pandemic. The persistence of this enhanced threshold has raised questions about whether the temporary pandemic-relief measure has effectively become a permanent feature of the IBC framework.

The continuation of the higher threshold limit suggests that the government may have determined that the enhanced threshold provides benefits beyond pandemic relief, including reduced frivolous litigation and improved judicial efficiency. However, this decision continues to be debated among insolvency practitioners and legal experts.

Regulatory Considerations for Reform

The current threshold framework under the IBC presents several regulatory considerations that may warrant future reform. The stark differential between the original Rs. 1 lakh threshold and the current Rs. 1 crore threshold suggests that an intermediate threshold level might better balance the competing interests of creditor access and debtor protection.

Some legal experts have suggested implementing a graduated threshold system that differentiates between various types of creditors or industries, similar to the approach adopted in some international insolvency jurisdictions. Such an approach could provide tailored threshold limits that reflect the specific characteristics and needs of different sectors of the economy.

Comparative Analysis with International Practices

International Threshold Practices

International insolvency regimes typically employ varying approaches to threshold limits, reflecting different policy priorities and economic contexts. The United States Bankruptcy Code, for instance, does not impose specific monetary thresholds for initiating bankruptcy proceedings but instead relies on other eligibility criteria and procedural safeguards to prevent abuse.

In contrast, the United Kingdom’s insolvency framework employs multiple threshold levels depending on the type of procedure being initiated. For company voluntary arrangements, the threshold is relatively low, while compulsory liquidation requires higher statutory demand amounts. This graduated approach provides flexibility while maintaining appropriate protective mechanisms.

Lessons for Indian Reform

The international experience suggests that threshold limit design should consider sector-specific characteristics, creditor types, and overall economic conditions. A one-size-fits-all approach, as currently employed under the IBC, may not adequately address the diverse needs of India’s complex economic landscape.

Future reforms to the IBC threshold framework could benefit from incorporating flexible mechanisms that allow for periodic adjustment based on economic conditions, inflation indices, or sector-specific considerations. Such adaptive mechanisms could provide the regulatory agility needed to respond to changing economic circumstances without requiring frequent legislative or executive interventions.

Economic Impact and Policy Considerations

Impact on Credit Markets and Commercial Relationships

The enhanced threshold limit under IBC has had significant implications for credit markets and commercial relationships in India. Suppliers and service providers have been compelled to reassess their credit policies and payment terms when dealing with corporate customers, knowing that the IBC remedy may not be available for smaller defaults.

This change has likely contributed to more cautious credit extension practices among operational creditors, potentially affecting the overall liquidity and efficiency of commercial markets. Some businesses have reportedly shifted toward advance payment requirements or shorter credit terms to mitigate the risk of irrecoverable smaller debts.

MSME Sector Implications

The enhanced threshold has disproportionately affected the MSME sector, which typically operates with smaller transaction values and limited financial resources. MSMEs serving larger corporate clients have found themselves in a particularly vulnerable position, lacking effective legal remedies for debt recovery through the IBC process.

This vulnerability has broader economic implications, as MSMEs constitute a significant portion of India’s industrial base and employment generation. The inability of MSMEs to effectively utilize insolvency proceedings for debt recovery may have contributed to increased payment delays and working capital constraints in this crucial sector.

Future Outlook and Recommendations

Need for Balanced Reform

The experience with the enhanced threshold limit under the IBC highlights the need for a more nuanced and balanced approach to threshold design. Future reforms should consider implementing a graduated threshold system that recognizes the different characteristics and needs of various creditor categories.

A potential reform approach could involve establishing different threshold limits for financial creditors, operational creditors, and different industry sectors. Such differentiation could preserve the accessibility of insolvency proceedings for smaller operational creditors while maintaining appropriate safeguards against frivolous litigation.

Technological Solutions and Alternative Mechanisms

The digital transformation of India’s legal and financial systems presents opportunities for developing alternative mechanisms for smaller debt recovery cases. Online dispute resolution platforms, automated recovery systems, and digital payment enforcement mechanisms could provide efficient alternatives to formal insolvency proceedings for smaller defaults.

Integrating such technological solutions with the IBC framework could help address the access to justice concerns raised by the enhanced threshold while maintaining the efficiency benefits of filtering smaller cases out of the formal insolvency process.

Conclusion

The threshold limit provision under the Insolvency and Bankruptcy Code represents a critical balance point between creditor access and debtor protection in India’s insolvency framework. The dramatic increase from Rs. 1 lakh to Rs. 1 crore in response to the COVID-19 pandemic has fundamentally altered the landscape of insolvency proceedings, creating both intended benefits and unintended consequences.

The judicial interpretation establishing the prospective application of the enhanced threshold has provided important jurisprudential clarity while highlighting the constitutional principles governing executive power and retrospective legislation. However, the continued application of the enhanced threshold long after the pandemic emergency raises important questions about the appropriate permanent level for the IBC threshold.

The experience with threshold modification under the IBC offers valuable lessons for future policy development in insolvency law. The need for flexible, adaptive mechanisms that can respond to changing economic conditions while maintaining appropriate stakeholder protections is evident from the challenges experienced during this transition.

As India’s economy continues to evolve and mature, the IBC framework must similarly adapt to ensure that it continues to serve its fundamental objectives of facilitating efficient insolvency resolution while protecting the legitimate interests of all stakeholders. The threshold limit provision, as a key gatekeeping mechanism, will undoubtedly continue to play a crucial role in shaping the effectiveness and accessibility of India’s insolvency regime.

Future reforms should focus on creating a more nuanced and balanced threshold framework that recognizes the diverse needs of India’s complex economic ecosystem while maintaining the efficiency and integrity of the insolvency process. Only through such thoughtful evolution can the IBC continue to serve as an effective tool for economic development and commercial confidence in India’s dynamic business environment.

References

[1] The Insolvency and Bankruptcy Code, 2016, Section 4.

[2] Ministry of Corporate Affairs, Notification S.O. 1205(E) dated March 24, 2020. 

[3] M/s Arrowline Organic Products Pvt. Ltd. v. M/s Rockwell Industries Limited, NCLT Chennai. Available at: https://ibclaw.in/m-s-arrowline-organic-products-pvt-ltd-vs-m-s-rockwell-industries-ltd-nclt/ 

[4] Bakul Cashew Co. vs. Sales Tax Officer Quilon, Supreme Court of India. 

[5] Indramaniyarelal Gupta v. W. R. Nath, Supreme Court of India. 

[6] Kirti Kapoor v. Union of India, Rajasthan High Court.

[7] Udit Jain vs. Apace Builders and Contractors Pvt. Ltd, NCLT Delhi. Available at: https://taxguru.in/corporate-law/ibc-minimum-threshold-rs-1-crore-date-filing-petition.html 

[8] Kerala High Court intervention in threshold limit case. Available at: https://www.livelaw.in/news-updates/ibc-threshold-march-24-notification-one-crore-kerala-high-court-stays-nclt-167125 

[9] Analysis of threshold limit developments. Available at: https://ibclaw.in/important-judgments-on-threshold-limit-increased-from-1-lakh-to-1-crore-for-filing-cirp-application-under-section-7-or-9-of-insolvency-and-bankruptcy-code-2016-ibc/