MCA NOTIFICATION ENHANCING MINIMUM AMOUNT OF DEFAULT APPLIES PROSPECTIVELY, CLARIFIES NCLAT

As the ongoing pandemic has impacted economies across the world, it is getting difficult to find adequate resolution applicants to rescue a corporate debtor which is under Corporate Insolvency Resolution Process (“CIRP”) under the Insolvency and Bankruptcy Code, 2016 (“IBC” or “Code”). A large number of firms, that otherwise maintain a good track record under existing promoters, face the challenge of their debt burden becoming disproportionate, relative to their cash flow generation abilities. This potentially impacts their long-term viability and pose significant financial stability risks. Globally, insolvency laws have been going through a series of amendments, providing sick companies a lifeline for staying afloat.

Increasing the default threshold for initiation of CIRP had long been deliberated upon. The February 2020 Report of the Insolvency Law Committee has also recommended it as a measure to reduce the number of CIRP applications and to prevent the IBC from being used as a mere recovery tool in the hands of creditors. As a part of the Government’s continuing efforts to combat the economic nosedive, the minimum threshold for initiating insolvency was increased from one lakh rupees to one crore rupees by means of a notification issued by the Ministry of Corporate Affairs dated March 24, 2020 in the exercise of powers conferred under the proviso to Section 4(1) of the IBC (“Notification”).

The Kolkata Bench of the NCLT has, in its order dated May 20, 2020 in Foseco India Limited v Om Boseco Rail Products Limited[1] deliberated on whether this increase in threshold under IBC is prospective or retrospective in effect.

The Operational Creditor, Foseco India Limited filed an application under Section 9 of IBC for initiation of CIRP against the Corporate Debtor, viz. Om Boseco Rail Products Limited.  The application was filed for the alleged default in payment of operational debt to the tune of 90,00,919.10 (Rupees ninety lakh nine hundred nineteen and paise ten only).

It was the contention of the Corporate Debtor that the Notification was retrospective in nature. Hence, it was argued that the Operational Creditor’s application was no longer maintainable, as the default alleged was below the revised threshold limit for initiation of CIRP.

However, the Tribunal concluded that the relaxation of the threshold under the Notification applies prospectively and not retrospectively. While relying primarily on the presumption of statutes being prospective unless found to be retrospective, either expressly or by necessary implication, the tribunal was of a view that such an increase in default threshold is prospective. 

Subsequently, there have been developments that have impacted the scope of this Notification. Earlier in June, the Union cabinet cleared the proposal to suspend insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC) for six months. An amendment was introduced into the code owing to the unprecedented stress borrowers were facing due to the economic repercussions of the pandemic. The newly inserted section 10-A in the IBC stated that, no fresh insolvency proceedings can be initiated against any borrower for defaults arising on or after March 25, 2020, until such time as notified. Recently, the Ministry of Corporate Affairs on September 24, 2020 extended the moratorium for initiating CIRP, by a further period of 3 months i.e. till December 25, 2020.

Pursuant to the NCLT Kolkata order, an appeal was filed by the ex-director of the Corporate debtor challenging the admission order passed by the Adjudicating Authority. 

NCLAT remarked that a Demand Notice was served on the CD on August 1, 2019, which is not disputed. Although, adequate opportunities were provided by the Adjudicating Authority no endeavor was made by the CD to make payment in respect of the outstanding debt.

NCLAT opined that the Adjudicating Authority had rightly admitted the application and in this regard, there is no legal flaw.  While relying on the decision of Supreme Court in Atlas Cycles Industries Ltd. V. State of Haryana AIR (1977), NCLAT pointed out that “just because a ‘Notification’ substitutes something in an earlier notification, the substitution cannot have retrospective operation[2]”.

While reviewing the contents of the Notification, where under the minimum amount of default limit was specified as one crore rupees, NCLAT concluded that “the said Notification is only ‘Prospective in nature’ and not a ‘retrospective’ one because of the simple reason that the said notification does not in express term speaks about the applicability of ‘retrospective’ or ‘retroactive’ operation”.

NCLAT held that “the Central Government is delegated with a power to quantify the amount of default at any time after the enactment of the ‘I&B’ Code, this power will not deprive / deny the right which had already accrued to the concerned stakeholders, at the time of projecting the said petition before the Adjudicating Authority”. NCLAT observed, “from the tenor, spirit and the plain words employed in the notification, one cannot infer an intention to take or make it retrospective as in this regard, the relevant words are conspicuously absent and besides there being no implicit inference to be drawn for such a construction in the context in issue”. Hence, while dismissing the appeal, NCLAT upheld the order passed by NCLT Kolkata and opined that the said notification shall not apply retrospectively. 

Comment: As a result of this order, NCLAT has put a final nail in the coffin and settled that the Notification shall apply prospectively and cannot be construed to have a retrospective application. If the Notification, is made applicable to the pending applications of IBC (filed earlier to the notification in issue) it will create absurd results of wider implications / complications which cannot be the intent of the legislature. Hence, a combined reading of the Notification with proviso to Section 4(1) of the IBC would require the default post lifting of suspension (in other words, the combined default pre-24 March 2020 and post-lifting of suspension) to amount to one crore rupees or greater, in order to file an application under the IBC.  It is indeed great to witness government’s quick responses in relation to corporate and economic interest of the country while combating the economic fallout of the COVID-19 crisis.

Foot Notes:

[1] CP(IB)No.1735/KB/2019

[2] Company Appeal (AT) (Insolvency) No. 557 of 2020