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A Perspective On The Perplexity Surrounding The Latest Amendment To The Insolvency And Bankruptcy Code

Ranjana Roy Gawai
24 April 2020 8:35 AM GMT
A Perspective On The Perplexity Surrounding The Latest Amendment To The Insolvency And Bankruptcy Code
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Extraordinary times call for extraordinary measures. With the outbreak of COVID-19, corporate entities faced unprecedented challenges in meeting their financial commitments, leading to defaults on loans, delays in repayment against supplied and services etc. To tackle the understandable inability, the Notification dated 24th March, 2020 ( hereinafter the Notification) was issued which altered the amount of default required to qualify for preferring an application under Section 7, 9 and 10 of the Insolvency & Bankruptcy Code, 2016. The Notification does not clarify whether it would be applicable prospectively or retrospectively. Further, no specific date of commencement of the operation of the Notification has been provided.

Therefore, the amendment so done is in a manner as if there has always been such threshold all along since the enactment of law of Insolvency & Bankruptcy. However, there may be a situation where there would be arguments on both sides of law with respect to its applicability whether retrospectively or prospectively. It is therefore, important to understand the real purport, object and meaning of present notification vis a vis applicability.

It is safe to say that the general rule is that an amendment to any existing law is presumed to be applied prospectively if no clear date of applicability has been provided, unless there is a specific provision for retrospective application or such intention appears from implied reading of the amendment. However, the contrary has been held to be true with respect to the amendments dealing only with the beneficial and procedural law. Some instances where it has been held by the Hon'ble Supreme Court that, an amendment to a beneficial and procedural law can be applied retrospectively even in cases where no clear provision has been made in this regard are as under:

  1. In Commissioner of Income Tax vs. Vatika Township Pvt. Ltd. (Civil Appeal 8750/2014), Hon'ble Supreme Court held that:

"where a benefit is conferred by a legislation, the rule against a retrospective construction is different. If a legislation confers a benefit on some persons but without inflicting a corresponding detriment on some other person or on the public generally, and where to confer such benefit appears to have been the legislators object, then the presumption would be that such a legislation, giving it a purposive construction,would warrant it to be given a retrospective effect. This exactly is the justification to treat procedural provisions as retrospective". (para 33)

1. It has been observed by the Hon'ble Supreme court in judgments such as Hitendra Vishnu Thakur vs. State of Maharashtra [(1994) 4 SCC 602] that a litigant has no vested right in the procedural law, unlike substantive law. Upon the basis of the said observation, the lower court had held the subject amendments to the TADA Act as retrospectively applicable as they dealt with the procedure for grant of bail. The position was reaffirmed by the Hon'ble Supreme Court.

2. Further, the Hon'ble Supreme Court has observed in the landmark judgment of Swiss Ribbons Pvt. Ltd. vs. Union of India [AIR 2019 SC 739] that the Insolvency and Bankruptcy Code, 2016 is a beneficial legislation, and in the light of the said observation the ruling laid down by the Apex Court in the matter of Vijay vs. State of Maharashtra (Appeal (Civil) 3164 of 2006) can be relied upon wherein it has been categorically held that when a law is enacted for the benefit of the community as a whole (under the present case Corporate Debtors), even in the absence of a provision, the statute may be held to be retrospective in nature. The controversy at hand in the Vijay vs. State of Maharashtra case was an amendment in a provision of the Code of Criminal Procedure, 1973. Just as the Notification dated 24th March, 2020 whereby the amount of default has been increased in Section 4 of the Insolvency and Bankruptcy Code, 2016 but no specific clarity for the date of enforcement has been provided, there was no clear date of commencement or applicability of the amendment in the Vijay Case. Following are certain significant observations of the Court:

3. While construing the beneficial provisions of 428 of the Criminal Procedure Code, 1973 in Boucher Pierre Andre vs. Superintendent, Central Jail, Tihar, New Delhi &Anr. [(1975) 1 SCC 192], this Court opined:

"This section, on a plain natural construction of its language, posits for its applicability a fact situation which is described by the clause "where an accused person has, on conviction, been sentenced to imprisonment for a term".

  1. There is nothing in this clause which suggests, either expressly or by necessary implication that the conviction and sentence must be after the coming into force of the new Code of Criminal Procedure. The language of the clause is neutral. It does not refer to any particular point of time when the accused person should have been convicted and sentenced. It merely indicates a fact situation which must exist in order to attract the applicability of the section and this fact situation would be satisfied equally whether an accused person has been convicted and sentenced before or after the coming into force of the new Code of Criminal Procedure
  2. Even where an accused person has been convicted prior to the coming into force of the new Code of Criminal Procedure but his sentence is still running, it would not be inappropriate to say that the "accused person has, on conviction, been sentenced to imprisonment for a term".
  3. Therefore, where an accused person has been convicted and he is still serving his sentence at the date when the new Code of Criminal Procedure came into force. Section 428 would apply and he would be entitled to claim that the period of detention undergone by him during the investigation, inquiry or trial of the case should be set off against the term of imprisonment imposed on him and he should be required to undergo only the remainder of the term.

  1. The position had earlier been settled by the Hon'ble Supreme Court in the matter of Memon Abdul Karim Haji Tayab vs. Dy. Custodian General [(1964 6 SCR 837)], wherein it was held that it is a well settled law that procedural amendment to a law apply in absence of anything to the contrary, retrospectively in the sense that they apply to all actions after the date they came into force though the action may have begun earlier or the claim on which the action may be based may be of an antecedent date.

  1. More recently, the Hon'ble Supreme Court, in the matter of Securities & Exchange Board of India vs. Classic Credit Ltd. (Criminal Appeal No. 67 of 2017), has held that a procedural amendment is retrospectively applied. Further, it was held that a procedural law, if amended, will apply to the pending matters also.

  1. In the matter of Ssangyong Engineering & Construction Co. Ltd. v. National Highway Authority of India (CIVIL APPEAL NO. 4779 OF 2019), the Hon'ble Supreme Court has held that the amendments introduced to Section 34 of the Arbitration Act w.e.f. 23rd October, 2015 will apply to all Section 34 applications filed after 23rd October, 2015 even if the underlying arbitration itself was commenced prior to the amendment. The Court has stated that a clarificatory amendment can only be retrospective if it does not substantively change the law, but merely clarifies some doubt which has crept into the law.

Further, an essential factor that must be kept in mind while interpreting the Notification dated 24th March, 2020 is the factual situation surrounding it. It is not out of the place to mention that the said Notification has come in the wake of the epidemic prevalent not nationally, but internationally as well. The purport behind this notification is not to further impact the already sluggish economy. As such it has been noticed that the mid segment business are going into liquidation once the Corporate Insolvency & Bankruptcy is initiated. Another import reason is to prevent the National Company Law Tribunal from the huge amount of litigation which seemed evident post the lockdown period, the Central Government exercised its power under Section 4 of the Insolvency & Bankruptcy Code, 2016 and altered the default amount. Had the change not been introduced, the Medium and Small Enterprises sector would have been the worst hit as it would have been burdened by liabilities without any revenue.

There are other areas of legislation where such dispute has been arisen and the courts have taken contrary view. One such area is Prevention of Money Laundering Act 2002 (hereinafter PMLA) where the hotly contested issue of applicability of prospectively has been leaned towards the accused -litigant as opposed to the contention raised by authority, the Enforcement Directorate. To mention a few: The decisions of the Hon'ble Supreme Court in Arun Kumar Mishra vs. Directorate of Enforcement, reported in (2015) SCC OnLine Del 8658, M/s. Ajanta Merchants Pvt. Ltd. vs. Directorate of Enforcement (2015) SCC OnLine Del 8659; Order dated 23.11.2015 in Directorate of Enforcement vs. M/s. Ajanta Merchants Pvt. Ltd., Crl.M.P. No. 18478/2015 in SLP(Crl.) No. 9987/2015.

Though the above proposition of the applicability of the notification will be tested before the Court of law and there will be arguments on both the sides, however, the mind of the court will weigh to the fact that the IBC is a beneficial legislation, as explained hereinabove in term of Swiss Ribbon (Supta), introduced to put the corporate debtor back on its feet, and cannot be thus given benefit to the one who has filed the petition before the notification as opposed to those who will be filing after the notification with new threshold. This will also give preferential right in favour of those who have filed the petition prior in time of the notification as against one with new threshold. This cannot be the intention of the legislation and will be in the teeth of the very principle of proceptivity. The aid can also be taken from the fact that notification is brought with twin purposed as explained hereinabove, interests of the corporate debtor will be hampered adversely, and the substance of the Notification will be lost.

Views Are Personal Only.

(Author is a Practicing Lawyer)

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