29 March 2022 12:12 PM GMT
Ever since the central government has issued the notification dated 24.03.2020 for increasing the threshold limit of default from Rs. 1 Lac to Rs. 1 Crore under Section 4 of the Insolvency and Bankruptcy Code, 2016 "Code" different benches of NCLT are giving contradictory judgements as to whether this notification has prospective or retrospective effect. The National Company Law...
Ever since the central government has issued the notification dated 24.03.2020 for increasing the threshold limit of default from Rs. 1 Lac to Rs. 1 Crore under Section 4 of the Insolvency and Bankruptcy Code, 2016 "Code" different benches of NCLT are giving contradictory judgements as to whether this notification has prospective or retrospective effect.
The National Company Law Tribunal (NCLT), New Delhi Bench-III has recently ruled in the matter of the "Bansal Trading Company V. Periwinkle Herbals Private Limited (C.P No. (IB)-606/ND/2021)" that the notification no. S/01 2015E dated 24.03.2020 issued by Ministry of Corporate Affairs (MCA) regarding the enhancement of threshold limit for initiating Corporate Insolvency Resolution Process (CIRP) from Rs. 1 Lac to Rs. 1 Crore is not applicable in cases where default has occurred prior to 24.03.2020. Ever since this notification has been issued by central government, NCLTs are consistently giving contradictory judgements on the applicability of the said notification thereby creating confusion in the minds of stakeholders. Before we delve into the article, let us go through the relevant statutory scheme of the Code.
Section 3(12): - Default means non-payment of debt when whole or any part of instalment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor as the case may be.
Section 4: - This part (Part II of the Code) shall apply to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of the 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."
Section 5(11): - "Initiation date" means the date on which the financial creditor, corporate applicant or operational creditor, as the case may be, makes an application to the adjudicating authority (NCLT) for initiating Corporate Insolvency Resolution Process.
Section 5(12): - "Insolvency Commencement Date" means the date of admission of an application for initiating Corporate Insolvency Resolution Process.
Part II of the Code deals with insolvency resolution and liquidation process of the corporate debtors. The applicant under Section 7,9 or 10 (as the case may be) files an application before the NCLT to initiate Corporate Insolvency Resolution Process (CIRP) against a corporate debtor. However, such application can be filed only if the applicant satisfies the litmus test prescribed under Section 4 of the Code. Section 4 provides the minimum amount of default for which an application can be filed before the NCLT. It also contains a proviso which confers power upon the central government to increase this threshold limit. Earlier the threshold limit was Rs. 1,00,000/-. Due to the outbreak of Covid-19 pandemic, the central government had used its power and issued the notification dated 24.03.2020 whereby it had increased the minimum amount of default to Rs. 1 Crore. The said notification provides that: -
"In exercise of power conferred by the proviso to section 4 of the Insolvency and Bankruptcy Code, 2016, The Central Government hereby specifies one crore rupees as the minimum amount of default for the purposes of the said section."
The objective of this notification was to protect solvent or financially sound corporate persons from going into unnecessary insolvency resolution process as a result of economic peril brought down by the Covid-19 pandemic. Soon after the issuance of the notification, the first issue that came up before the court was whether this notification would be applicable on the applications which are pending for admission before the adjudicating authority on the date of notification. The NCLAT in the matter of "MadhusudanTantia V. Amit Chorasia & Ors. (Company Appeal (AT)(Insolvency) No. 557 of 2020) has held unequivocally that the said notification is prospective in nature and it is not retrospective or retroactive. Hence, it will not apply to the pending applications or which are awaiting admission prior to the issuance of the notification. Once, it was held that the notification is not applicable on such applications which have been filed prior to its issuance, the next issue before the court was whether the said notification would apply in cases where application has not been filed but the default has already been occurred before 24.03.2020.
First observation in this regard came from Delhi High Court in the matter of "Pankaj Aggarwal Vs. Union of India & Ors. (W.P No. 3685/2020) wherein the court had held that prima facie the notification was applicable even on defaults occurred before 24.03.2020. However, the matter was later settled between the parties and the court did not get the opportunity to give final verdict on this issue. The NCLAT has also held in couple of its judgements that the date of default is relevant only for purpose of computing the period of limitation and the applicant has to satisfy the pecuniary jurisdiction of the NCLT on the initiation date. Reference being "Metal's & Metal Electric Private Limited V. Goms Electricals Pvt. Ltd. (Company Appeal (AT) (Insolvency) No. 243/2021)" and "Jumbo Paper ProductsV. Hansraj Agrofresh Pvt. Ltd." (Company Appeal (AT)(Insolvency No. 813 of 2021)". In the last judgement, the NCLAT had dismissed the appeal at the stage of admission only stating that the increase in threshold limit will be applicable for applications filed under section 7 or 9 on or after 24.03.2020 even if debt is of a date earlier than 24.03.2020.
Infact The Kerala High Court has also concurred with the views of Delhi High Court and NCLAT. It was held in the matter of "Tharakan Web Innovations Pvt. Ltd. V. NCLT & Ors. (W.P No. 27636 of 2020" that once the government has exercised the said power by issuance of a notification fixing the minimum amount of default as Rs. 1 Crore, the section will have to be read by replacing the words "One Lakh Rupees" by "Rupees One Crore". As such, from the date of amendment, part II of the IBC can apply only to matters where the minimum amount of default is Rs. 1 Crore.
Inspite of several judgements given on this aspect by the High Courts and NCLAT, Different benches of NCLT are still holding the view that date of default is relevant for the purpose of determining the applicability of threshold limit. The NCLT New Delhi Bench-II in the matter of "BLS Polymers Limited V. RMS Power Solutions Pvt. Ltd. C.P No. (IB)-340(ND)/2021" has held that "Once the default has occurred and the demand notice has been served prior to the issuance of the notification dated 24.03.2020, the increase in threshold limit is not applicable. Then New Delhi Bench-V in the matter of "SS Group Pvt. Ltd. V. Shiva Asphaltic Products Pvt. Ltd. C.P No. (IB)-568(ND)/2021" had taken the contradictory stand and held that the threshold limit of Rs. 1 Crore will be applicable for applications filed after 24.03.2020 even if the debt is of a date earlier than 24.03.2020. Now again the New Delhi Bench-III has held that the new threshold limit is not applicable if the default has occurred prior to 24.03.2020.
NCLTs are bound to follow the precedents set by NCLAT and High Court. A litigant should not suffer merely because his/her matter happens to fall before a particular bench of the NCLT which is persistently giving one opinion or the other. The NCLAT has been consistent in its opinion that the increase in the threshold limit is applicable on the applications filed after 24.03.2020 even if the default has happened prior to this date. Still, different benches of NCLT are giving conflicting opinions. Not only it causes unnecessary litigation before the already overburdened NCLAT but also add litigation expenses for the stakeholders. In the present matter also, the litigant ultimately has to approach NCLAT or the High Court for getting appropriate relief which will be a time-consuming process. In the meanwhile, this corporate debtor would go through unnecessary insolvency resolution process. The board of directors of the corporate debtor would remain suspended and the Resolution Professional (RP) would be handling the affairs of the company. Let's hope that soon the position of law gets settled in all the benches of NCLT before it causes any more confusion.
The Author is an Advocate at New Delhi and Views are personal.