Amendment Of Section 4 Of The Insolvency Code: Is It Retrospective?

Rajesh Kumar & Prabhat Kumar

1 July 2020 5:16 AM GMT

  • Amendment Of Section 4 Of The Insolvency Code: Is It Retrospective?

    Unprecedented situation requires unprecedented measures. The current pandemic COVID 19 has affected the entire society including business severely. Due to contagious nature of COVID 19 the Government of India was forced to take tough measures like lockdown, restriction of movement of men and goods etc. The lockdown was enforced with all sincerity and the result was obvious i.e. the economic activities came to standstill.

    To obviate the sufferings of the business certain measures were taken by the Government of India and the same were announced time to time. The industry was given economic packages, some fiscal concessions and in this background certain changes were done in the Insolvency and Bankruptcy code 2016.

    Section 4 of the Insolvency and Bankruptcy Code provides for applicability of Part-II of the Code, which provides for various procedures like application, appointment of IRP, procedures required to be followed by the IRP etc. Section 4 of the Code reads as,

    "(1) This Part 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."

    The section is fundamental, which decides the very applicability of the Code related to the insolvency proceeding. Union Government, vide MCA Notification S.O. 1205(E) dated 24.03.2020, increased the limit of default to Rs. One crore. The fundamental question is whether the notification is prospective or retrospective, i.e. does it apply to pending proceeding or default if occurred before 24.03.2020.

    Statutes are bifurcated on the basis of the ones dealing with procedure and others dealing with substantive rights. It is a well settled principle that procedural amendment to a law is applicable retrospectively in the absence of anything. Maxwell on Interpretation of Statutes, says that "No person has a vested right in any course of procedure. He has only the right to prosecution or defence in the manner prescribed for the time being by or for the court in which the case is pending, and if, by an Act of Parliament the mode of prosecution is altered, he has no other right than to proceed according to the altered mode". Further, it provides that "the general principle however, seems to be that alteration in procedure are retrospective, unless there be some good reason against it.

    In addition to the afore said principle, a position has been taken in a judgment delivered by a five-judge Bench of the Hon'ble Supreme Court in the matter of Memon Abdul Karim Haji Tayab Vs. Dy. Custodian-General [(1964) 6 SCR 837] held that "It is well settled that procedural amendments 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 come into force even though the action may have begun earlier or the claim on which the action may be based may be of an anterior date."

    The other aspect of procedural law that needs to be seen in light of any amendment being a change of forum. It is a well settled principle that amendments in law relating to forums and limitations are procedural in nature whereas amendments in law relating to right of action and right of appeal are substantive in nature. Change of forum is considered as a form of procedure so amendment in law relating to forum typically amounts to procedural in nature. However, a stand has been taken by the judiciary that change in forum in pending proceeding would not remain procedural in nature, but it would create a substantive right. Therefore, any new law or amendment bringing in change in forum does not affect pending actions or proceeding in court of law, unless the new law or amendment has a provision in it providing a clear indication that the pending actions or proceeding are to be affected.

    The legal principle with respect to change is forum is reiterated in Commissioner of Income Tax, Orissa v. Dhadi Sahu [(1992) SCR 3 168], wherein the Hon'ble Supreme Court observed, that "it was true that no litigant had any vested right in the matter of procedural law, but where the question is of the change of 'forum', it ceases to be a question of procedure only, with reference to pending matter". The "forum" of appeal or proceedings, it was held, was a vested right as opposed to pure procedure to be followed before a particular forum. It was therefore concluded, that a right becomes vested when the proceedings are initiated, in spite of change of jurisdiction/ forum by way of amendment thereafter. A similar view has been taken by Hon'ble Supreme Court in a recent judgment in the matter of Securities and Exchange Board of India v. Classic Credit [2017 SCCOnline SC 961].

    Section 4 of the IBC code is purely procedural. No creditor has any vested right in the insolvency proceeding. Part-II of the Insolvency and Bankruptcy Code is not a recovery procedure. The notification dated 24-03-2020 was brought by the government under special circumstances with a specific object. The object of the notification is obvious i.e. to ensure that small and medium enterprises should not be subjected to insolvency proceedings considering the current scenario. If the aforesaid notification is interpreted in any other way it will frustrate the object and purpose of the notification and the same will travel into stray direction. So, the notification is retrospective and will be applicable on all applications pending on the date of notification as well as the same will be applicable on new applications.

    To apply such statute in coherence with intention of legislature is "Doctrine of Fairness". When the changes in law has been done for the benefit of community as a whole, even in the absence of provision, the statute will be held to be retrospective in nature. The aforesaid principle has been settled by the Hon'ble Apex Court in Vijay VS State [(2006) 6 SCC 286]. In Govt. of India v. Indian Tobacco Association [(2005) 7 SCC 396], the apex court held doctrine of fairness is to be considered to be a relevant factor for construing a statute. In a case of this nature where the effect of a beneficent statute was sought to be extended…. For such purposes the statute need not be given retrospective effect by express words but the intent and object of the legislature in relation thereto can be culled out from the background facts.

    The Hon'ble High Court of Delhi in Pankaj Agrawal v. UOI [WPC 3685/2020] vide its order dated 23-06-2020 has stayed the insolvency proceeding initiated by the NCLT by observing that the notification dated 24-03-2020 "has changed the minimum amount of default from Rs. One Lakh to Rs One crore" in respect of insolvency resolution and liquidation for corporate persons. It further observed that prima facie there is an error in the approach of NCLT as after the notification dated 24-03-20, CIRP cannot be initiated for a default of Rs. One crore. The relevant para is as follows:

    "……The notification dated 24th March 2020 has changed the `minimum amount of default' from one lakh rupees to one crore rupees in respect of `Insolvency Resolution and Liquidation for corporate persons' in Part II of the Code. The proceedings in the present case have been commenced under Section 9 of the IBC which is in Part II of the Code. The purpose of the notification was to ensure that Small and Medium Enterprises viz., SMEs and MSMEs are not subjected to Insolvency proceedings during the lockdown or immediately thereafter. The present writ petition accordingly deserves consideration. Prima facie, this is an error by the NCLT, as the notification dated 24th March 2020 was clearly applicable."

    In view of these, we are of the opinion that the notification issued on 24.03.2020 under Section 4 of the Insolvency and Bankruptcy Code is retrospective and is applicable on all matters pending before National Company Law Tribunal. However, we must keep in mind that the last judicial word is yet to come.

    [Views expressed are personal views of the authors. Authors are partners in the firm "Rajesh Kumar & Associates. The authors may be contacted on]

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