Bar under Section 10A IBC on initiation of CIRP applies retrospectively; ‘March 25, 2020’ consciously added as it coincides with the imposition of National Lockdown: SC

Supreme Court: The bench of Dr. DY Chandrachud* and MR Shah, JJ has held that there is nothing wrong with the bar imposed under Section 10A of Insolvency and Bankruptcy Code, 2016 on the filing of applications for the commencement of the CIRP in respect of a corporate debtor for a default occurring on or after 25 March 2020 retrospectively to application filed before June 5, 2020.

ISSUE

Whether the provisions of Section 10A stand attracted to an application under Section 9 which was filed before 5 June 2020 (the date on which the provision came into force) in respect of a default which has occurred after 25 March 2020?

ARGUMENTS

By appellant

(i) Section 10A creates a bar to the ‘filing of applications’ under Sections 7, 9 and 10 in relation to defaults committed on or after 25 March 2020 for a period of six months, which can be extended up to one year;

(ii) The Ordinance and the Act which replaced it do not provide for the retrospective application of Section 10A either expressly or by necessary implication to applications which had already been filed and were pending on 5 June 2020;

(iii) Section 10A prohibits the filing of a fresh application in relation to defaults occurring on or after 25 March 2020, once Section 10A has been notified (i.e., after 5 June 2020);

(iv) Section 10A uses the expressions “shall be filed” and “shall ever filed” which are indicative of the prospective nature of the statutory provision in its application to proceedings which were initiated after 5 June 2020; and

(v) The IBC makes a clear distinction between the “initiation date” under Section 5(11) and the “insolvency commencement date” under Section 5(12).

(vi) In each case it is necessary for the Court and the tribunals to deduce as to whether the cause of financial distress is or is not attributable to the Covid-19 pandemic.

By Respondent

(i) The legislative intent in the insertion of Section 10A was to deal with an extraordinary event, the outbreak of Covid-19 pandemic, which led to financial distress faced by corporate entities;

(ii) Section 10A is prefaced with a non-obstante clause which overrides Sections 7, 9 and 10; and 9

(iii) Section 10A provides a cut-off date of 25 March 2020 and it is evident from the substantive part of the provision, as well as from the proviso and the explanation, that no application can be filed for the initiation of the CIRP for a default occurring on and after 25 March 2020, for a period of six months or as extended upon a notification.

PROVISION IN QUESTION

Section 10A is prefaced with a non-obstante provision which has the effect of overriding Sections 7, 9 and 10. Section 10A provides that:

(i) no application for the initiation of the CIRP by a corporate debtor shall be filed;

(ii) for any default arising on or after 25 March 2020; and

(iii) for a period of six months or such further period not exceeding one year from such date as may be notified in this behalf.

The proviso to Section 10A stipulates that “no application shall ever be filed” for the initiation of the CIRP of a corporate debtor “for the said default occurring during the said period”. The explanation which has been inserted for the removal of doubts clarifies that Section 10A shall not apply to any default which has been committed under Sections 7, 9 and 10 before 25 March 2020.

WHAT THE SUPREME COURT SAID

“The correct interpretation of Section 10A cannot be merely based on the language of the provision; rather it must take into account the object of the Ordinance and the extraordinary circumstances in which it was promulgated.”

Going into the legislative intent, the Court noticed that the date of 25 March 2020 has consciously been provided by the legislature in the recitals to the Ordinance and Section 10A, since it coincides with the date on which the national lockdown was declared in India due to the onset of the Covid-19 pandemic.

The Ordinance and the Amending Act enacted by Parliament, adopt 25 March 2020 as the cut-off date.

• The proviso to Section 10A stipulates that “no application shall ever be filed” for the initiation of the CIRP “for the said default occurring during the said period”.
• The expression “shall ever be filed” is a clear indicator that the intent of the legislature is to bar the institution of any application for the commencement of the CIRP in respect of a default which has occurred on or after 25 March 2020 for a period of six months, extendable up to one year as notified.
• The explanation which has been introduced to remove doubts places the matter beyond doubt by clarifying that the statutory provision shall not apply to any default before 25 March 2020. The substantive part of Section 10A is to be construed harmoniously with the first proviso and the explanation.

Reading the provisions together, the Court noticed that the Parliament intended to impose a bar on the filing of applications for the commencement of the CIRP in respect of a corporate debtor for a default occurring on or after 25 March 2020; the embargo remaining in force for a period of six months, extendable to one year. Therefore,

“Acceptance of the submission of the appellant would defeat the very purpose and object underlying the insertion of Section 10A. For, it would leave a whole class of corporate debtors where the default has occurred on or after 25 March 2020 outside the pale of protection because the application was filed before 5 June 2020.”

The Court, however, noticed that the retrospective bar on the filing of applications for the commencement of CIRP during the stipulated period does not extinguish the debt owed by the corporate debtor or the right of creditors to recover it.

Section 10A does not contain any requirement that the Adjudicating Authority must launch into an enquiry into whether, and if so to what extent, the financial health of the corporate debtor was affected by the onset of the Covid-19 pandemic.

“Parliament has stepped in legislatively because of the widespread distress caused by an unheralded public health crisis. It was cognizant of the fact that resolution applicants may not come forth to take up the process of the resolution of insolvencies (…), which would lead to instances of the corporate debtors going under liquidation and no longer remaining a going concern.”

Hence, the embargo contained in Section 10A must receive a purposive construction which will advance the object which was sought to be achieved by enacting the provision.

The Court further explained that the date of the initiation of the CIRP is the date on which a financial creditor, operational creditor or corporate applicant makes an application to the adjudicating authority for initiating the process. On the other hand, the insolvency commencement date is the date of the admission of the application.

To explain this further, the Court referred to the NCLAT’s order which stated that while ‘initiation date’ is referable to filing of application by the eligible applicant, ‘commencement date’ refers to passing of order of admission of application by the Adjudicating Authority.

“The ‘initiation date’ ascribes a role to the eligible applicant whereas the ‘commencement date rests upon exercise of power vested in the Adjudicating Authority. Adopting this interpretation would leave no scope for initiation of CIRP of a Corporate Debtor at the instance of eligible applicant in respect of Default arising on or after 25th March, 2020 as the provision engrafted in Section 10A clearly bars filing of such application by the eligible applicant for initiation of CIRP of Corporate Debtor in respect of such default.”

NCLAT had also noted that the bar created is retrospective as the cut-off date has been fixed as 25th March, 2020 while the newly inserted Section 10A introduced through the Ordinance has come into effect on 5th June, 2020.

“The object of the legislation has been to suspend operation of Sections 7, 9 & 10 in respect of defaults arising on or after 25th March, 2020 i.e. the date on which Nationwide lockdown was enforced disrupting normal business operations and impacting the economy globally. Indeed, the explanation removes the doubt 19 by clarifying that such bar shall not operate in respect of any default committed prior to 25th March, 2020.”

[Ramesh Kymal v. Siemens Gamesa Renewable Power Pvt Ltd, 2021 SCC OnLine SC 72, decided on 09.02.2021]

*Judgment by: Justice Dr. DY Chandrachud

Appearances before the Court by

For appellant: Senior Advocate Neeraj Kishan Kaul

For respondent: Senior Advocate Gopal Jain