The National Company Law Tribunal, New Delhi Bench (NCLT) in its judgment, namely, BLS Polymers Ltd. v. RMS Power Solutions (P) Ltd.[1] (“judgment”) held that Notification dated 24-3-2020 numbered as CG-DL-E-24032020-218898[2] (“Notification”), which enhanced the threshold limit from Rupees one lakh to Rupees one crore to initiate insolvency proceedings under the Insolvency and Bankruptcy Code, 2016[3] (“IBC”) is only applicable in respect of defaults that occurred on or after 24-3-2020 (date of the Notification) and not prior to that. The NCLT in a decisive ruling has put a quietus to the controversy over the interpretation and applicability of the Notification.
The Ministry of Corporate Affairs had issued the Notification in order to tackle large-scale insolvencies resulting from the lockdown imposed to combat the spread of COVID-19. The Notification was one of the several yet important economic measures undertaken by the Union of India to combat the COVID-19 Pandemic.[4] In particular, this Notification, increased the minimum threshold amount to trigger insolvency proceedings under the IBC from Rs one lakh to one crore. The threshold was enhanced by exercising the powers conferred under Section 4[5] IBC, as per which, the minimum amount of default prescribed as Rs one lakh under the said provision can be increased up till Rs one crore, by the Central Government.
For over more than a year, there was a shadow of doubt with respect to the applicability of the Notification. The applicability was unclear especially in cases where the default occurred prior to issuance of Notification, and the relevant applications for such a default had to be filed after the Notification was in operation. In the interregnum between the issuance of the Notification and this judgment, various Benches of NCLT have given contrary rulings on whether the Notification has a prospective effect or a retrospective effect. The clouds of uncertainty looming over the applicability of the Notification have been amply and decisively cleared by the NCLT in its judgment.
In the most precise manner, the NCLT held that the Notification is only applicable in respect of defaults that occurred on or after 24-3-2020 (date of the Notification) and not prior to that. To support this conclusion, NCLT identified four scenarios vis-à-vis the Notification that could lead to filing of an application for initiation of a corporate insolvency resolution process (CIRP). The four scenarios are given below:
(a) Where an application has been filed prior to the issuance of the Notification but has not been admitted by the NCLT against the corporate debtor.
(b) Where an application has been admitted against the corporate debtor before the issuance of the Notification.
(c) In case of an operational debt, where a demand notice under Section 8[6] IBC has been delivered prior to the Notification dated 24-3-2020, but the application is filed after 24-3-2020.
(d) Where the default occurred prior to the issuance of the Notification dated 24-3-2020 (but no demand notice was sent in case of an application filed under Section 9[7] IBC).
The NCLT observed that there was never a dispute regarding the applicability of the Notification in scenarios (a) and (b) above. This is because every notification has a prospective effect, unless and until a notification states otherwise. The Notification dated 24-3-2020 does not state that it shall operate retrospectively.
In the above background, the NCLT in the judgment confined its reasoning to scenarios (c) and (d) above. These are situations where the defaults occurred prior to the date of the issuance of the Notification (24-3-2020) and applications under Sections 7[8] or 9 IBC were not filed before 24-3-2020. The NCLT held that the Notification will not be applicable in these peculiar situations. Resultantly, the NCLT proclaimed that in cases where the default occurred prior to the date of the Notification (24-3-2020) and an application for initiation of CIRP is filed post 24-3-2020, the minimum amount of default shall remain as Rs one lakh and not Rs one crore.
The above finding of NCLT is based on reasons that are specified below:
(a) A harmonious reading of Sections 7, 8, 9 and 10[9] IBC reveals that occurrence of a default is a common event that not only triggers but vests a right in a financial creditor/operational creditor to file an application for initiation of CIRP. Specifically, in case of an operational creditor, an application can only be filed once a demand notice is served and the legal requirements pertaining to the demand notice have been fulfilled. Interestingly, a demand notice also can only be issued once a default has occurred. Default, as per Section 3(12)[10] IBC, simply means non-payment of a debt when the same has become due and payable but is not paid. NCLT observed that if the default occurred prior to the date of the Notification (24-3-2020) a right to sue the corporate debtor accrued in favour of the financial creditor/operational creditor much before the date of the Notification. Basis this, the NCLT reasoned that a right to sue, which has already accrued to a person, cannot be taken away by the Notification that is admittedly issued thereafter and is prospective in nature.
(b) Additionally, the right to sue is provided to a financial creditor/operational creditor by a central statute (IBC). As per Article 137[11] of the Limitation Act, 1963 this right to sue continues for a period of three years from the date of the default (which is prior to the date of the Notification). Considering this, the NCLT held that if a statute provides a person to file an application within a prescribed period for when such a right accrues, then by exercising delegated powers an executive cannot take away that right. NCLT supported its finding on the well-settled principle of law that once a right is vested, it cannot be divested.
Some authors have criticised the judgment passed by the NCLT and opined that the Notification was issued with a legislative intent to provide financial relaxations to economic slowdown which arose due to the COVID-19 Pandemic and consequent lockdowns. As such, the rule of purposive interpretation should have been followed and the NCLT should have held that any default which happened prior to the Notification should not be exempted as such an exemption would go against the legislative intent of the Notification.[12] However, we note that such an interpretation would give retrospective effect to the Notification which is impermissible in law.
Moreover, the ruling of the NCLT is also in consonance with the judgment passed by the Supreme Court in B.K. Educational Services (P) Ltd. v. Parag Gupta and Associates[13]. The Supreme Court in this judgment had opined that the right to sue accrues to creditor when the default occurs. Therefore, the accrued right to institute insolvency proceedings when the default occurs cannot be taken away by delegated legislation.
We reckon that the above finding of the NCLT with its supplemental reasons is a clarification on the applicability of the Notification that was deeply awaited by insolvency lawyers and insolvency professionals alike. These findings will help financial and operational creditors file applications for defaults that occurred before the date of the Notification (24-3-2020) but, for which, no application for initiation of CIRP has been filed till date. We certainly hope that the view taken by NCLT in its judgment is affirmed by the Supreme Court of India and becomes a view that is binding on the courts and tribunals pan India.
† Partner at DSK Legal.
†† Principal Associate at DSK Legal.
[2] Ministry of Corporate Affairs, Noti. No. S.O. 1205(E), dated 24-3-2020.
[3] Insolvency and Bankruptcy Code, 2016.
[4] Finance Minister announces several relief measures relating to Statutory and Regulatory compliance matters across Sectors in view of COVID-19 outbreak HERE .
[5] Insolvency and Bankruptcy Code, 2016, S. 4.
[6] Insolvency and Bankruptcy Code, 2016, S. 8.
[7] Insolvency and Bankruptcy Code, 2016, S. 9.
[8] Insolvency and Bankruptcy Code, 2016, S. 7.
[9] Insolvency and Bankruptcy Code, 2016, S. 10.
[10] Insolvency and Bankruptcy Code, 2016, S. 3.
[11] Limitation Act, 1963, Art. 137.
[12] Bar & Bench Weekly IBC Diary #1: Prospective effect of threshold enhancement, restored appeal as a pre-existing dispute and more <HERE>.
