Pranshu Goel, FCA, LL.B

The complex semantics of a simple question

The country witnessed an unprecedented nationwide locked down from March 24, ’20 due to the spread of Covid-19 virus. Movement of people and economic activities were restricted which spawned to severely effect the business activities, leading to a liquidity crisis.

Considering the disruption in the economic activities, which may prompt the default in payment of debts, Hon’ble Minister of Finance in foresight on March 24, ‘20 inter alia announced to increase the minimum threshold of default for initiating the corporate insolvency resolution process under section 4 of the Insolvency and Bankruptcy Code, 2016 to Rs. 1 crore from the existing threshold of Rs. 1 lakh, to give some respite to the businesses.

The announcement was immediately followed up by a notification issued by the Ministry of Corporate Affairs dated March 24, ’20. The notification notified the enhanced limit of Rs. 1 Crores for the purpose of Section 4 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’), however, did not shed light on the date of its applicability, which lead to confusion over the fate of the proceedings already initiated but pending adjudication, fuelling the debate of prospective or retrospective application of such notification.

The Ministry of Corporate Affairs in terms of the Proviso to Section 4 of the IBC has the delegated power to enhance the minimum amount of default from Rs. 1 Lakh to Rs. 1 Crore. It is key to note that the said notification has been issued in terms of the said delegatory power coming from the Proviso to Section 4 of the IBC and is not an amendment to the Code through legislature.

Hon’ble Supreme Court in MRF Ltd. Kottayam v. Asstt. Commissioner (Assessment) Sales Tax and Others (2006) 8 SCC 702, has held that the Government acting under the powers conferred on it by the enactment concerned, can exercise only those powers which are specifically conferred. In the absence of such conferment of power the Government, the delegated authority, has no power to issue a notification with retrospective effect.

Similar position was also taken by the Hon’ble Supreme Court in the case of Dr. Indramaniyarelal Gupta v. W.R. Nath AIR 1963 SC 274. Further, Hon’ble Madras High Court in M/s Ruby Overseas v. Union of India [W.P.No.2274 of 2018] has also held that “The provisions of the Act or notification are always prospective in operation unless the express language renders it otherwise, making it effective with retrospective effect.”

Recently, this issue came before the Hon’ble Kolkata Bench of National Company Law Tribunal in the case of Foseco India Limited v. Om Boseco Rail Products Limited [CP(IB)No.1735/KB/2019], wherein, the Corporate Debtor just before pronouncement of the order, raised an argument that in view of the recent notification enhancing the limit of default to Rs. 1 crore, the application is not maintainable for want of pecuniary jurisdiction. Hon’ble Bench dismissed the arguments of the Corporate Debtor and held that “it is a well settled law that a statute is presumed to be prospective unless it is held to be retrospective, either expressly or by necessary implication. When the amendment to Section 4 of IBC was inserted, a proviso enhancing the pecuniary jurisdiction for filing applications as against small and medium scale industries nowhere in the notification mentioned that its application will be retrospective. Therefore, it appears to me that the amendment shall be considered as prospective and not retrospective.”

Further, the said issue, is also dealt by the Hon’ble Chennai Bench of National Company Law Tribunal in the case of M/s Arrowline Organic Products Private Limited v. M/s Rockwell Industries Limited [IA/341/2020 in IBA/1031/2019], wherein, the Corporate Debtor filed an application before the Hon’ble NCLT recalling its order admitting the petition of the creditor on account of the fact that it lacked pecuniary jurisdiction. The Corporate Debtor submitted that the material date to reckon the pecuniary jurisdiction to entertain the petition is not the date of filing of the petition and is only the date when the petition was admitted in view of the provisions of Section 9(6) of the I&B Code, 2016 specifying the date of commencement of CIRP as the date of admission. Petitioner/Operational Creditor on the other hand argued and submitted that the notification has to be given a prospective effect and at the time when the petition was filed, and the ‘default’ occurred the pecuniary limit of Rs. 1 Lakh.  Hon’ble Bench after considering plethora of judgments held that the notification issued under a delegated power is always prospective until and unless specified otherwise. Hon’ble Bench further held that the law which was prevalent on the date of filing of the petition, proceeded with, and when the matter was finally heard and reserved, is to be considered. Since the matter was finally heard and reserved thereafter on March 4,’20, i.e. much before the date of notification of March 24, ’20, the earlier pecuniary limit of Rs. 1 lakh would only be applicable.

Albeit, the above view of the Hon’ble Bench and the Courts and the first-hand view of many of us on the first principles of law is that an amendment made to a substantive law, either through a delegated legislation or a notification like such, is always prospective and not retrospective until and unless clearly specified. However, the answer to this question is not as simple as it sounds. Owing to the multiple factors that influence this scenario, a rather convoluted understanding is required to address this question. Hence, it cannot be simply concluded that the cut-off date for the application of the revised threshold would be the same as the date of the notification.

The author has tried to consider few situations and different views pertaining to the applicability of such notification on those scenarios, in view of the principles of interpretation and the IBC, 2016.

Situation 1

Facts:

An application/petition has been filed before Hon’ble NCLT initiating corporate insolvency resolution process (‘CIRP’) against a corporate debtor before the date of notification i.e. March 24, ‘20, wherein the amount of default is less than Rs. 1 crore.

Arguments by Creditor Petitioner:

As already held by the Hon’ble Kolkata Bench and Hon’ble Chennai Bench of NCLT (supra), the said notification and the enhanced amount of default would apply prospectively.

The petitioner may also argue that the trigger point for initiation of insolvency proceeding is the ‘date of default’.  Since the ‘date of default’ is prior to the date of notification, the earlier limit of default of Rs. 1 lakh would be applicable and hence the application is maintainable.

Arguments by Corporate Debtor:

Another view could be that the petition would not survive as the notification would apply retrospectively in view of the principles of purposive interpretation.

Hon’ble Supreme Court of India in the case of Girdhari Lal vs Balbir Nath Mathur reported in AIR 1986 SC 1499, discussed the applicability of purposes interpretation of law and held that “Even where the words of statutes appear to be prima facie clear and unambiguous it may sometimes be possible that the plain meaning of the words does not convey and may even defeat the intention of the legislature; in such cases there is no reason why the true intention of the legislature, if it can be determined, clearly by other means, should not be given effect. Words are meant to serve and not to govern and we are not to add the tyranny of words to the other tyrannies of the world. The draftsman may have designed his words to meet what Lord Simon of Glaisdale calls the ‘primary situation’. It will then become necessary for the court to impute an intention to Parliament in regard to ‘secondary situations’. Such ‘secondary intention’ may be imputed in relation to a secondary situation so as to best serve the same purpose as the primary statutory intention does in relation to a primary situation.”

Further reference is also drawn to the Maxwell on Interpretation of Statutes, Tenth Edition. to quote: “Where the language of a statute, in its ordinary meaning and grammatical construction, leads to a manifest contradiction of the apparent purpose of the enactment, or to some inconvenience or absurdity, hardship or injustice, presumably not intended, a construction may be put upon it which modifies the meaning of the words, and even the structure of the sentence. … Where the main object and intention of a statute are clear, it must not be reduced to a nullity by the draftsman’s unskilfulness or ignorance of the law, except in a case of necessity, or the absolute intractability of the language used.”

It may be argued that the purpose and intent behind enhancement of the limit of default was to provide a breather to the businesses to avoid CIRP on account of economic crisis because of the spread of COVID-19 virus and thus the notification should be applied retrospectively to all the corporate debtors where the application has already been filed but pending adjudication, as they would be also be facing the head of economic disruption and may not be able to discharge the debt or settle with the creditors, even if they could have in normal scenarios.

Although, this argument was taken in brief by the Corporate Debtor in the case of M/s Arrowline Organic Products Private Limited (supra), however, the Hon’ble Bench did not discuss and render any decision on this aspect.

Situation 2

Facts:

A default has occurred by the Corporate Debtor on March 10, ‘20 amounting to Rs. 50 Lakhs. No application/petition has been filed yet with the Hon’ble NCLT initiating the CIRP. Can the creditor file an application with Hon’ble NCLT after the notification dated March 24, 2020 wherein the amount of minimum default is enhanced to Rs. 1 crore.

Arguments by Creditor:

As already stated supra, the ‘date of default’ is the trigger point and the law applicable on the ‘date of default’ is to be considered, irrespective of the time of filing of the application/petition initiating the CIRP. The ‘date of default’ in such situation is March 10, ’20, when the minimum pecuniary limit for default was Rs. 1 lakh. Thus, one may argue, that the application for initiating CIRP can be filed before the Hon’ble NCLT even after the date of notification i.e. 24^th March, 2020 in a case where the ‘date of default’ is prior to March 24, 2020 and the pecuniary limit of default is below Rs. 1 crore, as at the time of default the pecuniary limit to file the petition was a minimum default of Rs. 1 lakh.

The creditor may also argue that, the differential treatment between a creditor who has filed an application/petition prior to the date of notification and the one who has not, albeit the amount of default in both the cases is below the revised threshold and the date of default is also prior to the date of the notification, is violative of the principles of equality enshrined Article 14 of the Constitution of India.

Arguments by Corporate Debtor:    

Corporate debtor in this case may rely on the decision of the Hon’ble Kolkata Bench of NCLT (Supra) and decision of the Hon’ble Chennai Bench of NCLT (Supra) and press that notification is prospective and the date of filing of application, date of hearing and date of and the date when the matter is finally heard and reserved is the trigger point which is to be considered qua the date of notification. Therefore, since the application is filed after the date of notification having an amount of default below Rs. 1 crore, the same is not maintainable.

Apart from the above situations, there could be multiple other factors, situations, permutations, and combinations, one of which could be an act of part payment of debt by the corporate debtor pursuant to a default leading to the amount of default fall below Rs. 1 crore, to avoid the CIRP. There is no one size fit all and the Hon’ble Tribunal and Hon’ble Court must test facts and circumstances peculiar to a case before concluding as to whether the notification is applicable or not. In the absence of any guidance or clarification forthcoming from the government, one can only wait and watch how the Hon’ble Tribunal and Court would further interpret the same under different factual matrix.

STOP PRESS:

• At the time of printing this article, The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 was promulgated and published on June 5, 2020.
• As per the said ordinance a new Section 10A is inserted in the Insolvency and Bankruptcy Code, 2016, which provides that no application under Section 7, 9 and 10 of the Insolvency and Bankruptcy code could be filed against a corporate debtor for default arising on or after March 25, 2020 for a period of six months or such further period, not exceeding one year, as may be notified.
• The Ordinance also provides for a proviso to Section 10A, which provides that no application would ever be made in terms of Section 7,9 and 10 of the IBC, 2016 for the default arising on during the said period (i.e. from March 25, 2020 till the date that would be notified)
• One can note that that said ordinance also gives credence to the ‘date of default’, as no application/ petition for initiating CIRP would be entertained in cases where the ‘date of default’ is on or after March 25, 2020.
• Thus, from the said ordinance, one can draw a corollary that even for adjudicating the cut-off date of the notification enhancing the pecuniary limit to Rs. 1 crore from Rs. 1 lakh, one must consider ‘date of default’. In summary, one may argue that, if the date of default is prior to the date of notification dated March 24, 2020, the pecuniary limit of default of Rs. 1 lakh would be applicable, irrespective of the fact when the application/ petition initiating the CIRP is filed, i.e. before or after March 24, 2020.

Pranshu Goel
F.CA, L.L.B

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