Enhanced Minimum Amount of Default under IBC – Retrospective or Prospective?

[Ashwin Bala Someshwerar is an LL.M. Student at TNNLU, Tiruchirappalli, Tamil Nadu.]

The Ministry of Corporate Affairs (MCA) issued a notification on 24 March 2020 (hereafter, ‘the notification’) enhancing the minimum amount of default under the proviso to section 4 of the Insolvency and Bankruptcy Code, 2016 (IBC) from one lakh rupees to one crore rupees. The notification does not mention the date on which it becomes effective. It is well established law that in the absence of such date on which it becomes effective, it has to held that the notification operates prospectively from the date of its publication. However, there seems to be no consistency in accepting this position among the NCLT and NCLAT, and now the issue has gone up till the Supreme Court. This article attempts to clear the air on the prospective or retrospective application of the notification.

Prospective and Retrospective Operation – Legal Position

The Supreme Court in Govinddas v. Income Tax Officer held that “…it is well settled rule of interpretation hallowed by time and sanctified by judicial decisions that unless the terms of a statute expressly so provide or necessarily require it, retrospective operation should not be given to a statute so as to take away or impair an existing right or create a new obligation or impose a new liability otherwise than as regards matters of procedure…It ought to be considered prospective only”.  This position has been subsequently followed in S.L. Srnivas Jute Twine Mills P. Ltd. v. Union of India, and CIT v. Vatika Township Private Ltd.

Further, the Supreme Court in Director General of Foreign Trade v. Kanak Exports held that when the government is conferred with the statutory authority to make changes in the provision (section 4 enables the central government to enhance the threshold), and while exercising such delegated powers, the date of effect must be expressly mentioned if it wants retrospective application.

Conflicting Orders on the Notification

The following table captures some notable orders according to the author passed by NCLT and NCLAT in a timeline.

Date

Case

Holding*

12.10.2020

Madhusudan Tantia v. Amit Choraria and Ors., C.A. (AT) No. 557 of 2022 arising out of C.P. (IB) No. 1735/KB/2019 [three judge bench]

Notification is Prospective; inapplicable to pending proceedings including those for admission

27.07.2021

BLS Polymers Ltd. v. RMS Power Solutions Pvt. Ltd., C.P. No. IB-340(ND)/2021

Remedy under IBC available if date of default is prior to the date of notification

25.10.2021

Jumbo Paper Products v. Hansraj Agrofresh Pvt. Ltd., C.A. (AT) No. 813 of 2021 [two judge bench]

If application not filed before the date of notification, then enhanced threshold will be applicable

13.12.2021

B. Sreekala v. Al Sadiq Sweets and Ors., C.A. (AT)(CH)(INS) No. 55 of 2021 [two judge bench]

Unclear as to whether prospective or retrospective but held that NCLT erroneously allowed the application in violation of section 10A

24.02.2022

Metal’s & Metal Electric Private Ltd. v. Goms Electricals Pvt Ltd., C.A. (AT)(CH)(INS) No. 243 of 2021 [two judge bench]

Law stood as on the date of application is applicable; date of default has no significance (essentially retrospective)

*Holding is according to the author’s understanding, and readers are advised to read the original texts of the judgments.

Prospective Nature of Notification

In this background, the NCLAT, Delhi in Madhusudan Tantia v. Amit Choraria at para 56 held that –

…the said notification is only ‘Prospective in nature’ and not a ‘retrospective’ one because of the simple reason the said notification does not in express term speaks about the applicability of ‘retrospective’ or ‘retroactive’ operation. Suffice it for this Tribunal to point out that from the tenor, spirit and the plain words employed in the notification dated 24.03.2020 of the Ministry of Corporate Affairs, Government of India, one cannot infer an intention to take or make it retrospective as in this regard, the relevant words are conspicuously absent and besides there being no implicit inference to be drawn for such a construction in the context in issue. That apart, if the notification dated 24.03.2020 of the Ministry of Corporate Affairs, Government of India, is made applicable to the pending applications of IBC (filed earlier to the notification in issue) it will create absurd results of wider implications/complications.

Therefore, the NCLAT not only upheld the NCLT’s order, it went on to hold that the notification should be considered as prospective and not retrospective. The above decision assumes much of the significance because it comprehensively considered the following  propositions:

  • That the right conferred on an applicant to file an application under the IBC may be a substantive right but the requirement to be meted out for initiating CIRP process upon filing an application under the IBC is procedural in nature, thus, presumption should be retrospective as section 4 is procedural in nature.
  • That there is no vested right in pending proceedings.
  • That presumption against retrospectivity could be rebutted by necessary implication.
  • That the presumption against retrospective operation is not applicable to curative or declaratory statutes, and the MCA intended to bar admission of even pending applications for an alleged default of less than rupee one crore.
  • That the procedural changes creating new rights and liabilities should be construed prospective in operation.
  • That delegated legislations cannot have retrospective effect to deprive accrued rights.
  • That a conjoint reading of definition of default under section 3(12) along with sections 4, 8, and 9 of IBC 2016 would should that an operational creditor acquires the right to come under the provisions of the IBC by issuing a ‘Demand Notice’ under section 8 on the occurrence of default.

The above decision was noted by NCLAT, Delhi order in Jumbo Paper Products v. Hansraj Agrofresh Pvt. Ltd.However, it did not apply the precedent by distinguishing facts as in matter before it, the application was filed after the notification date, whereas in Madusudan Tantia, the application was filed before the notification date. This conclusion is erroneous because the ratio to be applied is ‘that the notification is prospective.’ Therefore, the pertinent issue that should have been considered was ‘whether the creditor accrues the right to invoke the provisions, as it stood then, of IBC when the debt due is defaulted’.

Subsequently, the NCLAT, Chennai in Metal’s & Metal Electric Private Ltd. v. Goms Electricals Pvt Ltd. considered both Madusudan Tantia and Jumbo Paper Products. Further, it also noted the holding of the Supreme Court in Ramesh Kymal v. Siemens Ganesa Renewable Power Pvt. Ltd. that section 10A of IBC which was notified on 5 June 2020 bars applications retrospectively from 25 March 2020 in view of covid lockdown.

It is also pertinent to note that section 10A clarified by an explanation that it did not save any default committed prior to 25 March 2020. This signifies the aspect of “default” being the substantive right essential for setting the wheels of IBC 2016 in motion and not an application for insolvency resolution process.

However, the NCLAT, Chennai went on to hold that section 4 of IBC is applicable, as it stood, on the date of ‘application’ and not on the date on which the ‘debt’ became due. Further, there exists no vested right to choose a particular forum albeit the creditor has an actionable right. The same should be considered only for the purpose of computing limitation.

In light of the above discussion, it is fairly clear, and the only consistency elicitable is that when the application is filed (it need not have been admitted) before the date of notification, then the applicant has the right to maintain the CIRP. However, there is inconsistency or rather no finding on the prospective or retrospective nature of the notification. It is also pertinent to note other situations are not substantively considered.

Whereas in the case of BLS Polymers Ltd. v. RMS Power Solutions Pvt. Ltd. (Original order not yet uploaded on the NCLT website, it shall be provided by the author on request), the NCLT, Delhi – II at para 23 considers the other situations where the default occurred but demand notice was sent after the date of notification; and where demand notice was sent prior to date of notification. The NCLT held that, by conjoint reading of sections 7, 8, 9, and 10, the common element is ‘default’, thus, when the default has occurred prior to the date of notification, the right to apply under the IBC cannot be taken away by delegated legislation. It went on hold that the creditor has 3 years from the date of default to invoke the remedies under the IBC. It could be evinced that the tribunal emphasised much on the occurrence ‘default’ to invoke rights under the IBC rather than an ‘application’ to initiate insolvency resolution process.

Further, there is a mandatory 10-day period afforded to the debtor to respond to creditor’s demand notice; if the notification was issued in the intervening period does that mean creditor is stripped of the remedies under the IBC? This would create an anomalous situation where there are two classes of creditors – a class of creditors who got a response before the date of notification and another class who received it after the date of notification. Both classes are at same position when issuing the demand notice but one class is treated differentially depending on the time taken by debtors to respond i.e. before or after the date of notification.

Reason of Covid Implications – Misplaced

It may be asserted that the threshold was increased to prevent disruption due to covid implications. And true that section 10A of the IBC was brought in as relief. However, this assertion is misplaced in the context of threshold under section 4 of the IBC. It is noted by the Report of the Insolvency Law Committee (ILC report) at para 2.2 that

due to the low threshold of default, a large number of applications were being filed for initiation of CIRP. This large number of applications is adding pressure on judicial infrastructure, which is causing delays both at the stage of admission and during litigation in the CIRP. These delays cause uncertainty for investors and have the potential to hinder a value maximizing insolvency resolution. Further, due to the low threshold for default, there is a chance that solvent debtor companies would be pushed into the CIRP.”

Further, in para 2.4 it went on to recommend that the threshold be increased to rupees 50 lakhs, thus, it would “significantly ease the burden on the adjudicating authorities while ensuring that cases that require recourse to the IBC continue to have access to it.”

The ILC Report (supra) was published in February, 2020, much prior to Covid pandemic in India. Further, from the above position of the MCA, it is amply clear that it intended to enhance the threshold to not only reduce the burden on the adjudicating authorities as a procedural measure, but also to prevent uncertainties to investors and hinderance to value maximization caused by delays in CIRP, and to prevent solvent debtors to be pushed into CIRP unnecessarily. Therefore, the enhancement of minimum amount of default was made for substantive reasons, and thus, the implication of the same has to be considered prospectively.

– Ashwin Bala Someshwerar

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