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Ergo Update

10-Jun-2020

Introduction

As part of the Government’s ongoing efforts to combat the economic fallout of the COVID-19 crisis, the Union Finance Minister in a press conference dated 24 March 2020 announced an increase in the threshold for invoking the corporate insolvency resolution process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC). A notification published by the Ministry of Corporate Affairs on the same date (Notification) states that the “Central Government hereby specifies one crore rupees as the minimum amount of default for the purposes of the said section.”

The Kolkata Bench of the Hon’ble National Company Law Tribunal (NCLT Kolkata / Tribunal) has, in its Order dated 20 May 2020 in Foseco India Limited v Om Boseco Rail Products Limited (CP (IB) No 1735/KB/2019), ruled on whether this increase in threshold is prospective or retrospective in effect.

Facts

Om Boseco (Corporate Debtor) purchased various foundry and chemicals from Foseco India (Operational Creditor) on credit. The Operational Creditor served a demand notice on the Corporate Debtor on 1 August 2019 for unpaid invoices issued between 12 March 2018 and 11 July 2019, along with interest thereon, for a total operational debt of INR 90,00,919.10.  Upon the Corporate Debtor’s failure to pay or respond to the same, the Operational Creditor filed an application for initiation of CIRP before the NCLT Kolkata.

The NCLT Kolkata reserved orders after a final hearing on the said application on 13 March 2020. However, the COVID-19 crisis caused a delay in passing orders. In the interim, on 13 May 2020, the Corporate Debtor requested a hearing by video-conference.

Legal Issues & Finding

The Corporate Debtor argued that the Notification, made in exercise of the powers conferred under the proviso to Section 4(1) of the IBC, was retrospective in nature. As such, it was argued that the Operational Creditor’s application was no longer maintainable, as the default alleged was below the new threshold limit for initiation of CIRP.

In doing so, the Corporate Debtor relied on the judgment of the National Company Law Appellate Tribunal (NCLAT) in Sri Munisuvrata Agri International Pvt Ltd v Bank of Baroda & Ors (Company Appeal (AT)(Insolvency) No.84 of 2019) and that of NCLT Kolkata in Sleepwell Industries Limited & Ors. (CP(IB) No.615/KB/2018).

However, the Tribunal concluded that the relaxation of the threshold under the Notification applies prospectively and not retrospectively.

In arriving at this finding, the Tribunal relied primarily on the presumption of statutes being prospective unless found to be retrospective, either expressly or by necessary implication. The Tribunal also found the two abovementioned judgments to be inapplicable to the facts of the present case. In particular, the finding in Sleepwell Industries, that the amendment to Section 10(3) of the IBC was retrospective in nature, was found to be inapplicable to the said Notification.

Comment

The Tribunal has taken a clear and categorical view that the increase in default threshold is prospective, i.e. only for applications for CIRP filed after the Notification. Given that the  Notification was issued early on, in the onset of the COVID-19 crisis in India (coinciding with the announcement of the first lockdown), it is likely that applications that had already been filed by this date were for defaults unconnected with COVID-19. Consequently, the Tribunal’s finding may also be consistent with the apparent intent of the measure, i.e. to extend relief for defaults caused by or related to the COVID-19 crisis.

However, increasing the default threshold for initiation of CIRP had long been discussed (and even recommended in the February 2020 Report of the Insolvency Law Committee) as a measure to reduce the number of CIRP applications and to prevent the IBC from being used as a mere recovery mechanism of first resort. It is possible that other courts/tribunals deciding the retrospectivity of the Notification may take this intent into account, which predates the COVID-19 crisis.

Further, subsequent developments have greatly modified the scope and applicability of the Notification. The Insolvency and Bankruptcy (Amendment) Ordinance 2020 was promulgated on 5 June 2020, whereby the initiation of fresh proceedings under Sections 7, 9 and 10 of the IBC has been suspended for a period of six months (extendable up to one year) for defaults arising on or after 25 March 2020. The Ordinance also introduces a proviso to clarify that no application shall ever be filed under the IBC for defaults occurring during the suspension period.

If the Notification on increase in threshold, dated 24 March 2020, is to apply only to fresh proceedings, but no fresh proceedings can be initiated under the IBC for defaults arising on or after 25 March 2020, the Notification becomes applicable only where (i) the default has arisen on 24 March 2020 (but not thereafter) or (ii) the default has arisen prior to 24 March 2020 but the application for CIRP is filed on or after this date. Therefore, for those creditors who had not already filed their IBC applications before 24 March 2020, it appears that there should be a default / outstanding sum of INR 1 Crore as on 24 March 2020 to initiate CIRP against a corporate debtor during the suspension period.

Further, the increase in threshold will also come into play after the end of the suspension of the IBC. The proviso to the newly introduced Section 10A of the IBC suggests that defaults occurring during the six-month suspension cannot be considered while filing an application for initiation of CIRP. Therefore, a combined reading of the Notification dated 24 March 2020 with this proviso would require the default post lifting of suspension (or possibly, the combined default pre-24 March 2020 and post-lifting of suspension) to amount to INR 1 Crore or greater, in order to file an application under the IBC. This represents a clear policy decision by the Government to make the harsh and irreversible provisions of the IBC permanently inapplicable to defaults arising during the COVID-19 pandemic (ie from on or after 25 March 2020 to the lifting of the suspension).

-       Ravitej Chilumuri (Principal Associate), Aaditya Gambhir (Associate)

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