NCLAT: Increase in default amount to Rs. 1 crore under IBC is prospective in nature

NCLAT has ruled that the increase in threshold to Rs.1 crore under IBC is prospective in nature.

Introduction

In order to combat the drastic  economic fallout of the COVID-19 crisis, the Union Finance Minister had announced that there would now be an increase in the minimum threshold for the invocation of any corporate insolvency resolution process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC). This notification had been introduces on 24 March, 2020. This notification, which had been published by the Ministry of Corporate Affairs on the same date stated that the Central Government now specified that the minimum amount of default for the purposes of this section under the IBC was 1 crore and not 1 lakh as was the case prior to this notification.

The Kolkata Bench of the Hon’ble National Company Law Tribunal has, in its Order dated 20 May 2020 in Foseco India Limited v Om Boseco Rail Products Limited, ruled on whether this increase in threshold is prospective or retrospective in effect.

However, the National Company Law Appellate Tribunal (NCLAT) has also held that this notification which had been released in March is prospective in nature and does not apply to pending applications.
 
Facts of the Case
  • In the case, Om Boseco who was the corporate debtor purchased several kinds of chemicals from Foseco India who is our Operational Creditor. The corporate debtor purchasedthese on credit. Subsequently, the operational creditor served a demand noticeto the corporate debtor for all the unpaid invoices, 1 August 2019 which had been issued between 12 March 2018 and 11 July 2019, along with an interest upon the same which resulted in a total operational debt of INR 90,00,919.10.  The corporate debtor eventually failed to pay up the same and upon the corporate debtor’s failure to pay or to even respond to the same, the operational creditor resorted to filing an application for the initiation of CIRP before the NCLT in Kolkata.
  • Following this, the NCLT Kolkata ended up reserving its orders after a final hearing on the same application as on 13 March 2020.
  • Subsequently however, the COVID-19 crisis caused a delay in passing orders and during this interim period, on 13 May 2020, the corporate debtor requested a hearing by video-conference for initiating the proceedings further.
Observations and judgment
  • It was the argument of the corporate debtor that the notification which had been made in exercise of the powers conferred under section 4(1) of the IBC, was retrospective in nature. Due to this, it was argued that the operational creditor’s application was not maintainable whatsoever, since this default was below the new threshold limit for initiation of CIRP.
  • While relying on this argument the corporate debtor resorted to relying on the judgment of the National Company Law Appellate Tribunal (NCLAT) in Sri Munisuvrata Agri International Pvt Ltd v Bank of Baroda & Ors and also that of NCLT Kolkata in Sleepwell Industries Limited & Ors. However, it was concluded by the Tribunal that this relaxation of the threshold under the Notification applies prospectively and not retrospectively, thereby nullifying the entire argument made by the corporate debtor in itself.
  • While arriving at tis finding, the Tribunal mainly relied upon the presumption of statutes being prospective unless found to be retrospective, either expressly or by necessary implication.
  • The Tribunal also found the two judgments mentioned above by the corporate debtor to be inapplicable to the facts of the present case, specifically, the finding in Sleepwell Industries, where the amendment to Section 10(3) of the IBC was retrospective in nature, and thus was found to be inapplicable to the said Notification completely.

Conclusion

The NCLT undertook a very transparent and clear viewpoint, that the increase in the default threshold is prospective in nature, meaning, it is only for applications for CIRP filed after the Notification has been made and not on those made prior to this notification. Since this Notification had been issued early on, during the onset of the COVID-19 crisis in India which also coincided with the first lockdown, it is highly likely that several applications which had already been filed by this date were for defaults, unconnected with the COVID-19 scenario. Subsequently, thus, the Tribunal’s finding may also be consistent with the intent of this measure in the first place, which was to extend this relief for defaults caused by or related to the COVID-19 crisis in itself.

Thus it is important to note that in case the Notification on the increase in the threshold, which is dated 24 March 2020, is to apply only to the fresh proceedings, but no fresh proceedings are permitted to be initiated under the IBC for defaults arising on or after 25 March 2020, then this Notification becomes applicable only wherein:

  1. The default has arisen on 24 March 2020 (but not thereafter).
  2. The default has arisen prior to 24 March 2020 but the application for CIRP is filed on or after this date hence, for all 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 in order to initiate CIRP proceeding against a corporate debtor during the suspension period s stipulated.

Furthermore, this increase in the threshold shall also be of significance after the end of the suspension of the IBC. The proviso to the newly introduced section 10A of the IBC suggests that all such defaults occurring during the six-month suspension period cannot be considered while filing an application for the initiation of CIRP proceedings. Hence. a combined reading of this Notification dated 24 March 2020 along with this proviso would mean that the any default made after the lifting of this suspension period amounts to INR 1 crore or greater, in order to file an application under the IBC.