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IBC THRESHOLD-WHETHER PROSPECTIVE IN NATURE?

September 21, 2020

By Vikrant Rana and Anuj Jhawar

Introduction

In the wake of COVID-19 pandemic, the Government of India vide Notification S.O. 1205(E) (“Notification”) dated March 24, 2020 raised the minimum threshold amount with respect to default in Corporate Insolvencies. Pursuant to Government’s notification, the threshold to initiate Corporate Insolvency Resolution Process (“CIRP”) has been raised to Rs. 1 Crore, from the earlier amount of Rs. 1 Lakh. However, one of the intrinsic issue that has arise post aforementioned notification is whether the notification effecting increase in threshold to trigger CIRP under the Insolvency and Bankruptcy Code, 2016 (IBC) is prospective or retrospective in nature.

Read Threshold Limit under IBC enhanced to INR 1 Crore

Corporate Insolvency Resolution Process (CIRP)- Meaning and Law

Corporate Insolvency Resolution Process (CIRP), as the term suggests is a procedure or mechanism under the Insolvency and Bankruptcy Code 2016, whereby financial creditor, operational creditor and the company itself can apply for initiation of insolvency proceedings conditional to minimum default amount i.e., 1 Crore.  Section 4 of the Code deals with the minimum threshold default amount and the same has been increased from Rs. 1 Lakh to Rs. 1 Crore as per the Notification released by the Government on March 24, 2020.

Interestingly, the above notification is a double edged sword for the apparent benefactors of the notification i.e., MSME’s, as on one hand it offers them protection and on other hand takes away their right to recover from big corporations. In view of rising concerns and speculations, the the Hon’ble National Company Law Tribunal (“NCLT”) in some of its recent judgments has rendered clarity on the issue- whether the modification in IBC threshold with respect to CIRP is prospective in nature?

Judicial pronouncements

M/s Arrowline Organic Products Pvt. Ltd. v. M/s Rockwell Industries Limited[1](NCLT Chennai- 2/6/20)

Facts:

Submissions by the Corporate Debtor/Applicant

The applicant contended that, as per the Notification vide S.O. 1205(E) dated March 24, 2020; the Government of India, raised the minimum threshold amount (under Section 4 of the Code) with respect to default in Corporate Insolvencies from Rs. 1 Lakh to Rs. 1 Crore. Corporate Debtor also asserted that, as the claim amount stated by Operational Creditor is less than the increased threshold i.e., Rs. 1 Crore, hence the order to commence CIRP under company petition IBA/1031/2019 should be quashed.

Submissions made by the Operational Creditor/ Respondent

The Operational Creditor in its counter, asserted that tribunal does not possess the power to recall or review the order passed on merits. Also, it was alleged by the Operational Creditor that, neither Section 420 of Companies Act, 2013 nor Rule 11 of NCLT Rules, 2016 confers power or authority upon NCLT to review or recall its orders.

Issues:

  1. Whether NCLT has the authority to recall the order passed on merits?
  2. Whether the notification dated March 24, 2020 is prospective or retrospective in nature?

In simple terms, whether the modified threshold to commence CIRP will be applicable to cases initiated prior to release of the Notification or not?

Judgment and Reasoning:

  • The Tribunal while adjudicating upon the issue of power of NCLT to recall the order passed, under Section 420 of Companies Act, 2013, relied upon various pronouncements such as, Peoples General Hospital vs. Alliance Industries[2], Dinesh Goyal v. DCB Bank Limited[3], Hero Exports v. K. Vasudevan[4]. The Tribunal observed that, the purported Section 420 of the Companies Act 2013 does not specifically confer power on any NCLT to recall or review any order(s) passed, but, at the same time permits and deals with rectification of records.
  • With respect to the prospective application and operation of the impugned notification, the Tribunal considered the verdict passed in the case of Bakul Cashew Co. vs. Sales Tax Officer Quilon,[5] wherein it was observed by the Supreme Court that only the Legislature has the power to make and amend laws and when any power is delegated by the legislature to any authority to notify any modification or alteration in a statute, the same power is limited and cannot be exercised retrospectively.
  • The Tribunal while shedding some light on the issue of prospective application of the Notification, relied upon Kirti Kapoor v. Union of India[6], in which issue relating to applicability (prospective or retrospective) of modification of the pecuniary limit under Section 1(4) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 from Rs. 10 Lakhs to Rs. 20 Lakhs, for filing an application for recovery of debts in the Debt Recovery Tribunal (DRT) by Banks and Financial Institutions had been discussed. The Division bench of Hon’ble Rajasthan High Court in Kirti Kapoor case[7] did not expressly hold the application of notification to be prospective in nature, but relied on the notion of ‘conditional legislation’ and sufficiently clarified the fact that, operation and application shall affect only future applicants, keeping in view the good belief of the respective applicants for recovery of debts.
  • The Tribunal also observed the nature of substantive and procedural laws and referred to the case of Hitendra Vishnu Thakur Ss ors. vs. State of Maharashtra & ors
  • Government exercising delegated legislative power and authority cannot act upon its discretion with respect to retrospective or prospective applicability– The Hon’ble Supreme Court in Indramaniyarelal Gupta v.W. R. Nath[9], Union of India v. Madan Gopal Kabra[10] and Allahabad High Court in the case of Modi Food Products Limited vs. Commissioner of Sales Tax, U. P[11] reiterated that legislature has the power to act retrospectively unless otherwise provided. But at the same time, Government exercising delegated legislative power and authority cannot act upon its discretion with respect to retrospective or prospective applicability. Power and authority of Parliament and delegated institutions, do not overlap. Legislature, being the maker of enactments and statutes, can confer retrospective effect while, Government exercising delegated powers, under such statutes, cannot lay its discretion or make laws retrospective unless mentioned expressly.
  • NCLT is a creation of legislature under a statute. It exercises delegated power, hence, the power to recall or review judicial enactments and statutes in not within the ambit of a Tribunal. In the present case, concerned Notification is issued by the Central Government and the provisions under which the same has been issued, does not confer power upon the Tribunal to act retrospectively.

CONCLUSION

In view of the recent observations made through judicial pronouncements and precedents it can be summed up that the Notification dated March 24, 2020 is prospective in nature. As far as the power to recall and review is concerned, the NCLT has been formed according to and under a statute and the same lacks the authority to act upon applicability and validity of enactments[12].

[1] MANU/NC/6868/2020

[2] Company Appeal 105/2018

[3] Company Appeal 702 of 2019

[4] CRP No. 499/2020

[5] MANU/SC/0410/1986

[6] Civil Writ Petition No. 21860/2018

[7] ibid

[8] MANU/SC/0526/1994

[9] MANU/SC/0066/1962

[10] MANU/SC/0053/1953

[11] MANU/UP/0171/1961

[12] Dr. Indramaniyarelal Gupta vs. W R Nath (1963 SC 274)

 

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