Impact of increased IBC Threshold on pending proceedings: Prospective or Retrospective Application?
Recently, the threshold of default for triggering the insolvency proceedings against a corporate debtor under the Insolvency & Bankruptcy Code, 2016 (“IBC”) was increased by a Notification issued by the Central Government on 24.03.2020 (“Notification”). The erstwhile limit of Rs. 1 Lakh was increased to Rs. 1 Crore. Since the remedy under IBC is one of the most efficacious remedy for resolving distress and consequently recovering legitimate dues of the creditors (if possible), it’s instructive to understand the impact of this Notification on the proceedings pending under section 7, 9 or 10 of IBC with the Adjudicating Authority (“NCLT”/“Tribunal”). This article analyses the decisions of the NCLT Chennai bench in Arrowline Organic Products Pvt. Ltd. v. Rockwell Industries Ltd and NCLAT in Madhusudan Tantia v. Amit Choraria on the issue of applicability of the Notification and concludes that it applies prospectively.
In both the cases, an application under section 9 of IBC was filed by an Operational Creditor and the matter was reserved for final order. Before the final order could be pronounced, the aforesaid Notification was issued. However, the Tribunal in both the cases, went ahead and admitted the application. The Corporate Debtors resisted the same on the ground of enhanced pecuniary jurisdiction for filing the application under section 7, 9 or 10 of IBC.
There are three arguments to justify the prospective applicability of the Notification as also broadly discussed in the aforesaid judgments:
- Retrospective Application of a Law (including delegated legislation) is permitted only when the Legislature grants such power expressly or by necessary implication.
- Right to file an application under section 7, 9 or 10 of IBC is a substantive right.
- This Right gets vested or crystallized only on filing of application under section 7, 9 or 10 of IBC and not before.
Firstly, the legislative power of the Legislature and the power of the executive body to enact a delegated/conditional legislation by virtue of an express provision contained in the enabling or parent statute, are different. It is well settled that both these powers aren’t co-extensive. While the Legislature can give retrospective effect to the provisions of legislations, the same can’t be done by an executive body unless such power is granted expressly or by necessary implication. From the proviso to section 4 of IBC, it is clear that the power to issue the Notification raising the threshold of default under section 4 is an exercise of delegated legislation and not an Act of Legislature. A bare reading of section 4 of IBC shows that no such power of giving a retrospective effect to the Notification is delegated on the Central Government. This intention can’t be found from the language of the Notification also. It is however, pertinent to mention that as per settled principles of Administrative Law, there is no need to peruse the Notification for its retrospective applicability in the absence of such a power flowing from the parent statute.
Although the Tribunals in the cases mentioned before; tried to locate the legal sanction for the retrospective effect of the Notification in its language, there wasn’t such a need in accordance with the legal position mentioned in previous paragraph.
Secondly, it is well settled principle of statutory interpretation that laws affecting substantive rights are presumed to be prospective in operation unless the contrary intention is conveyed by the Legislature expressly or by necessary intendment. Similarly, the laws affecting procedural rights are presumed to be retrospective in operation unless the contrary intention is conveyed by the Legislature expressly or by necessary intendment. Further, the right to file an action and the right to file an appeal are substantive rights and the right relating to forum and limitation are procedural rights as reiterated and affirmed in Karnail Kaur v. State of Punjab. Hence, the right to initiate proceedings under IBC is a substantive right as it affords a right to a financial/operational creditor to resolve the financial distress of the Corporate Debtor by initiating Corporate Insolvency Resolution Process (“CIRP”) and consequently recover its dues if possible. On this issue, a noteworthy (although glossy) argument was made in Madhusudan Tantia (supra) by the Corporate Debtor that the right to file an action under IBC may be a substantive right but the ‘requirement’ to initiate CIRP upon filing an action is procedural in nature and hence can be retrospectively amended. This argument makes an artificial distinction between filing an action under IBC and initiating CIRP by ignoring that without the latter, the presence of former will be an illusion and conflating the two is a result of lack of understanding of the remedy of IBC.
Thirdly, the substantive right to file an application under IBC gets vested on the date of institution of proceedings. This position, in the context of amendments to legislations and the law governing the pending proceedings has been held in Karnail Kaur v. State of Punjab. It is pertinent to mention here that in both Arrowline Organic Products (supra) and Madhusudan Tantia (supra), the matter was reserved for final orders and hence, it was easy for the Tribunal to admit the application despite the Notification. Reaching the same conclusion might not be that easy for cases where the amount of default is 1 Lakh or more but less than 1 Crore and (a.) matter has been filed with registrar of any bench of NCLT but hasn’t been listed yet and, (b.) matter is being heard but hasn’t reached the final stage of arguments. Whatever may be the perceived difficulty in reaching the conclusion in these cases, the legal position demands same treatment as the right to file an action under IBC crystallizes on institution of proceedings and can’t be taken away by retrospective application of the Notification subject to the conditions discussed before. For clarity, it must be noted that those cases where the amount of default is 1 Lakh or more but less than 1 Crore and proceedings haven’t been initiated already, the Notification will bar such initiation.
Lastly, it is well settled principle of statutory interpretation that the intention behind the statute is to be used in interpreting its provisions. A similar argument was made by the Corporate Debtor in Arrowline Organic Products (supra) by placing reliance on the context of COVID-19 amidst which the announcement of enhancement of limit of default was made by the Finance Minister. The slew of measures undertaken by the Government for bolstering the growth of Micro, Small and Medium Enterprises (“MSME”) Industry and the report of Insolvency Law Committee dated 20.02.2020 were also pressed by the Corporate Debtor to substantiate the argument of beneficial interpretation of the Notification. The Tribunal, however, correctly used only the report of the Insolvency Law Committee where the policy behind the enhancement of the limit of default was discussed and the same is focusing on higher value cases for better use of adjudication machinery for resolving financial distress. The outbreak of COVID-19 and other beneficial measures for the MSME sector are coincidental to the enhancement and aren’t the causes behind the same.
Hence, it can be observed that the decisions of the NCLT and NCLAT as aforesaid have in the opinion of the author, correctly held that the Notification applies prospectively in the light of the prevailing legal position. However, it remains to be seen if the intention behind the Notification sways the decision in any other direction, for the Supreme Court if and when this issue reaches the court.