Retrospective or Prospective – Sec. 4 of IBC Who is the Beneficiary? Debtor or Creditor – By Adv. Senguttuvan.K & Durghasree.G

Retrospective or Prospective – Sec. 4 of IBC: Who is the Beneficiary?
Debtor or Creditor?

As such, it is not clear whether this increase in threshold limit from 1 lakh to 1 crore is to protect the Corporate Debtors or Creditors: that too in view of revised standard for SME & MSME in terms of increased Turnover and Capital. Predominantly it looks to be the Creditors are the victims of this increase in Threshold Limit; amidst this situation, if the Courts hold that this amendment is retrospective in nature, then the situation worsens for SME & MSME Category Creditors.

In exercising the powers conferred under proviso of Sec 4 of IBC, the Government increased the threshold for default under IBC provisions for initiating insolvency proceedings from One Lakh to One Crore vide notification S. No. 1205(E) dated 24/03/2020. As usual, the applicability of the notification, retrospectively or not, was tested before the Court, NCLT; hereby authors wishes to discuss on the other dimension of that, when it is held retrospective?

The NCLT (Cal)[1] had a chance to rule whether the above said notification is prospective or retrospective in nature. The Hon’ble Tribunal had held that it is presumed to be applied prospectively unless it is expressly or by way of implication states it be applied retrospectively.

The Hon’ble Tribunal of Chennai Bench[2] also had a chance to review the question of law, wherein the CD has challenged the admitted petition of Creditor claiming the amendment is retrospective in nature and applies even to admitted but not yet ordered cases. NCLT dismissed CD’s please and held it as prospective.

The above two decisions were overruled by the Hon’ble HC of Delhi in the case of Pankaj Aggarwal v. UoI and Ors. [2020] ibclaw.in 17 HC, wherein the Hon’ble HC ordered while admitting the WP, by staying the operation of the NCLT Order holding that the said notification should be seen from the perspective of purpose and not effective date of the increase in threshold. The purpose as discussed in the decision taking the FM’s note/speech on this increase in threshold.

With all respects due to the Hon’ble HC of Delhi, the authors brings out that the view taken by the Court from the perspective of the CD, must have failed to repay for many months, much before the bank filing an application for adjudication before the NCLT and that too was filed before the 25.03.2020. The Hon’ble Court did not consider the state of Creditors when the default time which has no link to the Pandemic Unprecedented Situation.

When question of effective date of the above said notification was not clarified clearly in the minds of the professionals, an Ordinance dated 5^th June, 2020 was passed to suspend the CIRP proceedings.

FM’s Speech, Objects and Reasons for promulgation of the Ordinance and Explanation to Sec.2 (explanation to Sec.10A of IBC) of the said Ordinance has distinctly pointed out the intention i.e. the object is to safe the MSME’s who has defaulted after 25.03.2020 and that too due to the unprecedented situation caused by spread of COVID -19. Even though sec 7, 9 & 10 are suspended and the same becomes applicable to all the CD’s, only the industries really affected due to this unprecedented situation.

The Hon’ble NCLT Bench Chennai has applied two different approaches while deciding Arowline Case and Siemens Gamesa Case[3]. In Arowline Case, the issue was with respect to the effective date of increase in threshold limit u/s 4 of IBC and it was held in affirmative manner i.e. threshold limit can be applied only prospectively. This decision is based on the mere reading of the Notification; the purpose of such notification or intention for such notification or situation which forced for such amendment are not considered.

However, in the case of Siemens Gamesa Case, the Hon’ble NCLT Bench of Chennai placed reliance on the Preamble to the Ordinance; had the order was passed with mere reliance on the operating part of the Ordinance, which later would become the Act, the decision would have been different.

In case, if the increased threshold limit is applied retrospectively, then the Tribunal will dismiss all the cases, irrespective of earlier stand on admission; admitted or not, but not adjudicated. And in that case, it is SME and MSME Category of Creditors are the affected parties, because it is SME & MSME fighting with big Companies against their unpaid over dues.

The decision may be correct by holding only the Banker as lender to the SME & MSME in mind; but out of 100 cases filed by Creditors, about 60%+ are by the creditors and not by the Banker; the very important point is, more than 50% cases reaches settlement without ordered for proceedings. In such case, is it not the stand taken by the court requires correction or needs a clarification from the Government.

Almost, majority of the NCLT cases which is being admitted and pending before the respective benches would be questioned based on this pecuniary limitation and as a result the position of the numerous creditors will be put into disquiet which is great injustice to the Creditors and will save Debtors defaulted deliberately and not due to the unprecedented situation.

If the ratio laid down by Tribunal and HC, holding the amendment threshold limit as retrospective, then basic of object of the Code is defeated; the reason being such interpretation leads to protect the Debtors whose default was not caused by the unprecedented situation and renders injustice to the Creditors.

Already creditors are struggling to demonstrate the non-existence of dispute on receivables since the debtor comes with some communication to establish there exist dispute; it’s an uphill task for the creditor to demonstrate the non-existence of dispute.

In addition to this, if the Courts interpret the notification as retrospective along with increased threshold of disputed amount to approach the solution under IBC, the ultimate losers are only Creditors in the category of SME & MSME; actually an interpretation helps the Debtors who defaulted deliberately and not due to the unprecedented situation.

At this juncture the decisions placing reliance on the preamble and intention also requires, factual situation and it cannot be applied to all cases. The necessity of finding facts in each case and arrive at whether the Debtor defaulted due to the unprecedented situation or not, is essential. This draws support from the 7^th para of the Preamble wherein the Objects and Reasons for Promulgation of this ordinance is stated; it is extracted for the convenience of the readers:

“And WHEREAS it is considered expedient to exclude the defaults arising on account of unprecedented situation for the purpose of insolvency proceedings under this Code”

The Ordinance made exclusions and such an exclusion can be arrived only be looking into the facts of the each case and not by blanket interpretation. With the revised standards for SME and MSME, if this interpretation is applied flat to all, the Creditors who will be sufferer more in counts and the most of the initiatives by the Government to help SME and MSME during this unprecedented situation would defeat.

The Authors placing their humble prayer to the Courts, either to apply facts to conclude whether the initiation of Insolvency Proceedings are admissible or not, while treating the amendment as retrospective; OR hold the amendment only as Prospective; in such case the defaulted CD’s won’t take shelter under the Code.

Reference

[1] Foseco India v. Om Boseco Rail Products [2020] ibclaw.in 12 NCLT 

[2] Arrowline Organic Products v. Rockwell Industries [2020] ibclaw.in 18 NCLT

[3] Siemens Gamesa Renewable Power v. Ramesh Kymal [2020] ibclaw.in 52 NCLT