Spilt Relief: The Compartmentalization of COVID Period Under Section 10A of IBC
Malak Bhatt & Samridhi
(Malak is the Founding Partner, NM Law Chambers and Samridhi is an Associate at NM Law Chambers)
The Insolvency and Bankruptcy Code, 2016 [‘Code’] was introduced with the aim of consolidating the legal framework in order to “support development of credit markets and encourage entrepreneurship” within a timely manner. The major objective was to empower the Financial and Operational Creditors alike with an effective legal remedy while simultaneously providing flailing businesses a second shot at revival by handing the control of the Corporate Debtor to a new management under the leadership of an approved Successful Resolution Applicant.
It is evident that the introduction of the Resolution Applicants was an essential component for the successful implementation of the Code. Any Corporate Debtor faced imminent liquidation without the rescue and aid of a Resolution Applicant coming forward with a plan to keep the Corporate Debtor as a going concern. The necessity of reorganization and maximization of value of the assets by the resolution applicant through the resolution plan to keep the Corporate Debtor as a going concern has been recognized by the Hon’ble Supreme Court through a catena of cases, and most prominently in the oft referred judgment of Swiss Ribbons (P) Ltd. v. Union of India (2019) ibclaw.in 03 SC. Thus, the possible unavailability of the Resolution Applicants during the financially strenuous times of COVID-19 necessitated the introduction of legislative relief to safeguard the Corporate Debtors from the future of imminent liquidation.
Introduction of Section 10A
The emergence of COVID-19 threatened to throw a spanner in the mechanism established under the Code. The ensuing imposition of lockdowns resulted in a significant economic disruption necessitating implementation of immediate relief measures across the world. The Government of India promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance 2020 on 05.06.2020 thereby introducing Section 10A into the insolvency framework under the Code. The provision was later finally inserted via Insolvency and Bankruptcy Code (Second Amendment) Act 2020 on 23.09.2020.
Section 10A envisaged a retrospective perpetual embargo upon filing of application under Sections 7, 9 and 10 for initiation of Corporate Insolvency Resolution Process [‘CIRP’] against Corporate Debtors for any default arising between the period of 25th March, 2020 to 24th March, 2021. The non-obstinate provision stipulated that neither Financial Creditors (falling under Section 7), nor Operational Creditors (falling under Section 9) and nor the Corporate Applicant itself (falling under Section 10) shall trigger the insolvency process. The Explanation further clarified that the said provision “shall not apply to any default committed under the said sections before 25th March, 2020”.
Section 3(12) of the Code defines a default as “non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the debtor or the Corporate Debtor, as the case may be”. Given the impact of COVID-19 on the national economy, several businesses faced the risk of defaulting upon their debts to Financial Creditors and Operational Creditors. Although several banks provided a brief moratorium upon their loans, in consonance with the RBI Guidelines, but Section 10A also provided the much-needed respite to the Corporate Debtor against the operational debts.
The Judicial Intervention by the Hon’ble Supreme Court
Since its introduction, the provision of Section 10A has been a focus of much debate with respect to its application. The Hon’ble Supreme Court in the case of Ramesh Kamyal v. M/s Siemens Gamesa Renewable Power Pvt. Ltd. Civil Appeal No. 4050 of 2020 vide Order dt. 09.02.2021 (2021) ibclaw.in 08 SC clarified that Section 10A imposed an absolute bar upon triggering the insolvency process under Sections 7, 9 and 10 for any default arising after 25th March, 2020.
The Hon’ble Supreme Court took note of the object of the Ordinance coupled with the prevailing extraordinary circumstances and proceeded to observe that the legislative intervention was enacted in cognizance of the fact that “resolution applicants may not come forth to take up the process of the resolution of insolvencies which would lead to instances of Corporate Debtors going under liquidation and no longer remaining a going concern”.
The Apex Court further clarified that the provision did not stipulate any requirement to enquire and assess the extent and the manner of effect that COVID-19 exerted on the financial health of the Corporate Debtor.
The Cases of Interpretations by the Ld. National Company Law Appellate Tribunal
The aforesaid judgment resulted in several cases whereby the Creditors attempted to clarify the date of default to fall either prior or post the period provided under Section 10A. In the case of Yatra Online Ltd. v. Ezeego One Travel and Tours Limited Company Appeal (AT)(Ins.) No. 387 of 2023 vide Order dt. 31.03.2023, (2023) ibclaw.in 679 NCLAT the Operational Creditor had attempted to establish that the date of default was 01.04.2019 as the defaults had started accruing from 01.04.2019 and had finally crystalized on 30.10.2020.
The Ld. NCLAT relied upon the case of Ramesh Kamyal (supra) and proceeded to hold that in absence of any pleadings for amendment or evidence in support, the date of default shall be taken as 30.10.2020, as also substantiated by the Resolution Professional therein.
In view of the clear embargo for proceeding against the Corporate Debtor, the creditors attempted to drag the corporate guarantors to the insolvency proceedings to extract their claims. This attempt was repelled by the Ld. NCLAT in the case of Vikram Kumar v. Aranca (Mumbai) Pvt. Ltd. Company Appeal (AT)(Ins.) No. 836 of 2023 vide Order dt. 14.09.2023 (2023) ibclaw.in 594 NCLAT wherein it was held that as the corporate guarantee was invoked on 25.08.2020, i.e. during the period provided under Section 10A, hence, the CIRP cannot be initiated against the Corporate Guarantor. The said Order was upheld by the Hon’ble Supreme Court vide Order dt. 08.01.2024.
However, the Ld. NCLAT has recently attempted to distinguish amongst the claims raised during the period under Section 10A and the subsequent accrual of claims beyond the pale of the said provision.
In the case of Naresh Choudhary v. Sterling Enamelled Wires Pvt. Ltd. Company Appeal (AT)(Ins.) No. 39 of 2023 vide Order dt. 16.08.2023 (2023) ibclaw.in 532 NCLAT, the Ld. NCLAT attempted to separate the purchase orders in order to exclude the ones wherein the date of default was prior to 24th March 2021 and upholding the ones wherein the date of default was post 24th March 2021. The said exercise was necessitated as the Operational Creditor had failed to provide the date of default either in the demand notice issued under Section 8 of the Code or under the application filed under Section 9 of the Code. However, upon a perusal of the date of defaults arising from the invoices and consequent segregation of the dates, the Ld. NCLAT upheld the order by the Adjudicating Authority thereby admitting the Corporate Debtor into CIRP.
The said case of Naresh Choudhary (supra) was relied upon by the Ld. NCLAT for adjudication of Rashtriya Polymers & Solvents v. Kanodia Technoplast Ltd. Company Appeal (AT)(Ins.) No. 1140 of 2023 vide Order dt. 09.07.2024 wherein the Ld. NCLAT was faced with a similar issue, although there existed no ambiguity over the date of default. The Operational Creditor therein issued a demand notice under Section 8 dt. 30.09.2021 for debt arising from invoices falling within the period of 01.07.2020 to 03.06.2021. Consequently, the Operational Creditor approached the Adjudicating Authority via application under Section 9.
It was the case of the Creditor that the Ld. Authority undertook the painstaking exercising of segregating the amount and periods of invoices falling within and post the period of Section 10A, yet, it proceeded to dismiss the application holding it to be barred under Section 10A.
Contrary to the rationale of the Ld. Authority, the Ld. NCLAT held the issue to be covered by Naresh Choudhary (supra). The Ld. Tribunal opined that only a limited exercise had to be undertaken to assess whether the invoices falling outside the period of Section 10A crossed the threshold of INR 1 cr. provided under Section 4 of the Code. As the said threshold was met by the Creditor therein, the Ld. NCLAT proceeded to remand the matter back to the Ld. Authority to proceed further.
Conclusion
The case of compartmentalizing the period provided under Section 10A by segregating the invoices and consequent claims is a reiteration of a similar procedure utilized by the Ld. NCLAT whereby the invoices may be segregated between those barred by limitation and those falling within the period of limitation. The said exercise of categorization by limitation basis was recently carried out by the Ld. NCLAT in the case of M/s Laxmi Trading Corporation v. M/s Hindustan Construction Company Ltd. Company Appeal (AT)(Ins.) No. 1476 of 2023 vide Order dt. 27.02.2024 (2024) ibclaw.in 115 NCLAT wherein each invoice was assessed with respect to its admissibility basis the date of default falling within the period of limitation.
Moreover, the Apex Court in the case of Ramesh Kamyal (supra) had held that the Corporate Debtors had to be safeguarded, especially in view of the fact that the Resolution Applicants may not be available to rescue the Corporate Debtor due to the significant economic disruption caused by the COVID-19. In the present times, there exists no such fear.
Further, the outright dismissal of claims raised by the Operational Creditor by relying upon the absolute bar of Section 10A pose a risk of endangering the said Operational Creditors to fiscal strain and hardships. Hence, it is essential that the legislative lifeline extended under Section 10A be restricted to its stipulated period to prevent its unintended misuse by severely restricting the avenues for Operational Creditors to seek timely relief against the continual debts accruing against the Corporate Debtor. Any denial of such reliefs to the Creditors may inadvertently result in defeating the purpose and object of the Code whereby the Creditors will be denied of an effective timely remedy against the Corporate Debtors.
