Introduction
Since the Insolvency and Bankruptcy Code (‘IBC’ or ‘the Code’) has been implemented with the adjudicatory powers being bestowed upon the National Company Law Tribunal (‘NCLT’), as many as 12,000 cases have been filed as in March 2019.[1] By the end of September 2019, the number of cases pending under IBC before the NCLT was 10,860.[2] This heavy burden on the NCLT is likely to be reduced, with the threshold being increased from ₹1 lakh to ₹1 crore.
On March 24, 2020, the Ministry of Corporate Affairs came out with a Notification [MCA Notification S.O. 1205(E)] to provide relief to small-sized companies and the MSMEs in the backdrop of the COVID-19 crisis. The concise Notification specifies ₹1 crore as the minimum amount of default for the purposes S.4 of the IBC. This would mean that the amount of debt defaulted to initiate insolvency proceedings would now have to be at least ₹1 crore as compared to the previous minimum default amount of ₹1 lakh. Even though the Central Government intended to ease out the impact of economic fallout, it has also created an ambiguity as to the operation of the Notification, whether it will be prospective or retrospective?
Operation of Notification: Retrospective or Prospective?
Before proceeding to interpret the Notification, the first issue that needs to be addressed is whether the principles of statutory interpretation can be applied to a notification at all. This can be answered affirmatively, since it comes under the purview of “law” within Article 13 of the Constitution of India, 1950. Such a notification is a subordinate or delegated legislation.
At this juncture, it is essential to understand that the law operates in the following two ways: prospectively or retrospectively. A prospective operation is a general rule which is based on the principle of lex prospicit non respicit, i.e., the law looks forward not back. The legal maxim of Nova constitutio futuris formam imponere debet non praeteritis also backs the general principle further by providing that a new law ought to impose form on what is to follow, not on the past. On the other hand, it is a fundamental principle of construction that unless it is expressly stated or necessarily implied that a statute has retrospective application, it is prospective[3]. Furthermore, in the case of Commissioner of Wealth Tax, Meerut v. Sharvan Kumar Swarup & Sons[4],the distinction between Substantive and Procedural Laws was made clear-
“As a General Rule, laws which fix duties, establish rights and responsibilities among & for persons natural or otherwise are “Substantive laws,” while those which merely prescribe the manner in which such rights & responsibilities may be exercised & enforced in a Court are ‘Procedural Laws.’”[5]
Non-viability of Retrospective Operation
A notification is an executive act, and it is a settled position in law that subordinate legislation cannot be applied retrospectively unless and until the validating statute authorizes the same.[6] In addition to the same, sufficient and rational justification for such an application is also necessary.[7] Moreover, drawing an analogy with Section 6 of the General Clauses Act, 1897, we can see that by invoking Section 6(e), all amendments or notifications are prospective unless specified to be retrospective; for which the power must be delegated to the executive by the legislature in the statute itself.
In the case of the aforesaid Notification, it is clear that no express provision for retrospective operation is made. Neither Section 4 of the IBC nor Section 239 dealing with the Rulemaking power of the Government gives such power. Further, an operation by necessary implication is also not viable owing to the present circumstances under which such notification was brought in force.
Grey Areas under the Prospective Operation
After the aforesaid discussion, it is manifestly clear that the Notification will be applied prospectively. However, there are certain grey areas regarding such operation as well, which further creates confusion and requires clarification. The Notification is silent on the cases that had been filed but could not be taken up yet due to the limited working of the courts and other authorities. The door of our adjudicatory bodies is likely to be shut for these cases because, in the absence of any clarification, the Notification could be applied to such cases having a retrospective effect by necessary implication.
The Authors suggest that on the issue of clarity pertaining to ‘pending cases,’ a clear distinction can be made between the date of admission and the date on which application was filed. The cases where the application has been filed should also be excluded, along with the cases where the order of admission has been passed from the purview of the Notification.
Moreover, the Notification also does not provide for any particular time period for amending the applications that are already filed, as was done in case of Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 dated 28-12-2019. Though the 2019 Ordinance was heavily discussed due to other Constitutional issues which go beyond the scope of this Article, the Authors would like to bring into light that the non-availability of such an option furthermore deprives the litigants and paves the way for a definite dismissal of their applications in furtherance of the amended threshold limits. However, on the other hand, if such an option were to be given to the litigants, this, in turn, would affect the already accrued substantive rights and would imply a retrospective operation without powers to do the same.
Operational Creditors
The class of Operational Creditors (OC) is going to be affected differently by the aforementioned notification and the crisis. Operational debt, under S.5(21), is defined as a claim arising out of the provision of goods or services and employment or in respect of dues arising out of the laws in force. There would barely be situations wherein an OC such as an employee would be owed an amount to the tune of ₹1 crore rupees.
Due to the ongoing crisis itself, the effect of non-payment of dues to the OC would be substantial. The OCs were already placed at a position weaker than the Financial Creditors (FC) considering the exclusion from the Committee of Creditors and the Waterfall Mechanism, and now, with the legal recourse to IBC being practically shut, this notification would add further to the woes of the OCs.
Therefore, the applicability of the notification with respect to the OCs must be construed liberally. If a demand notice under S.8 has been delivered in furtherance of the fulfillment of the requirements to file an application by the OCs, then such applications must not be rejected only on the basis of the failure to meet the threshold. This is based on the reasoning that the FC under the code has an option to file an application jointly with other FCs in order to meet the threshold amount. However, an OC has to fulfill the threshold prescribed in his individual capacity.
The Government has also notified its intent to suspend the insolvency proceedings for six months or until further orders to a maximum time period of a year by introducing an S.10A in the code.[8] In such a case, there is a need to differentiate between cases genuinely affected by COVID and other cases concerning the OCs and even otherwise. The default in the payment of dues not occurring due to the COVID-19 crisis must not be given leeway from the operation of the Code as the interest of businesses of the OCs involved in the provision of goods and services must also be taken in consideration.
Concluding Remarks
It is commendable on the part of the Central Government to raise the minimum amount of default to ₹1 crore because of the hardships that the companies are facing due to lockdown. However, while taking steps to ease the impact of the pandemic, the government also must make the operation of the Notification clear. Otherwise, it would do more harm than good and eat into the Judicial time, which now is more precious than ever due to the limited number of cases being taken up per day. It is our view that the Notification is prospective in nature.
Further, in light of the object of raising the threshold, it also seems that such a modification is temporary in nature, which also needs clarification. There is also a need to consider the interest of the OCs. Finally, it would be in the interest of the stakeholders to also mention the cutoff date for the operation of the amendment with regards to the suspension of the insolvency proceedings.
[1] PTI, ‘12,000 cases filed since implementation of insolvency law, setting up of NCLT, says official’ (The Economic Times, 25 March 2019)
<https://economictimes.indiatimes.com/news/economy/policy/12000-cases-filed-since-implementation-of-insolvency-law-setting-up-of-nclt-says-official/articleshow/68563213.cms?from=mdr> accessed 23 April 2020
[2] PTI, ‘10,860 cases under IBC pending before NCLT at the end of September: Govt’ (The Economic Times
03 December 2019) <https://economictimes.indiatimes.com/news/economy/policy/10860-cases-under-ibc-pending-before-nclt-at-the-end-of-september-govt/articleshow/72348493.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst> accessed 23 April 2020
[3] S.L. Srinivasa Jute Twine Mills v. Union of India (2006) 2 SCC 740 ¶ 18
[4] Commissioner of Wealth Tax, Meerutv. Sharvan Kumar Swarup (1994) 6 SCC 623
[5] Id. at ¶ 6
[6] Director General of Foreign Trade v. Kanak Exports (2016) 2 SCC 226 ¶ 113
[7] B.S. Yadav v. State of Haryana AIR 1981 SC 561
[8] Timsy Jaipuria, ‘COVID-19: Government to suspend insolvency proceedings for six months, amends IBC’ (CNBC-TV18 23 April 2020) <https://www.cnbctv18.com/legal/govt-allows-temporary-relief-from-insolvency-proceedings-for-firms-5758061.htm> accessed 23 April 2020
This article is written by Winy Daigavane & Belmannu Pavan of NUALS, Kochi.
Disclaimer: This article is an original submission of the Author. Kindly refer to our Terms of use or write to us in case of any concerns. Image used is for representational purposes only. This article is purely for academic purposes & nothing herein shall be construed as professional legal advice.
