The Government of India (GoI) has announced various relief measures with respect to statutory and regulatory compliance matters across various sectors and Special Economic Package to counter the impact of COVID -19 on the economy. One notable relief measure announced related to enhancement of threshold for triggering corporate insolvency resolution from Rs.1 lac to Rs. 1 crore. This measure was taken to prevent many companies, more specifically MSME’s, from being pushed into insolvency on account of financial distress due to virtual shut down of businesses due to lockdown. The GoI, acting with speed, issued necessary notification on the 24th of March enhancing the monetary limit.
The monetary change has initiated a debate on the fate of corporate insolvency applications filed but pending admission by the National Company Law Tribunals (NCLT) as on the date of notification. Under the scheme of IBC, Corporate Insolvency Resolution Process (CIRP) is initiated on the date when the applicant (who could be a financial creditor/operational creditor or the corporate debtor itself) files an application with NCLT for initiating CIRP. However, CIRP only commences on the date of admission of application by the NCLT.
In perhaps first such decision, the Hon’ble Kolkata Bench of NCLT in the case of Foseco India Limited v. Om Boseco Rail Products Limited had the occasions to examine whether the minimum default limit to Rs. 1 crore will be applicable to applications pending for admission as on the date of notification. The NCLT took note of the settled law that statute is presumed to be prospective unless it is held to be retrospective, either expressly or by necessary implication. Further, the amendment brought by the notification nowhere mentioned that its application will be retrospective. Accordingly, the NCLT has ruled that the amendment shall be considered as prospective and not retrospective, thus admitting the application for CIRP.
While the NCLT did not refer to any ruling to propound the view, it will be useful to take note of the ruling of Hon’ble Supreme Court in the case of K. Sashidhar vs Indian Overseas Bank. The ruling had interpreted the effect of lowering the voting threshold of Committee of Creditors (CoC) from 75% to 66% by Act No. 26 of 2018 w.e.f. 6 June 2018 in context of Sec 30(4) of the IBC. The court had held that the amendment is to modify the voting share threshold for decisions of the CoC and cannot be treated as clarificatory in nature. It changes the qualifying standards for reckoning the decision of the CoC concerning the process of approval of a resolution plan. The rights/obligations crystallized between the parties in terms of the governing provisions (at the point of time) and can be divested or undone only by a law made in that behalf by the legislature. There is no indication that the legislature intended to undo the decisions of the CoC already taken prior to 6 June, 2018. In view thereof, the 75% threshold as was applicable on the date of passing of the resolution plan by the CoC was considered sacrosanct.
The ratio of the ruling of the SC would directly lend support to the decision in the case of Foseco India Limited. Thus, taking recourse to protection under the enhanced threshold of Rs. 1 crore in respect of application pending for admission as on the date of notification may not be rewarding for corporates exploring this as a escape route.
Suspension of fresh initiation of CIRP
On a related note, another aspect that requires consideration is regarding the announcement made by the Finance Minister as part of the Special Economic Package announced over May 13 to 17 with regard to suspension of fresh initiation of insolvency proceedings up to one year (though with a qualification – ‘depending upon the pandemic situation’). The announcement was made on May 17. Based on media reports, apparently the government has promulgated an ordinance for suspending initiation of new CIRP which is pending Presidential assent, however fine print is awaited. This leaves an ambiguity whether CIRP can be initiated in the interim. Going by the intent, one needs to be cautious of any adventurism in initiating new CIRP. It may not be out of place to assume issuance of retrospective notification effective May 17th (date of announcement). Doing otherwise may only show the GoI in bad light which is best avoidable given the situation.
Regarding the fate of applications already filed (i.e. CIRP ‘initiated’ but ‘not admitted’), it may be reasonable to infer that the suspension may not have an impact on such applications. This is considering the use of expression “suspension of fresh initiation of insolvency proceedings”. CIRP’s initiated, though pending for admission as on 17th May 2020, may therefore continue, unless the notification prescribes otherwise. Interestingly, if the government was to take a liberal call and suspend all CIRP applications pending admission by NCLT as on the date of announcement (17th May), it may provide reprieve to numerous corporates whose fate is left hanging in balance due to defaults, including those whose CIRP’s are admitted by NCLT post effective date of notification. This may well be wishful thinking.
It will be worthy of the Government to notify the suspension at the earliest to settle the debate.
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