A-Insights

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 17^th (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 17^th 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 (17^th 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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Astha Srivastava & Sayli Petiwale

The Ministry of Corporate Affairs (“MCA”) has introduced the Companies Fresh Start Scheme, 2020 (“Scheme”) on March 30, 2020.[1] This Scheme has been introduced in furtherance of the steps undertaken by the government for providing relaxations to businesses from statutory and regulatory compliance matters amidst COVID-19.[2] The Scheme allows the defaulting companies to make a fresh start by enabling filing of belated documents at the MCA Registry without incurring any additional fee and/ or prosecution charges as may be prescribed under the Companies Act, 2013 (“Act”).

This is a unique Scheme introduced by the MCA, which provides an opportunity to the defaulting companies to avail a one-time waiver on imposition of additional fees on filling of belated documents. Considering the unprecedented pandemic and slowdown in the economy due to preventive measures taken by the government, this Scheme would ease out the financial burden on the companies. Moreover, the Scheme would provide applicant companies immunity from prosecution/ penal proceedings with respect to filing of belated returns/ documents. The Scheme also covers inactive companies within its ambit and provides certain relaxations, which would enable them to remain on the register of companies with minimal compliance requirements. This Scheme would indeed enable the companies to start afresh and be compliant.

An overview of the provisions of the Scheme is provided hereunder:

1. Applicability:

The Scheme is applicable on ‘defaulting companies’ i.e. a company which has made a default in filing of any: (i) document; (ii) statement; and (iii) return, etc. including annual statutory document on the MCA 21 registry. The Scheme can be availed irrespective of duration of default. Currently, the MCA has issued a list of 76 forms (for companies and Limited Liability Partnership Firms) covered under this Scheme.[3]

2. Tenure:

The tenure of the Scheme is from April 1, 2020 to September 30, 2020. Therefore, the pending fillings must be completed within this period to avail benefits provided under the Scheme.

3. Payment of fee:

The fee applicable on belated filing of any document/ form with the Registrar of Companies (“RoC”) would attract normal fees for such filing, as per section 403 of the Act read with Companies (Registration Offices and Fee) Rules, 2014. Additional fee towards delay in filing of such forms/ documents would not be applicable.

4. Immunity under the Scheme:

An immunity from prosecution or proceedings against imposition of penalty would be provided to the defaulting companies on account of delay in filing of documents/ forms. The Scheme however does not provide immunity for any other consequential proceedings including proceedings involving the interest of shareholders or any other person qua the company or its directors or key managerial personnel etc. Thus, immunity is against delayed filing of documents/ forms and not for violation of substantive provisions of law.

5. Withdrawal of appeal preferred by the defaulting company:

If an appeal has been preferred by the defaulting company/ its officer in default against: (i) issuance of notice; (ii) filing of complaint; or (iii) passing of an order, in relation to statutory filings, by a competent court/adjudicating authority the applicant would be required to withdraw such appeal before filing an application under this Scheme. A proof of such withdrawal is required to be furnished along with the application seeking issuance of immunity certificate.

6. Extension of time for filing appeal:

Additional time of 120 days has been granted for filing appeal with the Regional Director against the order of adjudicating authority imposing penalty for delay in/ non-filing of any document. This extension is available for appeals falling due within March 1, 2020 to May 31, 2020 enabling defaulters to avail of the scheme without having the need to file the appeal within the statutory period of 60 days. During the additional period no prosecution for non-compliance of order related to non-filing of document/ form shall be initiated.

7. Application for issuance of immunity certificate:

An application seeking immunity from filing of belated documents is required to be filed with the RoC in Form CFSS-2020. The application is required to be made after closure of the Scheme and filing of documents (taken on record or approved by RoC) but before the expiry of 6 months from date of closure of the Scheme. Therefore, Form CFSS-2020 is required to be filed by March 31, 2020. Pertinently, no fee is payable on filing of Form CFSS-2020. An immunity certificate would be issued by the RoC on the basis of declaration made in this Form.

It is important to note here that immunity shall not be granted where any appeal is pending before any court or in case of management disputes of the company pending before any court or tribunal. Further, immunity shall not be provided if any court has ordered conviction, or any adjudicating body has imposed penalty and no appeal has been preferred against such orders before the commencement of this Scheme.

8. Exclusions from the Scheme:

The Scheme shall not be applicable in following cases:

• RoC has initiated final notice of strike off under section 248 of the Act;
• An application for strike off under section 248 of the Act has been filed by a company;
• Companies which have been amalgamated under a scheme of compromise or arrangement under the Act;
• Application has been made for obtaining dormant status under section 455 of the Act;
• Vanishing companies;
• Where an increase in authorized capital is involved (Form SH-7) and charge related cases (Forms CHG-1, CHG-4, CHG-8 and CHG- 9 for creation and satisfaction of charges);

9. Effect of immunity:

Upon granting immunity, the RoC would be required to withdraw any pending prosecutions before the concerned court(s) and any pending penalty proceedings under Section 454 of the Act (except where appeal has not been preferred against conviction order/ imposition of penalty before commencement of the Scheme). The grant of immunity would be deemed as completion of action on behalf of the RoC with respect to defaults for which immunity is sought under the Scheme.

10. Scheme for inactive companies:

The inactive companies[4] while filing Form CFSS-2020 can simultaneously:

• Apply for dormant status by filing Form MSC-1 at a nominal fee; or
• Apply for striking-off by filing Form STK-2 and paying the applicable fee.

11. Implications on not availing the Scheme:

The RoC would take appropriate action under the Act against the companies which fail to avail the benefits under the Scheme and are in default with respect to statutory filings.

[1] Circular bearing No. 12/2020 dated March 30, 2020 issued by the MCA. This circular could be accessed here.

[2] The Notification could be accessed here.

[3] This list could be accessed here.

[4] Section 455 (1) (i) of the Act, “inactive company means a company which has not been carrying on any business or operation, or has not made any significant accounting transaction during the last two financial years, or has not filed financial statements and annual returns during the last two financial years”.