IBC: The Revised Threshold Pickle
Due to the rapid spread of the novel coronavirus disease (COVID-19), India was forced to suspend most of its economic activities, considerably impacted the economy. Given that, suspension of economic activities may trigger debt defaults, the Government attempted to provide various reliefs to businesses.
One such attempt, in the form of a delegated legislation, has been to increase the minimum threshold amount of default, for application of the Insolvency and Bankruptcy Code, 2016 (the “Code”) on a defaulted debt of a corporate debtor (“CD”), and the consequent, initiation of corporate resolution process (“CIRP”). In terms of the notiﬁcation dated March 24, 2020 (the “Notiﬁcation”) minimum threshold has been increased from Rs. 1,00,000 to Rs. 1,00,00,000, pursuant to the powers delegated to the Government in terms of proviso to Section 4 of the Code.
The Notiﬁcation does not provide a speciﬁc date for application of the revised threshold, which has created a somewhat turbulent confusion. Broadly, there is only one question - whether increase in the threshold would apply prospectively or retrospectively, in the context of commencement of corporate insolvency resolution process (commonly referred to as 'admission'). The answer to this question is somewhat complicated - as the trigger points are related to multiple factors, the cut-off date for the application of the revised threshold would not be as simple as the date of the Notiﬁcation.
The one question, whether increase in the threshold would apply prospectively or retrospectively, perhaps, subsumes multiple questions, permutations and combinations
Prospective vs. Retrospective
The legislature has dealt with aspect of application of an amendment of a statute or repeal of a statute, whether prospective or retrospective, in the sections 5, 6 and 6A of the General Clauses Act, 1897, which would, normally, apply in cases where the statute itself is silent on this aspect. Broadly, the intention indicated by sections 5, 6 and 6A, is that a statute, amendment or repeal thereof would come into force on the date it receives the assent of the President, and would apply to cases / causes of action prospectively.
Additionally, the Apex Court, in a plethora of its judicial pronouncements has held that an amendment / repeal shall be applicable prospectively, unless it is expressly or by necessary implication made to have a retrospective effect, and has laid down certain parameters, which, inter alia, are:
- MCA Notiﬁcation S.O. 1205(E) dated March 24, 2020
- Keshvan Madhava Menon v. State of Bombay (AIR 1951 SC 128), Memon Abdul v. Dy. Custodian General (AIR 1964 SC 1256), Videocon International Ltd. v. Securities and Exchange Board of India (AIR 2015 SC 1042), State of Bombay v. Supreme General Films Exchange Limited ((1960) 3 SCR 640), Hitendra Vishnu Thakur v. State of Maharashtra (AIR 1994 SC 2623), Trimbak Damodar Raipurkar v. Assaram Hiraman Patil 1962 SCR Supl. (1) 700; 1966 AIR 1758 and Shri Vishwas Bajirao Patil vs The State Of Maharashtra. (Writ Petition No. 12767 of 2015) or intention, whereas the latter, unless such construction is textually impossible, is presumed to be prospective in its application;
- whether a statute affects substantive rights or merely procedure. The former, is presumed to be prospective in operation unless made retrospective, either expressly, by necessary implication
- law relating to forum and limitation is procedural in nature, whereas law relating to right of action and right of appeal even though remedial is substantive in nature;
- every litigant has a vested right in substantive law but no such right exists in procedural law;
- the time at which a right vests in the litigant, whether prior to or after the date of an amendment or repeal.
In addition to the above, considering the aspect that the intendment of a statute is a relevant factor, perhaps, nature of the statute would also be a relevant factor
Therefore, generally, as far as law on Prospective vs. Retrospective is concerned, it is well established that the above mentioned factors, inter alia, would be required to be considered in order to determine the date of application of, a statute, an amendment or repeal thereof.
Whilst, strictly, the Notiﬁcation is not an amendment of the Code, in the quintessential sense, but an instance of delegated legislation simply increasing the limits set out under section 4 of the Code, no doubt it affects substantive rights of the stakeholders. However, even in case of delegated legislation, the Hon'ble Supreme Court has held that change through a delegated legislation can only be prospective and not retrospective, unless the rule making authority has been vested with the power under the statute to make rules or amendments thereto with retrospective effect and such power has been exercised.
The Resolution (of the Pickle)
As the increase in the threshold, set out in section 4 of the Code, changes the rights of creditors, no doubt, the Notiﬁcation brings about a substantive change in the Code and not merely a procedural change. However, it would be required to be examined whether by implication, the increase in the threshold, would apply to all cases which are pending consideration for 'admission', otherwise heard, with orders reserved, or where demand notice has been issued but insolvency petition not ﬁled, etc., bearing in mind the intention of the Code.
The Supreme Court has observed that the insolvency proceedings by nature are not adversarial to the CD and are not recovery proceedings. It also observed that the Code is a beneﬁcial legislation, for the beneﬁt of the CD, and therefore, the Code, and speciﬁcally, admission of a CD into CIRP cannot be seen from the traditional lens of adversarial proceedings
Most judicial pronouncements, analysing Prospective vs. Retrospective, have dealt with various aspects of application of the statute, amendment or repeal thereof, whether prospective or retrospective, generally, in the context of statute pertaining to adversarial proceedings or revenue related proceedings and / or based on a 'cause of action'. Therefore, the yard stick applied in such cases ought not be applied in cases of 'admission' or any other proceedings under the Code. However, having said that, the same can also not be ignored, and certain basic principles laid down in such judicial pronouncements may be applied, purely for their persuasive value.
When an insolvency petition is ﬁled under the Code, the role of the adjudicating authority is, inter alia, to identify whether the debtor has committed a 'default' in repayment of an unequivocal debt to the petitioning creditor. Whilst, there are various stages in which the role of the adjudicating authority is paramount, the stages prior to the admission of a CD into CIRP are relevant, as the Notiﬁcation pertains to pre - admission scenario.
Accordingly, considering the general factors which are pertinent in the Prospective vs. Retrospective analyses, and the intention of the Code, the adjudicating authority would be faced with the conundrum of examining,
- whether the change brought vide the Notiﬁcation is by necessary implication, retrospective;
- whether the date of 'default', date of demand notice, date of ﬁling of the insolvency petition, date of adjudication or time of vesting of right in the creditor (viz. the right to apply and / or right to admission) would be the relevant date for application of the Notiﬁcation;
- its power, at the time of passing of the adjudication order, to go beyond the letter of the Notiﬁcation, and refraining itself from applying the Notiﬁcation to matters for 'admission' to cases where the amount of default is less than Rs. 1,00,00,000.
Recently, Kolkata Bench of the NCLT, observed that “It is a well settled law that a statute is presumed to be prospective unless it is held to be retrospective, either expressly or by necessary implication. When the amendment to Section 4 of the Code was, inserted a proviso enhancing the pecuniary jurisdiction for ﬁling applications as against small and medium scale industries, nowhere in the notiﬁcation mentioned that its application will be retrospective. Therefore, it appears to me that the amendment shall be considered as prospective and not retrospective.” However, various aspects may not have been considered in arriving at this observation, and a simplistic solution to a complicated question has been provided.
- The law on the instant aspect is, clearly, not yet settled, and in the absence of a clariﬁcation from the Government, the Supreme Court of India would, perhaps, eventually, lay down the parameters for application of the Notiﬁcation. Whilst, no straight jacket formula is possible, and each case would be required to be examined independently, the following thoughts may merit consideration:
- The right to ﬁle a petition against a CD is different from right to admission of the CD into CIRP. In a given situation where an insolvency petition has been ﬁled but has not been adjudicated, the right to ﬁle the petition as per the erstwhile threshold limit was vested in the petitioner, however, the right to admission did not vest or even accrue.
Therefore, even applying the analogy prevalent in relation to other statutes, asprior to its amendment, which can be applied only to rights which have vested and not future rights, the right to admission, being a future right ought to attract and satisfy the Notiﬁcation.
- As the petitioning creditor becomes entitled to ﬁle an insolvency petition against a CD upon occurrence of a default, within the limitation period, and if the Notiﬁcation is applied prospectively, on the basis of the analogy prevalent in the cases of other laws (as has been done in Om Boseco, supra), the Notiﬁcation would apply only to insolvency petitions, where the date of default is post date of the Notiﬁcation. This would, perhaps, lead to a preposterous situation, where the adjudicating authority would apply old provisions of the Code to all cases pending for admission and also cases which are yet to be ﬁled, albeit, default has occurred prior to the date of the Notiﬁcation.
The mechanism under the Code, distinctly provides for two independent yet related steps. First being, if the CD 'defaults' in the payment of a ﬁnancial debt, entitling the ﬁnancial creditor to approach the adjudicating authority under the Code. The other being, adjudication by the adjudicating authority if a 'default' has occurred. This being said, prior to the Notiﬁcation, an
application for a default above Rs.1,00,000 but below Rs. 1,00,00,000 may have been appropriately ﬁled. However, with the said Notiﬁcation coming into effect, it can be argued that the adjudicating authority would not have the powers under the Code to admit a CD into CIRP where the amount of default is less than Rs. 1,00,00,000.
As the arrangement under sections 8, 9 and 10 of the Code stands in contrast to section 7 of the Code, the above argument would apply differently in case of ﬁnancial debt and operational debt.
- Further, it can also be argued that, the differential treatment between a petitioning creditor who has ﬁled an insolvency petition, and the one who has not, prior to the Notiﬁcation, although the date of default in both cases is prior to the date of the Notiﬁcation and the amounts of default are similar, are violative of the principles of equality enshrined in the Constitution
Vipul Ganda is an advocate practising in courts at Delhi. He was assisted by his chamber colleagues, Advocates Shreya Jain and Alexandra Celestine in writing this article.
This article was published by the Bar & Bench on their website on May 31, 2020