Analyzing Delhi High Court Order on Threshold Limit under IBC

When the Central Government increased the threshold limit with effect from 24th March, 2020, many speculative interpretations were doing the rounds.

Here we have a ‘prima facie’ view of Hon’ble Delhi High Court dated 23rd June, 2020 in the matter of Pankaj Aggarwal vs. Union of India and Ors which noted that NCLT fell in error while ignoring the increased threshold limit from 24th March, 2020 while admitting a petition on the basis of default of Rs. 1,00,000/-. The Court stayed the order of NCLT till next date of hearing on deposit of Rs. 10 lakhs with the Registrar of the Court within 2 weeks. It also allowed the company to carry on its day to day operations and IRP was given a liberty to approach the Court for seeking any directions.

Let’s analyze this order:

  1. This order is only an interim order and presents prima facie view of the Court. It is not the final view.
  2. None appeared on behalf of the operational creditor whose application was admitted by NCLT and even the IRP was not present at the time of hearing.
  3. What probably persuaded the court was the protection of MSME’s from insolvency proceedings. This aspect weighed heavily in favor of the Petitioner.
  4. At this moment, the Court has not gone into the question whether the notification applies prospectively and not retrospectively.
  5. It seems that the application u/s 9 was pending prior to this notification was not brought to the notice of the Court.
  6. The law on the date of filing of application should apply as has been held by Supreme Court in Supreme Court in Glaxo Smith Kline Plc. & Ors. v. Controller of Patents and Designs & Ors., 2008 (4) CHN 197 while upholding single bench judgment of Calcutta High Court held that “the petitioner’s application submitted on September 29, 1999 is to be decided by the transport authority under the law that was existing at that date, and not by applying the government notification dated August 2, 2004 that was given no retrospective effect”.
  7. The mandate of law is clear on this aspect and this interim order which is only a prima facie view should not be a cause of concern amongst IP fraternity.
  8. No doubt, uncertainty will continue to prevail on this issue till 13th August, 2020, which is the next date of hearing in this case unless the Operational Creditor challenges it or some other Court passes an authoritative judgment on this aspect in some other case.
  9. The Court was under the impression that NCLT was not aware of notification dated 24th March, 2020. It seems the NCLT order did not deal with this issue.
  10. A question also needs to be answered on the fact whether High Court should have entertained the Writ Petition on non-consideration of notification of 24th March, 2020 in a specific case by NCLT. There is alternative efficacious remedy provided in IBC in the form of appeal before NCLAT, which is hearing all urgent matters online during these unprecedented times.
  11. In conclusion, this interim order, is not a conclusive or authoritative judgment being a prima facie view.

Disclaimer: The views expressed here are for academic purposes alone and should not be deemed as legal or professional advise on the subject. If relied upon, Tranzission does not take any responsibility for any liability or non-compliance.

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Deciphering IBC Ordinance, 2020 – COVID Period Defaults cannot be a Trigger for Corporate Insolvency Resolution Process

Time Stops for COVID Period Defaults

Ashish Makhija, Insolvency Professional
FCA, FCMA, LLM (India), LLM (USA)
Managing Attorney, AMC Law Firm
ashish@amclawfirm.com

Much awaited Ordinance suspending actionable sections of Corporate Insolvency Resolution Process was promulgated on 5th June, 2020. 

Reasons for Promulgation of Ordinance

  1. COVID-19 Pandemic has created uncertainty and stress for business for reasons beyond their control.
  2. India was under lockdown from 25th March, 2020 to combat COVID-19 and this added to disruption of normal business operation
  3. It is difficult to find adequate number of resolution applicants to rescue corporate persons who may default in discharge of their debt obligation.
  4. Distress is around due to unprecedented situation and corporate persons are being pushed into insolvency proceedings under the Code.
  5. Defaults arising on account of unprecedented situation to be excluded for the purposes of insolvency proceedings under the Code.

Here is the low down of the Ordinance:

  1. Section 10 A has been inserted in the Code suspending initiation of CIRP under sections 7, 9 and 10 for COVID Period Defaults.
  2. No application under sections 7, 9 and 10 can be filed for defaults arising on or after 25th March, 2020for a period of 6 months (COVID Period), that is, upto 24th September, 2020 (‘COVID Period Defaults’). 
  3. 3Central Government has retained power to extend COVID Period upto one year i.e. 24th March, 2021.
  4. The Ordinance provides permanent protection to corporate debtors for COVID Period Defaults. For such defaults, no application for initiation of CIRP can ever be filed by any creditor.   
  5. Initiation of CIRP on the basis of defaults that occurred prior to 25th March, 2020 is allowed.
  6. By the same analogy, the defaults arising after the COVID Period will entitle the creditors and corporate debtors to initiate CIRP.
  7. A question arises whether the application can be filed for initiation of CIRP if the COVID Period Default continues beyond COVID Period? Conjunct reading of Section 10A, proviso to Section 10A and Explanation manifests that COVID Period Default has to be expunged. Such a default cannot be a cause to trigger CIRP at any time. Logically, therefore, the quantum of COVID Period default has to be excluded as it is non-est in the eyes of law.  Put Simply, COVID Period Default = No Default. For initiating CIRP after the COVID Period, there should be a fresh default of minimum amount of Rs. 1 Crore. Nonetheless, the amount of default after COVID Period can be combined with default arising before 25th March, 2020.  
  8. The creditors and corporate debtors will have to spend their time in proving the exact date of occurrence of default as Adjudicating Authority will be bound to identify the timeline of occurrence of default.
  9. Another amendment in Section 66 protects the parties carrying on the business of the corporate debtor from order of contribution as COVID period default will not fall under the category fraudulent trading or wrongful trading.