[By Christina D’Souza]
The author is a third year student at RMLNLU, Lucknow.
It has been almost a year since the Notification dated 24.03.2020([i]) (“Notification”) was notified by the Ministry of Corporate Affairs to increase the amount of default from 1 lakh rupees to 1 crore rupees for filing applications under Part II of the IBC. Even today, an issue is raised before NCLTs regarding the admissibility of claims less than 1 crore rupees where date of default is prior to the date of Notification.
In May 2020, in the case of Madhusudan Tantia vs Amit Choraria ([ii]), the NCLAT clarified that the Notification is prospective in nature. It also went on to note that the Notification will not apply to the applications where default occurred prior to the date of Notification. However, in July 2020, the Delhi High Court in the case of Pankaj Agarwal vs Union of India ([iii]), passed an interim stay on the order of NCLT accepting an application for a default of less than 1 crore where default occurred prior to the date of Notification. The Delhi High Court noted that there was an error by the NCLT in accepting the application, as the Notification was clearly applicable. Kerala High Court([iv]) and Madras High Court([v]) have taken similar positions.
Recently, in February 2021, the Delhi High Court, in the case of Hari Singh vs Dynamic Aura LLP([vi]), directed the parties to the NCLT to have this issue of admissibility of claims prior to the date of Notification resolved. The NCLT took a divergent approach on this issue. Even after agreeing that the Notification has a prospective application, the NCLT went on to dismiss the application for which the date of default was prior to the date of Notification.
NCLT’s Observations in Hari Singh Case
Prospective or Retrospective application of the Notification not an issue
NCLT accepted that the Notification has a prospective effect, but it went on to note that the issue is not whether the Notification is retrospective or prospective in nature. The issue is whether the right to file an application is a statutory right or a vested right.
Right to file an application under IBC Code is a statutory right
In this regard, the NCLT went on further to note that monetary jurisdiction is a statutory right, not a vested right. It reasoned on the lines that elements of vested right are altogether different from the statutory right. The Right of filing a case is a statutory right, not a vested right, when statute goes, that right also goes.
The jurisdiction under the IBC is one of the remedies the creditor has. If the creditor cannot meet the requirements to initiate insolvency proceedings, then it is always open to the creditor to proceed before the DRT under SARFAESI Act or the Civil Courts under the Civil Procedure Code. Therefore, the parties shall not remain under the notion that it is a vested right to file cases below the threshold limit of one crore, even after that statutory right is not in existence in the statute. Thereby, unless a statutory right is exercised within time, i.e., before 24.3.2020, it cannot be construed as a vested right to file a case.
Class Concept for monetary jurisdiction
The NCLT recognized a class of creditors for the purpose of the jurisdiction of the Tribunal in light of the Notification. As per the same, the class of creditors who cross the threshold of one crore rupees to file cases, shall be able to invoke the jurisdiction of the Tribunal. The NCLT grouped all kinds of creditors in only one class because the Notification pertained to section 4 of the IBC and section 4 is applicable to all classes of creditors. Thus, the creditor filing an insolvency application shall belong to this class, i.e., must have crossed the threshold of one crore under section 4 of the IBC.
The increased threshold applies to non MSME cases as well
While interpreting the text of the Notification in a literal sense, the NCLT noted that “if at all the Government intention was only to apply this threshold to MSME cases, Government would mention that specifically”. NCLT further noted that they are required to go by the plain language of the Notification and not otherwise because there is no ambiguity in understanding its language. Nevertheless, even if the Notification was only for providing a relief to MSMEs, the Government at its level cannot create such a classification because that would be a legislative policy work, which cannot be done by the Government alone, without the approval of the Parliament through Legislation.
Analysis of the Decision
Interestingly, in the Hari Singh case, the Delhi High Court itself directed the NCLT to determine the legal point raised by the petitioners. The position that the Notification is applicable prospectively is more or less settled and the NCLT was right in not delving into the same. What sets this decision apart from all the previous decisions on this issue is the fact that even after accepting that the Notification is applicable prospectively, the NCLT still went on to dismiss the application because the threshold was not met, and the date of default was prior to the date of Notification. To support its decision in this regard, the NCLT did give some strong reasons and at the same time it made the applicants aware of an alternate remedy which they could pursue instead.
An interesting question comes up regarding the precedence of Hari Singh case as the NCLAT in Madhusudan Tantia case has given a different observation in this regard. Even though both the Delhi High Court in Pankaj Agarwal case and the NCLT in Hari Singh case have reached a similar conclusion, the NCLT has taken a divergent view while coming to its conclusion, which is evident from the reasoning which is first of its kind.
While the Delhi High Court in Pankaj Agarwal case was of the opinion that the objective of bringing in the Notification was to give protection to MSMEs and the same would fail if the Notification is not made applicable; the NCLT in Hari Singh case observed that if the intention of the Government was to protect MSMEs, it would have been mentioned in the Notification. Since no such indication is mentioned in the Notification, the Notification is applicable to everyone equally.
Precedence must be given to the NCLT decision over the NCLAT decision because as it is evident, various High Courts have taken a view similar to that of the decision of the NCLT.
The Way Forward
With the expiry of suspension of fresh proceedings, IBBI Chairperson Mr. M.S. Sahoo remarked([vii]) that it has become clear that the suspension on initiation of corporate insolvency proceedings in respect of COVID-19 defaults expired on 24.03.2021 and COVID-19 has become the new normal for business. However, the threshold for initiation of a CIRP still remains that of 1 crore and this may leave some creditors stranded([viii]).
Considering the fact that now floodgates will open of all the pending insolvency cases which could not be filed due to the suspension([ix]), it seems less likely that the threshold would be reduced back to one lakh rupees from one crore rupees at this juncture as this will only add to the heap of cases already lining up before the NCLTs across the nation. Additionally, considering the fact that there are other alternative remedies available to the creditors who cannot meet the threshold, it seems prudent to keep the threshold at one crore only.
Possible recourse available to a creditor is to go after the personal guarantor(s) to the corporate debtor (if any) under section 95 of the IBC. Since the Notification amends section 4 of the IBC and section 4 only applies to Part II of the IBC, a creditor can go after the personal guarantor under Part III where the threshold is of 1 thousand rupees. Another possible recourse available to a creditor is to proceed before the DRT under the SARFAESI Act or the Civil Courts under the Civil Procedure Code. However, the latter may lead to delays as Civil Court proceedings do not have stringent timelines like the CIRP proceedings do under the IBC.
On the brighter side, an IBC Ordinance([x]) was recently introduced to allow pre-packaged insolvency processes for MSMEs.In a pre-packaged insolvency, a troubled company and its creditors conclude an agreement in advance of statutory administration procedures which allows statutory procedures to be implemented at maximum speed([xi]). Introduction of pre-packaged insolvency process is a welcome move as this provides another option to the creditors whose claims are less than the threshold amount. In the meanwhile, it is prudent on the part of the NCLTs to dismiss such applications as the they are already expected to be burdened by all the new applications which have piled up due to the lifting of the suspension.
[i] Notification by the Ministry of Corporate Affairs increasing the threshold amount from 1 lakh to 1 crore, https://ibbi.gov.in//uploads/legalframwork/48bf32150f5d6b30477b74f652964edc.pdf.
[ii] Madhusudan Tantia vs Amit Choraria, Company Appeal (AT) (Insolvency) No. 557 of 2020.
[iii] Pankaj Agarwal vs Union of India, W.P.(C) 3685/2020 & CM APPLs. 13194/2020, 13195/2020, 13196/2020.
[iv] Kerala High Court stays NCLT order entertaining IBC plea filed after March 24 for default of less than Rs 1 crore, https://www.barandbench.com/news/litigation/kerala-high-court-stays-nclt-order-ibc-march-24-default-less-than-rs-1-crore.
[v] Arrowline Organic Products Pvt. Ltd vs. Rockwell Industries Ltd., CRP SR No.40137 of 2020.
[vi] Hari Singh and Ors. vs. Dynamic Aura LLP and Ors., Company Petition Nos. (IB)-30(PB)/2021 and (IB)-38(PB)/2021.
[vii] Normalcy restored for stressed assets, https://www.thehindu.com/business/Industry/normalcy-restored-for-resolution-of-stress-under-ibc-says-sahoo/article34163328.ece.
[viii] IBC threshold limit raise may leave some creditors stranded, https://www.thehindubusinessline.com/news/national/ibc-threshold-limit-raise-may-leave-some-creditors-stranded/article34169213.ece.
[ix] IBC activity likely to see gradual rise after resumption, say experts, https://www.business-standard.com/article/economy-policy/ibc-activity-likely-to-see-gradual-rise-after-resumption-say-experts-121032301580_1.html.
[x] IBC Amendment Ordinance on pre-packaged insolvency, 2021, https://www.livelaw.in/pdf_upload/ibc-amendmnet-ordinance-2021-pre-packaged-insolvency-process-391438.pdf.
[xi] Vanessa Finch, Corporate Insolvency Law Perspectives and Principles (2nd edn, Cambridge University Press 2009) 453; V. Vilaplana, ‘A Prepack Bankruptcy Primer’ (1998) 44 The Practical Lawyer 33.