The National Company Law Appellate Tribunal has held that the June Ordinance suspending initiation of insolvency proceedings on account of COVID-19 was retrospective in nature and was applicable from March 25, 2020.
The Appellate Tribunal has clarified that the bar on initiation under Section 10A of the Insolvency and Bankruptcy Code would not operate in respect of applications filed in respect of default committed before March 25, 2020 though such application might have been filed later.
Case Background – Appeal with regards to suspending initiation of Insolvency proceedings
The appeal was directed against the order passed by National Company Law Tribunal, Chennai Bench, declining to admit the insolvency plea against the Respondent/Corporate Debtor, M/S Siemens Gamesa Renewable Power Pvt. Ltd, in view of Section 10A of the Insolvency and Bankruptcy Code.
The Appellant/Operational Creditor, Ramesh Kymal had filed an application under Section 9 IBC against the Corporate Debtor for an alleged default which took place on April 30.
In view of Ordinance, the Corporate Debtor moved an application before the NCLT to dispose of the insolvency proceedings.
Allowing the Corporate Debtor’s plea, the NCLT held that the Ordinance of June 5, 2020, was applicable retrospectively to the defaults arising on or after March 25, 2020.
Before the Appellate Tribunal, the Appellate contended that the word “initiation date” had to be distinguished from “Insolvency Commencement Date”.
Under Section 5(11) IBC, “initiation date” referred to the date on which an insolvency application is made to the Adjudicating Authority under Section 5(12) , “Insolvency Commencement Date”, on the other hand, meant the date of admission of the application.
As per the Appellant, Section 10A IBC only applied to cases at the stage of “initiation” and not “commencement”.
It was argued that since the present proceedings had already been initiated on May 11, 2020 i.e. before the Ordinace was notified and were at the stage of admission or rejection, the NCLT could not have invoked the bar in terms of Section 10A.
Section 10A could not be construed to include applications that had already been filed and were pending, the Appellant argued.
The Respondent, on the other hand, argued that initiation of insolvency proceedings against businesses, when the economy and markets have been critically impacted on account of COVID-19, would not only be counterproductive to the legislative scheme of the IBC.
It was submitted that the Ordinnace was applicable to all pending proceedings and the cut off date of March 25, 2020 was specifically identified.
In view of the submissions made before it, the NCLAT formed the following issue for adjudication:
“..whether an application for initiation of CIRP of a Corporate Debtor in respect of default committed before 25th March, 2020 but filed before 05th June, 2020 i.e. the date on which amending ordinance came into force, in respect of such default, would be maintainable in view of the express bar created by the main provision of Section 10A.”
The NCLAT stated it was a settled law that a substantive right could not be taken away except by clear indication of the intention to that effect by an express statutory provision or by necessary implication.
The NCLAT observed that even a plain reading of the newly inserted Section 10A made it “manifestly clear” that the Section began with a non-obstante clause and placed an embargo on filing of insolvency application for any default arising on or after March 25, 2020 for a period of six months or such further period as may be notified.
Proviso to the main provision also created an absolute bar qua a default that may occur during the specified period, it noted.
Further, taking into account the definition of ‘initiation date’ and ‘commencement date’, the NCLAT added that there was no scope for initiation of corporate insolvency resolution process for any default arising on or after 25th March, 2020 as Section 10A clearly barred filing/inititaion of such applications.
The bar created is retrospective as the cut-off date has been fixed as 25th March, 2020 while the newly inserted Section 10A introduced through the Ordinance has come into effect on 5th June, 2020. The object of the legislation has been to suspend operation of Sections 7, 9 & 10 in respect of defaults arising on or after 25th March, 2020 i.e. the date on which Nationwide lockdown was enforced disrupting normal business operations and impacting the economy globally.
Relying on the Explantion to Section 10A, NCLAT has clarified that the bar on initiation would not operate in respect of applications filed in respect of default committed before March 25, 2020 though such application might have been filed after the cut off date.
“Such interpretation not only serves the object of basic legislation but also goes along the tone and tenor of Section 10A with the explanation appended thereto clarifying the mist, if any, surrounding, the newly inserted provision. We hold accordingly.“, NCLAT held.
In the present case, since the default occurred after the cut-off date, the NCLAT held that the bar imposed under Section 10A was clearly attracted.
The appeal was accordingly dismissed.