NCLT HOLDS ENHANCED MINIMUM THRESHOLD OF RS 1 CRORE NOT APPLICABLE TO DEFAULTS BEFORE PANDEMIC

The Government of India vide Notification S.O. 1205 (E) dated 24.03.2020 (“Notification“) raised the minimum #threshold of #default amount to Rs. 1 Crore, from the earlier amount of Rs. 1 Lakh, in order to trigger Corporate Insolvency Resolution Process (“#CIRP“) under the Insolvency and Bankruptcy Code, 2016 (“#IBC“).

The purpose was to prevent large-scale insolvency proceedings, especially against micro, small and medium enterprises (MSMEs), as they are undergoing financial stress caused by the Pandemic. The Notification comes into force with effect from 24.03.2020, which makes it clear that the object of the increased threshold is also in line with the object of the IB (Amendment) Ordinance, 2020 regarding suspension of fresh insolvency proceedings for a period of 6 months. The Ordinance further makes it clear that it applies only to those defaults arising on or after 25.03.2020.

Recently, the Hon’ble National Company Law Tribunal (“NCLT“), Kerala in the case of M/s Tharakan Web Innovations Pvt. Ltd v. Cyriac Njavally [IBA/34/KOB/2020], vide its Order dated 01.12.2020 ordered that the Notification increasing the threshold with respect to CIRP is prospective in nature and does not apply to the defaults arising before 25.03.2020.

In this case Cyriac Njavally(‘Operational Creditor’) filed an Application under Section 9 of IBC against M/s Tharakan Web Innovations Pvt. Ltd (‘Corporate Debtor’) on 07.03.2020. The debt became due on 06.07.2019. The Operational Creditor therein had sent a Demand Notice under Section 8 of the IBC to the Corporate Debtor demanding payment of Rs. 31,33,595/- on 25.02.2020. But no reply raising any dispute has been received by the Operational Creditor within the stipulated statutory period of 10 days from 25.02.2020.

In this regard, the Corporate Debtor had also moved an Application numbered as IA/175/KOB/2020 in IBA/34/KOB/2020 under Rule 32 of the NCLT Rules, 2016 challenging the maintainability of the said Section 9 Petition, in view of the Notification dated 24.03.2020.

The issues before the NCLT, Kerala was whether the modification in IBC threshold with respect to CIRP is prospective in nature?

The Bench of NCLT, Kerala analyzed the facts of the case and observed that it is evident that despite the expiry of 10 days from the date of service of the Demand Notice, the Corporate Debtor failed to dispute or repay the due amount to the Operational Creditor. This clearly indicated that the Corporate Debtor is not able to pay its debts taken in the normal course of business. That the Operational Creditor filed the Application under Section 9 IBC only after waiting for 10 days from the service of Demand Notice.

However, the Corporate Debtor contented that the Application was filed on 07.03.2020 by the Operational Creditor, which is not maintainable in view of the fact that the Corporate Debtor received the Demand Notice only on 02.03.2020. Therefore, the mandatory period of 10 days to object to the Notice or repay the alleged debt had not elapsed. Further, the admitted date of initiation of the proceedings on the part of the Operational Creditor is 25.09.2020 and the claim is Rs. 25 Lakhs. Therefore, this Application is clearly hit by Section 4 of IBC as the minimum amount of debt required to file an Application now stands enhanced to Rs. 1 Crore, and that the Application is to be dismissed.

On the other hand, the Operational Creditor contented that the Application dated 07.03.2020 was filed on 25.09.2020 for a default that occurred before 24.03.2020.

In this regard, NCLT referred to the Hon’ble NCLAT Order dated 12.10.2020 in Madhusudhan Tantia VS. Amit Choraria and Anr. [CA (AT) (Insolvency) No. 557/2020] holding that the said Notification is only Prospective in nature’ and not a retrospective’ one because of the simple reason that the said Notification does not expressly provide for retrospective or ‘retroactive’ applicability.

In this view, the NCLT observed that the debt has become due on 06.07.2019 as per the Application filed under Section 9 of IBC. It further noted that the Demand Notice demanding payment of Rs. 31,33,595/- was sent to the Corporate Debtor at its Registered Office on 25.02.2020. However, the Respondent/Operational Creditor did not receive any repayment or reply within the stipulated period of ten days from 25.02.2020.

Therefore, the NCLT did not accept the contentions of the Corporate Debtor as the Insolvency Application was filed 10 days after the Demand Notice was sent. Further, the Notification dated 24.03.2020 is prospective in nature and does not apply to the defaults that have occurred on or before 24.03.2020.

Therefore, since the Section 9 Application under IBC has been filed by the Operational Creditor after complying with the statutory provision under Section 8 of IBC against the default of Rs. 31,33,595/- that has occurred before 24.03.2020, the Application is maintainable. Hence, IA/175/KOB/2020 challenging the maintainability of the Application in view of the Notification dated 24.03.2020 was dismissed by the NCLT.

Lakshmi Vishwakarma

Associate

The Indian Lawyer & Allied Services