SUPREME COURT HOLDS THAT BAR ON DEFAULT PROVISIONS UNDER THE INSOLVENCY AND BANKRUPTCY CODE, 2016 APPLIES RETROSPECTIVELY

An Ordinance was promulgated by the President of India on 05.06.2020 by which Section 10A was inserted into the Insolvency and Bankruptcy Code, 2016 (“#IBC”). Section 10A of the IBC suspends the proceedings against initiation of Corporate #Insolvency Resolution Process (“#CIRP”) for default arising on or after 25.03.2020 for a period of six months or such further period, not exceeding one year from such date as may be notified (“Ordinance”). This bar however was extended for a further period till March, 2021.

Explanation appended to the #Section10A of the IBC clearly states that the said provision shall apply to any default committed under Section 7, 9 and 10 of the IBC on or after 25.03.2020.

Recently, a Bench of Supreme Court of India in the case of Ramesh Kymal versus M/s Siemens Gamesa Renewable Power Pvt Ltd [Civil Appeal No. 4050/2020], vide its Judgment dated 09.02.2021 reiterated and held that the Ordinance dated 05.06.2020 is applicable with retrospective effects thereby no proceedings shall be entertained against any default committed on or after 25.03.2020 as enumerated in Section 10A of the IBC.

The issue before the Supreme Court was whether Section 10A of the IBC would apply, where the Application under Section 9 of the IBC was filed before 05.06.2020, when Section 10A was inserted in view of a default which has committed after 25.03.2020?

Facts: The brief facts pertaining to the case involves the Appellant, who issued a Demand Notice to the Respondents on 30.04.2020 in which the specified date of default was 30.04.2020 with respect to his operational dues. Subsequently, the Appellant filed an Application under Section 9 of the IBC before the National Company Law Appellate Tribunal (“NCLT”), on 11.05.2020. During the pendency of the Application, an Ordinance dated 05.06.2020 was passed and Section 10A was inserted in IBC.

In this view, the NCLT, vide its Order dated 09.07.2020 dismissed the Application as not maintainable. The said Order and the validity of this Section 10A of the IBC was challenged before the National Company Law Appellate Tribunal (“NCLAT”). The NCLAT, vide its Order dated 19.10.2020 affirmed the NCLT Order dated 09.07.2020, whereby it was held that the Application under Section 9 of the IBC filed by the Appellant was not maintainable in view of Section 10A of the IBC, which was inserted with retrospective effect, vide Ordinance dated 05.06.2020.

The Appellant then filed an Appeal against NCLAT Judgment and Order dated 19.10.2020 before the Supreme Court on the ground that the Application under Section 9 of the IBC was filed before the Ordinance dated 05.06.2020 was came into existence and as such was not applicable. The Appeal was also filed on the ground that the Application is filed in respect of default which has occurred after 25.03.2020.

Supreme Court Decision:

The Supreme Court while considering the aforesaid issue observed that the date of 25.03.2020 has consciously been provided by the legislature in the recitals to the Ordinance and Section 10A, since it coincides with the date on which the National Lockdown was declared in India due to the Pandemic.

The Supreme Court also pointed out that the expression “shall ever be filed” in the Proviso to the Section 10A of the IBC is a clear indicator that the intent of the legislature is to bar the institution of any application for the commencement of the CIRP in respect of a default which has occurred on or after 25.03.2020.

It further said that the Explanation to the Section 10A of the IBC removed the doubts by clarifying that this Provision shall not apply to any default committed before 25.03.2020. It is also important to mention that the substantive part of Section 10A is to be construed harmoniously with the first Proviso and the Explanation.

The Supreme Court said that “the correct interpretation of Section 10A cannot be merely based on the language of the provision; rather it must take into account the object of the Ordinance and the extraordinary circumstances in which it was promulgated. It must be noted, however, that the retrospective bar on the filing of applications for the commencement of CIRP during the stipulated period does not extinguish the debt owed by the corporate debtor or the right of creditors to recover it.”

The Judgment also stated that the date of the initiation of the CIRP is the date on which a financial creditor, operational creditor or corporate applicant makes an application to the adjudicating authority for initiating the process. On the other hand, the insolvency commencement date is the date of the admission of the application. The Supreme Court said that the contention of the Appellant that the Application has been filed before the Ordinance was promulgated is unacceptable. Therefore, the Supreme Court upheld the NCLAT Judgment and Order dated 19.10.2020.

Lakshmi Vishwakarma

Senior Legal Associate

The India Lawyer & Allied Services