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With an intention to expedite and simplify the process of Insolvency and Bankruptcy proceedings in India and to ensure the existence of a time bound process and stressing on the importance of revival of Stressed Assets, the Central Government through the Ministry of Corporate Affairs introduced the Insolvency and Bankruptcy Code, 2016 (“Code”) and the same was put into force with effect from 28.05.2016. The Insolvency and Bankruptcy Board of India (“IBBI”) was named as the Regulator of the Code. The IBBI proactively came with a set of regulations known as The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”) which came into force from 30.11.2016 following the IBC.

The Code as well as the CIRP Regulations have been amended quite a number of times to achieve the purpose of the initiation of the Code, to ensure that the interests of all stake holders are met and to ensure that the Resolution happens in a time bound manner.

Right from the inception it was clear that only on the existence of a Debt and its subsequent Default, the provisions of the Code can be invoked. The term ‘default’ was duly defined in “Part I” under Section 3(12) of the Insolvency & Bankruptcy Code, 2016. According to the said sub section “default” means non-payment of debt when whole or any part or instalment of the amount of the debt has become due and payable and is not paid[1] by the debtor or the Corporate Debtor, as the case may be.

The Insolvency Resolution and Liquidation for Corporate Persons is dealt with under Part II of the Code and Section 4 of the Code deals with the Applicability/ Application of the said part. Section 4 of the Code earlier stated that the prima-facie threshold to file any application under the Code was a minimum default of Rs 1,00,000/-. However, the proviso to the section conferred upon the Government the right to alter the said amount at its own discretion up to Rupees  1 Crore.

In view of the outbreak of the pandemic Covid-19 affecting businesses and economies globally, and in light of the nationwide lock down in India due to the same, the Finance Ministry of India on 24.03.2020, announced certain specific reliefs’ packages for companies under the Companies Act 2013 as well as the Insolvency and Bankruptcy Code, 2016. The same was followed by a notification^[2] released by the Ministry of Corporate Affairs on the same date whereby the Central Government specified Rs. 1,00,00,000/- (Rupees One Crore) as the minimum amount of default, as against the earlier amount of Rupees One Lakh, for the purposes of the said section.

For the sake of convenience the Proviso clause of Section 4 is reproduced below:
“Provided that the Central Government may, by notification, specify the minimum amount of default of higher value which shall not be more than one crore rupees.”

The threshold limit provided for, under Section 4 of the Insolvency and Bankruptcy Code, 2016 of Rupees One lakh to trigger insolvency proceedings has been raised to Rupees One Crore by way of a notification by the Central Government. The Central Government is of the opinion that raising of the threshold limit will prevent triggering of insolvency proceedings against small and medium enterprises that are facing currently the heat of coronavirus pandemic, thereby effectively safeguarding the interests of Micro, Small and Medium Enterprises (“MSME’s”) in these times of strife. Also, there have been views stating that this revised threshold limit being put in place may not just be temporary, but in fact may be permanent. This of course only time can answer.

Nature of the Amendment:

There also exists a cloud as to whether the recent amendments are prospective or retrospective in nature and neither the Notification nor the Finance Ministry provided any clarity with respect to the same, however the Supreme Court vide its plethora of judgements has time and again stressed on the point that “any amendment to a statute affecting the legal rights of an individual must be presumed to be prospective unless it is made expressly or is impliedly retrospective”. A few Notable judgements are:

In Hitendra Vishnu Thakur v. State of Maharashtra[3], the Apex Court laid down the ambit and scope of an amending act and its retrospective option as follows: “….. A statute which affects substantive rights is presumed to be prospective in operation unless made retrospective, either expressly or by necessary intendment, whereas a statute which merely affects procedure, unless such as construction is textually impossible, is presumed to be retrospective in its application, should not be given an extended meaning and should be strictly confined to its clearly defined limits….”

In Maharaja Chintamani Saran Nath Shahdeo v. State of Bihar[4], the Apex Court had elaborately discussed the scope and ambit of an amending legislation and its retrospectively and held “….There is also no express or implied provisions in the amending Act to indicate that the Act will have retrospective effect. We, therefore, hold that the amending Act would apply prospectively.…..”

In M/s. Videocon International Limited Vs. Securities Exchange Board of India[5], wherein the Apex Court held that “….unless the language used plainly manifests in express terms or by necessary implication a contrary intention a statute divesting vested rights is to be construed as prospective, a statute merely procedural is to be construed as retrospective and a statute which while procedural in its character, affects vested rights adversely is to be construed as prospective…..”

In Zile Singh Vs. State of Haryana & Ors.[6], the Apex Court held that “…..It is a cardinal principle of construction that every statute is prima facie prospective unless it is expressly or by necessary implication made to have a retrospective operation. But the rule in general is applicable where the object of the statute is to affect vested rights or to impose new burdens or to impair existing obligations. Unless there are words in the statute sufficient to show the intention of the Legislature to affect existing rights, it is deemed to be prospective only ‘nova constitutio futuris formam imponere debet non praeteritis’ a new law ought to regulate what is to follow, not the past…….”

Apart from the Apex Court, the Hon’ble National Company Law Tribunal (“NCLT”), Mumbai Bench while hearing an Application under Section 10 of the Code in the matter of Wig Associates Private Limited, when the question of the nature of the Amendment under Section 29A of the Code was placed, the Hon’ble Bench opined that “Insolvency proceedings are a continuous proceedings and therefore cannot be halted, altered or changed once commenced till finalization.”

From the above Supreme Court citations and the Order of the Hon’ble NCLT it may be presumed that the amendment to Section 4 of the Code is likely to be applicable only to the Applications that are going to be subsequently filed and for all the pending proceedings the same shall continue as if the un-amended provision is still in force. However given that the Code has several stages starting from issuance of mandatory statutory notice by an Operational Creditor under section 8; filing an Application under section 9 before the Hon’ble  NCLT Registry; matter being listed for hearing for the very first time and the subsequent hearings; the billion dollar question at this point in time will be; what is the likely threshold/cut-off point to which this amendment would apply. While some may argue  that the Amendment is applicable only to the applications that are to be filed afresh post the date of amendment; we can only hope that all these will be clarified over the coming days hopefully by a notification/clarifications given stating that the Judiciary is semi-functional at this point in time due to the challenges amidst COVID and may not be in a position to decide upon this at an apex level.

Bonafide Filing of Application by Creditors:

Further one can argue that with the introduction of the recent Amendment, the essence and the Soul of the Insolvency & Bankruptcy Code, 2016 is retained. It is needless to say that “Resolution” has always been the mantra and no Creditor shall not use the Code as a mechanism to recover from the Stressed Corporate though he may, under the Code, put the corporate entity into the Corporate Insolvency Resolution Process and recover the dues through resolution from the Resolution Applicant who steps in or from the proceeds on Liquidating the Company. The Code strives for Resolution and discourages recovery in every possible way.

It is needless to say that keeping resolution in mind the Code does not allow/ prohibits action to foreclose, recover or enforce any security interest against the properties of the Corporate entity during the period of Corporate Insolvency Resolution Process.

In order to avoid the misuse of the law, the provisions under the Code does not allow the termination of the Corporate Insolvency Resolution Process by the Petitioning Creditor even after his dues are completely settled off. The Code looks at the bigger picture, the Resolution and Revival of the Corporate Entity undergoing the process. In line of which the Code was amended to bring in the Provision Section 12A.

It could be argued or debated that the Amendment is a blessing in disguise as the threshold is now increased to Rupees One Crore, as it believed that only those Creditors who have a genuine interest to resolve a stressed asset will file Petitions under the Code to take it into Corporate Insolvency Resolution Process and not use the Code as recovery forum; but of course there would be multiple views and perspectives on the same.

Prior to the amendment, Creditors used the Code as a weapon against the Corporates to clear of their dues failing which they were threatened to be put into Insolvency, without considering the financial position of their Debtors. It is not an exaggeration to say that there was always a sword hanging on the heads of all Corporates even if the dues owed by them were meagre in nature, since the Code was used more as a recovery mechanism rather that a legislation to support resolution of these stressed corporates. While the intent is in no manner to undermine the importance and relevance of an Operational Creditor with smaller dues; given the way the Code was being put to use; the Insolvency Law Committee recommended to increase the threshold under section 4 of the Code from Rs.1,00,000/- to up to Rs.50,00,000/-. Further for Operational Creditors it was recommended to be revised to Rs.5,00,000/-. However the formal announcement followed by the Ordinance has increased the threshold to Rs. 1,00,00,000/-. It is important to note that, usually the committees take such decisions only post deliberations based on the performance and data available on the application of the law and representations if need be from stakeholders.

The Supreme Court in the matter of M/s. Mobilox Innovations Private Limited vs. Kirusa Software Private Limited[7] , categorically laid down that the Insolvency & Bankruptcy Code, 2016 is not intended to be used as a substitute to a recovery forum.Further the Apex Court in the matter of M/s. Transmission Corporation of Andhra Pradesh Ltd. Vs. Equipment Conductors & Cables Ltd[8]  referring to its order passed in the Mobilox Innovations Private Limited (Supra), the Supreme Court reiterated that the Insolvency & Bankruptcy Code, 2016 cannot be used as a recovery forum.

In the matter of M/s. Nowfloats Technologies Pvt. Ltd. Vs. M/s. Getit Info services Pvt. Ltd[9]., the Hon’ble National Company Law Tribunal held “…..the Insolvency Resolution Process is initiated for the benefit of the general body of creditors and is a representative action and not for the recovery of money of the individual creditor for which necessarily claims are required to be submitted to the Official Liquidator or the Interim Resolution Professional as the case may be……”

Further, the Hon’ble National Company Law Tribunal in the matter of Bombay Stock Exchange Limited v. Asahi Infrastructure & Projects Limited[10] held that the National Company Law Tribunal is not the right Forum to initiate recovery proceedings and dismissed the instant Application.

The Necessity of the Amendment:

The threshold might come across as a sudden change in the systematic approach followed in the past three years of effective implementation of IBC, 2016, however, it could certainly be seen as the positive measure in the interest of companies who would be extremely cash strapped post the present lockdown situation and might not be able to immediately get back to its business in place. The cyclical chain of payments would certainly be affected and unless a check and balance is put into place to begin with an amendment like this and even possibly the suspension of the law or some time; we would see thousands of cases being filed across the country resulting in both clogging of the system and admission of several good companies into the Insolvency Resolution process which could otherwise have revived itself given a period of 6-9 months’ time depending from industry to industry.

Stepping into the shoes of MSMEs, it comes across as a huge relief amongst this challenging time and the lockdown. The financial stress and the lack of business, could possibly wipe out almost a good number of MSME companies with no possible recourse. They already have and will have even more serious challenges with respect to the interest payments to its lenders and other financial institutions, labour issues relating to retrenchments, layoffs and pay cuts.  Putting them into Insolvency at this stage could have a huge negative impact in the long run and hence has to be considered from a wider perspective. The restructuring of these companies would be difficult and revival even more difficult as even people/ companies stepping in as a Resolution Applicants showing interests in reviving a MSME is likely to be very minimal and given that there is a bar on promoters in most cases, that shall add to the woes (of course with the exceptions as available in the law).

Conclusion

As far as the MSMEs are considered this Amendment comes across as a blessing in disguise, but lays down a huge ambiguity and void with regard to the creditors, and other stakeholders, who are unsure about the further recourse. Creditors claiming below this threshold of Rupees One Crore, are certainly at this point in time lost and feel remediless as the only option before them would be the civil suits/suits for recovery of money as the winding up provisions from the Companies Act 2013 have been repealed giving powers under the Insolvency & Bankruptcy Code, 2016. In the interest of these Creditors some fast track or reasonable remedy has to be provided even if not the Insolvency Resolution Process as this breather should not be misused by the beneficiary as well. We may in the coming days, be able to determine an alternate remedy and ensure equitable justice to all parties

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[1] Amended by Act No. 26 of 2018  and replaced the word ‘repaid’ (w.e.f. 6-6-2018)

[2] https://www.ibbi.gov.in/uploads/legalframwork/48bf32150f5d6b30477b74f652964edc.pdf

[3] (1994) 4 SCC 602

[4] (1999) 8 SCC 16

[5] (2015) 4 SCC 33

[6] (2004) 8 SCC

[7] (2018) 1 SCC 353

[8]  2018 SCC  SC 2113

[9] Order delivered on 11-04-2017 by Hon’ble NCLT Delhi.

[10] Order delivered on : 11.02.2019 by the Hon’ble NCLT Mumbai