Section 4 Amendment – applicable to default date or initiation date – By Adv. K. Senguttuvan

Adv. K. Senguttuvan, SAPAA Law Firm

Sec 4 Amendment – applicable to default date or initiation date
Is NCLT correct in dismissing applications filed after 25.03.2020
Is not NCLT going over-board by disregarding the principles laid down by the Apex Court

In today’s business scenario, supplying for payment in future is the highest risk even if there are high profit margin. At this juncture IBC was a blessing in disguise for the creditors supplying to Corporate Debtors. However, those blessings were taken away on 25th Mar 2020, by increasing the threshold limit to One Crore from One Lac.

This is depriving the benefits to all creditors; especially the Small and Medium Industries / Traders having very wide base of customers with whom the supply at point of time would never cross, etc. But the authors intend to the address another issue which is, the applicability of amended Sec 4 is with reference to default or initiation date.

There were repeated discussions among the professionals and as well in the Court Halls, about the amendment as “Prospective or Retrospective”; there were not much of discussion on applicability of amendment – cut-off is with reference to default or initiation date.

Sec 3(12) of the Code defines the default as“default” means non-payment of debt when whole or any part of instalment of the amount of debt has become due and payable and not paid by the debtor or the corporate debtor, as the case may be.

Sec 5(11) of the Code defines the initiation date“initiation date” means the date on which a financial creditor, corporate applicant or operational creditor, as the case may be, makes an application to the Adjudicating Authority for initiating corporate insolvency resolution process.

It is very important to understand that, in the shadow of the IBC Mechanism, Operational creditors had very good bargaining power to recover their dues; out of court settlements, did  reduce to the burden of Adjudicating Authority; many times after application being filed, it got settled which again very positive to Adjudicating Authority as well to Operational Creditors. If the increase in threshold limit is only to reduce the burden of adjudicating authority, then it should have been other way round by increasing number of benches; not at the cost of poor small and medium category Operational Creditors.

The Insolvency Law Committee proposed to increase the threshold limit to 50 Lacs for Financial Creditors while the Committee was pitching only 5Lacs for the Operational Creditors. But the Executive with bad understanding and worst drafting, put all the MSME Category Operational Creditors on bad footing without making difference between FC & OC and also, by just replacing “One Lakh rupees” with “One Crore Rupees” without brining clarity on the effective date and effective date with reference to what – date of default or date of initiation.

What’s the Issue

In the absence of the clarity, the most of the NCLT benches have rejected the applications filed after cut-off date (cut-off for what is yet unanswered) treating the cut-off is for “date of initiation” and not for “date of the default”; few benches were generous in holding the applications filed before 25.03.2020 but not yet disposed/admitted/ordered as fit and ordered as per the threshold limit prevailed prior to 25.03.2020.

In the era of Virtual Hearings, the OC’s are already struggling to present their case amidst the poor connectivity; adding fuel to the fire the Benches were also rejecting just on presentation to the bench without even granting a minute to submit OC’s side.

The Author is of the opinion that the question on cut-off date, whether it refers to the “date of initiation” or “date of the default”, has been firmly answered by the Hon’ble NCLAT and the same was also upheld by the Apex Court in the case of Ramesh Kymal Vs. M/s. Siemens Gamesa Renewable Power Private Limited (2021) 08 SC. The Apex Court was in agreement with the view of the NCLAT and upheld the decision of the NCLAT by holding that the bar created through the statute by way of an ordinance in Section -7, 9 and 10 of the Act ceases to operate in respect of default committed prior to 25/03/2020. Therefore, the operability of the amendment made to Section-4 should also be interpreted in the same light as it is clear that the Legislature intended to protect CD only in the Post COVID era. The relevant para of the Judgement is as follows;

“13. Reading the two definition clauses in juxtaposition, it emerges that while the first viz. ‘initiation date’ is referable to filing of application by the eligible applicant, the later viz. ‘commencement date’ refers to passing of order of admission of application by the Adjudicating Authority. The ‘initiation date’ ascribes a role to the eligible applicant whereas the ‘commencement date rests upon exercise of power vested in the Adjudicating Authority. Adopting this interpretation would leave no scope for initiation of CIRP of a Corporate Debtor at the instance of eligible applicant in respect of Default arising on or after 25th March, 2020 as the provision engrafted in Section 10A clearly bars filing of such application by the eligible applicant for initiation of CIRP of Corporate Debtor in respect of such default. 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. Indeed, the explanation removes the doubt by clarifying that such bar shall not operate in respect of any default committed prior to 25th March, 2020.”

 However the same may not be acceptable as it was understood in general that the question of law before the Court was with regard to Section 10A  – What will happen to those cases where the date of default is anterior to the relevant date as specified in the main provision of Section 10A namely 25/03/2020 – The Apex Court held it as prospective and it’s relevant only to date of default and not to the date of initiation.

The purpose of insertion of Sec 10A is to protect the CD’s during unprecedented pandemic period; means the defaults arising due to the pandemic and not the defaults already exist and those defaults by no stretch of imagination can be linked to pandemic situation.

Is not the same principle applicable even to the threshold limit in the absence of effective date and the date refers to? Even though the reason for raising the threshold limit is not pandemic and it is based on the recommendations of the Insolvency Law Committee, the Sec 4 amended only by replacing the value without making any reference to effective date and which date – date of default or date of initiation.

The OC’s are at this state due to the bad drafting of Sec 4; further bureaucracy is also not bothered to give any clarification or explanation, while Sec 10A had such explanation with which only NCLAT concluded that it’s default committed and not the date of initiation.

Further the CDs are using the amendment to Section-4 fraudulently to escape from the clutches of the rigors of the IBC. One such example is where the CD decides to pay a partial amount so as to bring the quantum of default below one crore and thereafter take umbrella under the Proviso to Section-4 of the IBC by invoking the said proviso before the NCLT regarding maintainability. In such cases, the OCs are left high and dry and stand vilified by the narrow interpretation given by NCLT and NCLAT.

Promissory Estoppel

An OC is an eligible applicant under the Code until three years from the date of default by the CD; it’s the practice and also good for the judiciary that the OCs normally use all resorts to bargain and collect the dues; only when the time to approach the NCLT is nearby for expiry, the OC resorts to legal; that too only after issue of Form 3 with which the CD still can work out for an amicable solution.

The time period of three years from the date of default is promised in the Code and can the amendment to Sec 4 extinguish such a right by way of mere amendment, irrespective of whether it is prospective or retrospective.

For invoking promissory, there are three elements and they are:

1)       The promisor should reasonably expect to induce action or forbearance from the promisee – here the GoI is the promiser and OC is the promise; while the limitation is three years for invoking the IBC provisions from the date of default, the amended section should have clarified that to avoid multiple litigations

2)       Such action or forbearance is in fact induced – exist direct cause-effect relationship

3)       Injustice can be avoided only by enforcement of the promise – courts have inteprted the injustice as “unfair results”; it is for sure that the unexplained unclear amendment brought many unfair results for the poor MSMEs

Hence the author is of the strong opinion that the doctrine of promissory estoppel can be invoked and it will result into give effect to the amendment as date of default on or after the 25.03.2020.


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