Section 4 and 10A of Insolvency and Bankruptcy Code, 2016: Default Limit and Bar
-By Mahir Dani, Student of 2nd Year at New Law College, Pune
- On 24th March 2020, the default limit for initiating Corporate Insolvency Resolution Process was increased from 1 lac to 1 crore under section 4 of the Insolvency and Bankruptcy Code, 2016, by a notification of the Central Government.
- In the wake of Covid Pandemic, an ordinance was issued on 5th June, 2020 which suspended the insolvency proceedings for default which occurred on or after 25th March ,2020 for a period of 6 months which may be extended to 1 year. Currently the insolvency proceedings are suspended for default arising on or after 25th March to 24TH December, 2020 i.e. Suspension Period. (By notification of 24th September, 2020 , the suspension was extended by 3 months from the said date.) Thus section 10A was inserted as follows:
Section 10A: Suspension of initiation of corporate insolvency resolution process
“10A. Notwithstanding anything contained in sections 7, 9 and 10, no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25th March, 2020 for a period of six months or such further period, not exceeding one year from such date, as may be notified in this behalf:
Provided that no application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the said default occurring during the said period.
Explanation. – For the removal of doubts, it is hereby clarified that the provisions of this section shall not apply to any default committed under the said sections before 25th March, 2020.]”
- Therefore, as a result of the Notification and the Ordinance:
- no application can ever be filed for initiation of insolvency proceedings under the Insolvency Code in respect of defaults occurring during the Suspension Period i.e. 25th March to 24th December,2020.
- in case of payment defaults occurring prior to, or after the expiry of, the Suspension Period, the application for insolvency process can be filed only if the amount of default is 1 crore or more.
- in case an application was filed prior to the Notification but has not been admitted till date, such application should not be affected by the Notification (in view of the recent rulings of the NCLT benches) and/or the Ordinance.
Case Laws on Increase in threshold limit by March 24, 2020 notification:
- The Kolkata Bench of the Hon’ble National Company Law Tribunal (NCLT Kolkata / Tribunal) has, in its Order dated 20 May 2020 in Foseco India Limited v Om Boseco Rail Products Limited  ibclaw.in 12 NCLT, held that the threshold limit increased to 1 crore by notification dated 24th March 2020 is prospective in nature and not retrospective. It will only apply to fresh applications and not applications already filed or pending under section 7 or 9 of the Insolvency and Bankruptcy Code,2016.
- NCLAT had upheld the view of NCLT Kolkata vide its order dated 12th October, 2020 reported at (2020) ibclaw.in 294 NCLAT stating the threshold limit is prospective and not retrospective in nature from the date of 24th March, 2020.
- NCLT Chennai also held that the above increase in threshold limit is prospective in nature i.e. applicable from 24th March 2020 and not retrospective in Arrowline Organic Products Pvt Ltd v. Rockwell Industries Limited  ibclaw.in 18 NCLT in its judgement dated 2th June ,2020.
Whether there is a complete bar on insolvency proceedings?
- No, the explanation of section 10A says that the said section is not applicable to defaults before 25th March, 2020. Hence we can file an application for CIRP for the defaults prior to the said date today.
- NCLT Delhi by its judgement in Dhankalash Distributors Pvt Ltd v. Arena Superstructures Pvt Ltd, C.P. (IB)-875(PB)/2020 dated 29th October, 2020 admitted an application for initiation of CIRP for default arising on 31.01.2020 much before 25th March, 2020 and hence the Section 10A will not be attracted.
- NCLT Mumbai, in the matter of R. D. Engineers (India) Private Limited, P. (IB) – 925-MB-2020 , also admitted the application under section 9 of IBC , by its judgement dated 26th October , 2020 for default before 25th March 2020.
- NCLT Kochi, in Urvashi Kamat v. Moonriver Resorts Private Limited IBA/17/KOB/19, by its order dated 9th October 2020, admitted the application for default before 25th March, 2020.
- In Ramesh Kymal Vs. M/s. Siemens Gamesa Renewable Power Private Limited (2020) ibclaw.in 306 NCLAT, NCLAT upheld the NCLT Chennai decision on the issue Whether an application for initiation of CIRP of a Corporate Debtor in respect of default committed after 25.03.2020 and filed before 05.06.2020 would be maintainable in view of the express bar created by the Section 10A?
|1||Claim amount||Rs. 104.11 crore|
|2||Date of Claim made by Operational Creditor [Form 5 filing date]||11.05.2020|
|3||Date of default as per the Form 5||30.04.2020|
|4||Date of IBC Amendment Ordinance, 2020 (Sec. 10A)||05.06.2020|
|5||Cut off date of default as per the Ordinance||25.03.2020|
NCLAT and NCLT held that though the ordinance was promulgated on 5th June , 2020 it was barring filing of applications for default on or from 25th March, 2020. In the instant case , though application for CIRP was filed before the ordinance was promulgated , the application will not be maintainable as the default was after 25th March , 2020 and thus it will be barred by section 10A.
Writ Petition in Delhi High Court:
A Writ Petition has been filed in the Delhi High Court i.e. P.(C) 8408/2020 Flight Lieutenant Rupa R Guar v. Registrar, NCLT Delhi ; against rejection of registry for admitting the Petition for initiating CIRP as the default amount is less than 1 crore. The interesting thing in this case is a demand notice was sent by the Petitioner on March 2, 2020 under section 8 of the Code. After that in March 2020 , the default limit increased to 1 crore. In September 2020, the Petitioner tried to file insolvency application and the registry rejected it since the default amount was less than 1 crore. The High Court has issued notice to the Central Government and further hearing shall in January 2021.
- By the insertion of section 10A, as of today there is a suspension in force for initiating CIRP for the default on or after 25th March 2020 to 24th December 2020 i.e. the Suspension Period. CIRP can never be initiated for the default happened during this period.
- Section 10A does not apply to the default happened before 25th March 2020 as stated in the explanation clause of the said section and various judgements of different NCLTs are there, some of which are above stated. Hence as of today also, an application for initiating CIRP can be filed for the default which happened before 25th March 2020.
- The threshold limit has been increased from 1 lac to 1 crore with effect from 24th March 2020. This increase is prospective in nature and it will be applicable for filing fresh or new applications for initiating CIRP subject to the condition that the default must be prior to the date of 25th March, 2020 as stated in section 10A.
- Hence if we are to file an application today, we will have to consider the following things:
- The default must have happened before 25th March, 2020.
- The default amount must be at least Rs 1 crore.
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