The revised default threshold of ₹1 crore for trigger of corporate insolvency applies prospectively from March 24 and not retrospectively, the National Company Law Appellate Tribunal (NCLAT) has ruled.
This would mean that those applications before March 24 which had debt default of less than ₹1 crore, but over ₹1 lakh can be admitted for corporate insolvency process.
Dismissing an appeal (by a majority shareholder and director of Om Boseco Rail Products Ltd) against an order of the NCLT Kolkata bench, which had held that the Ministry of Corporate Affairs (MCA) notification increasing the default limit to ₹1 crore applied prospectively, the NCLAT also ruled the revised default limit would not apply to those applications under the IBC which were pending for admission on March 24 — when the minimum default limit was raised to ₹1 crore from ₹1 lakh.
Relief to small business
The MCA had on March 24 notified the enhanced minimum amount of default limit of ₹ 1 crore for initiating corporate insolvency resolution process (CIRP). This move was seen to provide relief to small and medium businesses as it by and large prevented the start of insolvency proceedings against MSMEs amid the pandemic.
The government had also suspended the initiation of insolvency proceedings (under provisions of Sections 7, 9 and 10 of IBC) against corporate debtor for defaults arising post March 25, when the lockdown was announced. This suspension will be in force till December 25.
Greater clarity
Reacting to the NCLAT judgment, Petrushka Dasgupta, Partner, Induslaw, said this provides clarity that the said notification will not apply to the pending applications filed before the concerned ‘Adjudicating Authority’ (Authorities), under IBC (waiting for admission), prior to the issuance of the March 24 notification. This will provide substantial relief to creditors whose matters were filed before the commencement of lockdown and whose claim was under ₹1 crore, she added.
Ravitej Chilumuri, Partner, Khaitan & Co, said that “...construing the Notification to be retrospective would have meant extending the benefit of the Notification to entities whose defaults could not be attributed to the vagaries of the Covid-19 Pandemic.”
He highlighted that the notification under Section 4 of IBC is a delegated legislation and it follows the well settled principle of statutory interpretation that a statute which created new rights and liabilities shall be construed to be prospective unless otherwise provided either expressly or by implication.