Insolvency Application Must Meet Threshold As Per Amended S.4 IBC, Though Notice U/S 8 Was Issued Pre-Amendment : Kerala High Court

Factual Background

The Petitioner/ Corporate Debtor filed a petition before the High Court of Kerala under Article 226 of the Constitution, challenging the order of the Adjudicating Authority under IBC, which allowed the application of the Operational Creditor for initiating CIRP against the Corporate Debtor.

The Petitioner contended that the application for initiation of CIRP was filed on 25.09.2020, which was after the order of the Ministry of Corporate Affairs dated 24.03.2020., which amended Section 4 of the IBC to increase the default amount for initiation of CIRP from Rs. 1 Lakh to Rs. 1 Crore.

Issues

The High Court framed the following issues in the case-

• Whether the application which relates to a defaulted amount less than Rs.1 crore can be filed after 24.3.2020, on which date amendment to Section 4 was introduced ?

• Whether the prospectivity of the amended Section 4 has to be decided on the basis of the defaulted amount or on the basis of the date of default ?

• Whether the order of the NCLT can be challenged in a proceedings under Article 226 or should the petitioner be relegated to the appellate remedy?

Analysis By The High Court

The Court analyzed the various amendments that were made to the IBC after it came into force.

Maintainability Of Writ Petition

The Court took note of the decision of the Supreme Court in Ghnashyam Mishra& Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., wherein it was held that-

"Non-exercise of jurisdiction under Article 226 is a rule of self-restraint. It has been consistently held that the alternate remedy would not operate as a bar in at least three contingencies, namely,

(1) where the writ petition has been filed for the enforcement of any of the fundamental rights;

(2) where there has been a violation of the principle of natural justice; and

(3) where the order or proceedings are wholly without jurisdiction or the vires of an Act is challenged."

The Court, thus allowed the writ petition and held that there is no necessity to relegate the Petitioner to exercise the alternate remedy.

Jurisdiction Of NCLT

With regard to the jurisdiction of the NCLT, the Court held that since the Adjudicating Authority is a creature of the Stature, its jurisdiction is only that which has been statutorily defined, recognized and conferred.

The CIRP is triggered as soon as there is a default as mentioned in Section 4 of IBC.

When the CIRP is initiated by the Operational Creditor, a notice u/s 8 has to be sent to the Corporate Debtor. After a passage of 10 days thereafter and non-payment by the Corporate Debtor during such period, CIRP can be initiated.

In the present case, the notice u/s 8 was issued prior to coming into force of the Amendment to Section 4. If the application for initiating had been filed before 24.3.2020, it would have conformed with the minimum default which had been prescribed at that point of time, i.e. more than Rs. 1 Lakh. However, in the case at hand, the application was filed six months after the amendment. Thus, the Adjudicating Authority did not have the jurisdiction to entertain the same.

As held by the Supreme Court in ManishKumar v. Union of India-

"…existence of a default as defined in Section 4 of the Code is the litmus test on the anvil of which, the Adjudicating Authority gets jurisdiction to entertain an application. The litmus test cannot change depending on whether the application is filed under Sections 7 or 9 or 10. The litmus test is the test for the applicability of the entire Part II."

It was also held in Manish Kumar that if a vested right can be taken away by a retrospective law, there is no reason why the legislature cannot modify the vested right.

In the present case, the right of the applicant/Operational Creditor to approach the Tribunal stood modified on 24.3.2020. After this date, only applications for defaults of amounts above Rs. 1 Crore can be entertained by the NCLT.

The Court held- "Since Section 4 deals with applicability of the provisions of Part II, it is necessarily a provision which gives jurisdiction to the Adjudicating Authority. Once the application of Part II is taken away for debts more than Rs.1 Crore, there is no further jurisdiction available under the Statute to the NCLT to act as an Adjudicating Authority under the IBC. It is hence a clear case of total want of jurisdiction."

Default as defined in Section 3(12) means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be.

The High Court observed-

"From the date of the amendment, Part II of the IBC can apply only to matters relating to insolvency and liquidation of corporate debtors, where the minimum amount of default is Rs.1 Crore. Once that is the position, the application of Part II itself is taken away with effect from 24.03.2020 as far as defaults less than Rs.1 Crore are concerned and hence no application can be filed after 24.03.2020 regarding an amount where the default is less than Rs.1 Crore."

The High Court set aside the decision of the NCLT and allowed the writ petition, and held that there is no necessity or purpose for relegating the petitioner to the alternate remedy.

Counsel for the Petitioner: Joseph Kodianthara (Sr.), Isaac Thomas, Sharad Joseph Kodanthara 

Counsel for the Respondent: S. Manu (ASGI) (R1), G.Harikumar (Gopinathan Nair)

Citation: 2022 LiveLaw (Ker) 54

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