IBC Ordinance Suspending Insolvency Process Applicable To Pending Applications With Respect To Defaults Arising On Or After March 25: NCLT [Read Order]

Nilashish Chaudhary
12 July 2020 3:04 PM GMT
IBC Ordinance Suspending Insolvency Process Applicable To Pending Applications With Respect To Defaults Arising On Or After March 25: NCLT [Read Order]
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The National Company Law Tribunal (NCLT), Chennai Bench has ruled that Section 10A of the Insolvency and Bankruptcy Code, 2016 (IBC), which bars the initiation of insolvency proceedings against a defaulter, will be applicable to pending applications with respect to defaults arising on or after March 25.

NCLT also observed that it was 'untenable' to suggest that Sec. 10A would be applicable to only those cases which were filed after June 5 - the date of promulgation of the IBC Ordinance 2020 - as it would be contrary to the legislative intent and object expressed in the promulgation of the Ordinance, by the Centre.

"The date of filing cannot determine the rights of the parties in view of the prevalent extraordinary situation which will wholly defeat the object of the promulgation of the Ordinance in protecting the interest of the corporate persons", held the NCLT

The Chennai Bench of NCLT passed this verdict in a case where insolvency proceedings under Section 9 IBC were pending against a Corporate Debtor, when the Centre promulgated the "Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020" on June 5, which suspended the workings of Section 7, 9 and 10 of the IBC.

Section 10A was inserted for such purposes, taking note of the difficulties caused to companies by lockdown.

Given this development, the Corporate Debtor approached NCLT seeking for proceedings against them to be disposed of, since their date of alleged default was April 30.

The two-member Bench, comprising of R Varadharajan, Member (Judicial) and Anil Kumar B, Member (Technical), had to consider the distinction to be drawn between insolvency petitions that had already been filed from the ones that had not. The question to be considered was whether Section 10A would be applicable to pending proceedings.

The Operational Creditor also urged that in case of no financial distress arising out of COVID-19, protection under Sec 10A could not be claimed by the Corporate Debtor.

Looking into Sec 10A, the NCLT clarified that its provisions do not apply to defaults arising before March 25, and thus creditors had not been restrained from approaching NCLT in those instances. The provision which opens with a non-obstante clause, overrides Sec 7, 9 and 10 initially for a period of 6 months, which could be extended further beyond March 25, 2021, opined the Bench.

Despite the Ordinance being published on June 5, the Tribunal laid down that "the main provision of Section 10A taken together with the Explanation makes it clear that a 'Lakshman Rekha' so as to say, has been demarcated by providing the relevant date of 25.03.2020 in relation to a default and filing of an application for initiation of CIRP".

Taking stock of the legislative intent, the Tribunal further stated as follows:-

"The Executive, as manifest from the Objects and reasons, seems to have also been concerned about proper suitors being available for resolution of insolvency of corporate persons if pushed into insolvency in relation to defaults, arising on or after 25th March 2020…

…the object of I&B Code is for the resolution of insolvency of corporate persons in a time bound manner by maximizing the value of the assets available with the Corporate Debtor by balancing the interest of all the stakeholders concerned, which may not happen; this seems to be apprehension of the Executive under the prevailing situation prompting it to exclude the default arising on or after 25.03.2020 as a 'default' itself giving rise to the filing of an application seeking initiation of the CIRP."

Additionally, considering the application before it, NCLT laid emphasis on the proviso to Sec 10A to enunciate that pending insolvency applications regarding defaults which had allegedly occurred on or after March 25 are removed from the ambit of Sections 7, 9 and 10.

Therefore it was concluded that, since the alleged default in the present case had arisen on April 30, the main proceedings would come under the ambit of Sec 10A. The present application was thus allowed, while the main insolvency proceedings were disposed of.

Thereby NCLT has held that the Centre's Ordinance, passed on June 5, will have retrospective applicability in terms of defaults arising on or after March 25, 2020.

Click Here To Download Order

[Read Order]

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