The Chennai Bench of National Company Law Tribunal (NCLT) has held that the Central Government's decision to enhance the minimum threshold for the initiation of insolvency proceedings is prospective in nature.
On March 24, 2020 the Centre issued a Notification under Section 4 of the Insolvency & Bankruptcy Code 2016 (IB Code), through which the minimum threshold for a petition to be maintainable before NCLT was increased from Rs. 1 lakh to Rs. 1 crore.
In a plea filed by Rockwell Industries Ltd., the Operational Creditor, to initiate Corporate Insolvency Resolution (CIR) Process against the Corporate Debtor, Arrowline Organic Products, NCLT passed an Order of Admission on May 5.
In light of the March 24 Notification, however, the Corporate Debtor applied for a recall of this admission order and further sought for the petition seeking initiation of insolvency proceedings to be dismissed.
It was contended that the amount claimed by the Corporate Creditor in the proceedings before the Tribunal was to the extent of around Rs. 21 lakh, well below the threshold minimum of Rs. 1 crore. Thus, maintaining that the Notification was to be applied retrospectively.
Arguing that the enhancement in the minimum pecuniary threshold was applicable to all matters pending before the Tribunal, the Corporate Debtor urged that the Admission Order was wrongly passed, especially against a company which came under the category of Micro, Small and Medium Enterprises (MSME), which was dealing in essential services.
On the other hand, it was the case of the Corporate Creditor that the Tribunal had no power to review or recall an order passed on merit. While the inherent powers of NCLT could not be invoked in this case, argued Rockwell Industries, the only remedy available to Arrowline was to go in appeal before the appellate authority [National Company Law Appellate Tribunal (NCLAT)] under Section 61 of the IB Code.
Additionally, the Corporate Creditor averred to the Corporate's default as having occurred well before the Centre's Notification came into play. It was also pointed out that the Order was reserved on March 4, while the Notification in question was issued on March 24.
Upon consideration, the single Bench comprising of Member (Judicial), R. Varadharajan held that NCLT did not have the power to recall or review its order. Agreeing with the Corporate Creditor's submission, it was further stated that in absence of power to recall or review under Section 420 of the Companies Act, 2013 or Rule 11 of the NCLT Rules, the appropriate remedy for the applicant lay in an appeal before NCLAT.
"…in the absence of any power of recall or review available to this Tribunal and in the case on hand, I find it does not fall within the confines of Section 420 of the Companies Act, 2013 nor Rule 11 of NCLT Rules, 2016, and as the recourse, if at all for the party aggrieved, namely the Applicant/Corporate Debtor, should have been to approach the Appellate Tribunal under Section 61 of I&B Code, 2016, if so advised and not this Tribunal by way of this Application and this Tribunal is hence constrained to dismiss this Application", held NCLT.
Considering the main issue regarding the applicability of the March 24 Notification, the Tribunal referred to several precedents and was of the considered view that the enhanced pecuniary limit was not to be made applicable retrospectively.
"…this Tribunal confines itself only to a careful reading of the Notification and the provisions under which it has been issued, and find that the provision under which the Notification had been issued do not expressly confer any power on the delegate to issue the Notification making it retrospective in its operation nor any necessary intendment can also be gathered therefrom", observed the Bench after elaborately deliberating on the issue.
In conclusion, the appeal was dismissed, and it was laid down that the March 24 Notification was prospective in nature.
"The Notification issued by the Central Government through the Ministry of Corporate Affairs dated 24.03.2020 .., in view of the detailed discussions in relation to the issue of its Applicability, can be considered only as prospective, i.e. applicable from 24.03.2020."