Bar Under Section 10A IBC Against Initiation Of CIRP Retrospective; Applies To Applications Filed From 25 March 2020

The Supreme Court has held that Section 10A of the Insolvency and Bankruptcy Code barred filing of applications for the commencement of the CIRP in respect of a corporate debtor for a default occurring on or after 25 March 2020, even if such application was filed before 5 June 2020 (the date on which the amendment came into force).

The bench comprising Justices DY Chandrachud and  MR Shah observed that that the retrospective bar on the filing of applications for the commencement of CIRP during the stipulated period does not extinguish the debt owed by the corporate debtor or the right of creditors to recover it. 

The issue in this case was whether the provisions of Section 10A stand attracted to an application under Section 9 which was filed before 5 June 2020 (the date on which the provision came into force) in respect of a default which has occurred after 25 March 2020.

Holding that such a bar is attracted in the instant case, the National Company Law Appellate Tribunal had upheld dismissal of an application filed by an operational creditor under Section 9  as not maintainable. (In this case, the application was filed On 11 May 2020).

Section 10A provides that: (i) no application for the initiation of the CIRP by a corporate debtor shall be filed; (ii) for any default arising on or after 25 March 2020; and (iii) for a period of six months or such further period not exceeding one year from such date as may be notified in this behalf.  The proviso to Section 10A stipulates that "no application shall ever be filed" for the initiation of the CIRP of a corporate debtor "for the said default occurring during the said period". The explanation clarifies that Section 10A shall not apply to any default which has been committed under Sections 7, 9 and 10 before 25 March 2020.

The contention raised was that the expression "shall be filed" is indicative of a legislative intent to make the provision prospective so as to apply only to those applications which were filed after 5 June 2020 when the provision was inserted. Rejecting this construction, the bench observed:

"Adopting the construction which has been suggested by the appellant would defeat the object and intent underlying the insertion of Section 10A. The onset of the Covid-19 pandemic is a cataclysmic event which has serious repercussions on the financial health of corporate enterprises. The Ordinance and the Amending Act enacted by Parliament, adopt 25 March 2020 as the cut-off date. The proviso to Section 10A stipulates that "no application shall ever be filed" for the initiation of the CIRP "for the said default occurring during the said period". The expression "shall ever be filed" is a clear indicator that the intent of the legislature is to bar the institution of any application for the commencement of the CIRP in respect of a default which has occurred on or after 25 March 2020 for a period of six months, extendable up to one year as notified. The explanation which has been introduced to remove doubts places the matter beyond doubt by clarifying that the statutory provision shall not apply to any default before 25 March 2020. The substantive part of Section 10A is to be construed harmoniously with the first proviso and the explanation. Reading the provisions together, it is evident that Parliament intended to impose a bar on the filing of applications for the commencement of the CIRP in respect of a corporate debtor for a default occurring on or after 25 March 2020; the embargo remaining in force for a period of six months, extendable to one year. Acceptance of the submission of the appellant would defeat the very purpose and object underlying the insertion of Section 10A. For, it would leave a whole class of corporate debtors where the default has occurred on or after 25 March 2020 outside the pale of protection because the application was filed before 5 June 2020."

The bench further noted that Section 10A does not contain any requirement that the Adjudicating Authority must launch into an enquiry into whether, and if so to what extent, the financial health of the corporate debtor was affected by the onset of the Covid-19 pandemic. 

"Parliament has stepped in legislatively because of the widespread distress caused by an unheralded public health crisis. It was cognizant of the fact that resolution applicants may not come forth to take up the process of the resolution of insolvencies (this as we have seen was referred to in the recitals to the Ordinance), which would lead to instances of the corporate debtors going under liquidation and no longer remaining a going concern."

While dismissing the appeal, the court observed thus about the difference between 'date of initiation' and insolvency commencement date': 

The date of the initiation of the CIRP is the date on which a financial creditor, operational creditor or corporate applicant makes an application to the adjudicating authority for initiating the process. On the other hand, the insolvency commencement date is the date of the admission of the application. 

Case: Ramesh Kymal vs. M/s Siemens Gamesa Renewable Power Pvt Ltd. [Civil Appeal No. 4050 of 2020]
Coram: Justices DY Chandrachud and MR Shah
Counsel: Sr. Adv Neeraj Kishan Kaul, Sr. Adv Gopal Jain
Citation: LL 2021 SC 71 

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