Amendment of default threshold prospective in nature, holds NCLAT

October 2020

On March 24, 2020, the Indian government had, on account of the pandemic, amended section 4 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) to increase the minimum amount of default for initiating insolvency process against corporate debtors from INR 1 Lakh (USD 1,400) to INR 1 Crore (USD 1.4 million) (“March 24 notification”). Since then, the March 24 notification has been subject to judicial interpretation to examine whether the revised threshold has prospective or retrospective application. On October 12, 2020, the National Company Law Appellate Tribunal (“NCLAT”), in Madhusudan Tantia v. Amit Choraria and Ors. (“Foseco decision”) held that the March 24 notification will have prospective application.

Facts: Between March 2018 and July 2019, Foseco India Limited (“Operational Creditor”) raised multiple invoices against Om Boseco Rail Products Limited (“Corporate Debtor”) for supply of foundry and chemicals, which remain unpaid. Subsequently, on September 5, 2019, the Operational Creditor filed a section 9 application before the National Company Law Tribunal (“NCLT”), Kolkata bench for initiation of corporate insolvency resolution process against the Corporate Debtor for an unpaid operational debt of about INR 90 Lakhs (USD 1.3 million).

The final hearing took place on March 13, 2020 and the matter was reserved for orders. However, due to outbreak of COVID-19, subsequent national lockdowns and disruption in functioning of courts and tribunals, the decision was pronounced on May 20, 2020 through video conferencing. During pronouncement, the Corporate Debtor contended that in view of the March 24 notification, the section 9 application should be dismissed due to a “retrospective” enhancement of NCLT’s pecuniary jurisdiction. The key issue was whether the revised default threshold (i.e. from INR 1 Lakh to 1 Crore) will apply to pending applications.

While rejecting the Corporate Debtor’s contentions, the NCLT observed that “a statute is presumed to be prospective unless it is held to retrospective, either expressly or through necessary implication”. Since the March 24 notification was silent on this aspect, NCLT held it as prospective in nature and admitted the section 9 application.

Aggrieved by NCLT’s order, a majority shareholder and director of the Corporate Debtor filed an appeal before NCLAT. The appellant argued that the May 20 order was erroneous since at the time of its pronouncement, the operational debt was below the revised minimum threshold of INR 1 Crore. He further submitted that in addition to fresh claims, the applications pending admission were also covered by the March 24 notification and, accordingly, applications where the default was for less than INR 1 Crore could not be admitted. His underlying rationale was that section 4 (which provides for minimum default amount) is procedural in nature and, therefore, the March 24 notification must be applied retrospectively.

Ratio: NCLAT observed that any revision in minimum default amount after enactment of IBC cannot deprive creditors from exercising their substantive right to initiate insolvency process against defaulting debtors. It held that the March 24 notification was “prospective” in nature and shall not apply to pending applications filed prior to March 24, 2020. It affirmed NCLT’s May 20 order.

PSA view: The Foseco decision reaffirms the settled law on “prospective v. retrospective” application of statutes. It also reiterates the June 2, 2020 order of NCLT, Chennai bench in Arrowline Organic Products Private Limited v. Rockwell Industries Limited on the limited point of prospective application of March 24 notification. The legislative intent behind the March 24 notification was to provide relaxations to MSME companies in the wake of COVID-19 induced economic slowdown. Any interpretation which leads to inclusion of pending applications under its ambit may allow recalcitrant debtors to take advantage of relaxations with respect to debts and defaults which occurred prior to the said notification.

Contributing author:

Resham Jain