Increased default limit for triggering insolvency not applicable retrospectively: NCLAT
The Central Government’s notification dated 24 March 2020 enhancing the minimum amount of default limit from Rs one lakh to Rs 1 crore for initiating a corporate insolvency resolution process (CIRP) against small and medium scale industries is only ‘prospective in nature’ and not a ‘retrospective’ one, the National Company Law Appellate Tribunal (NCLAT) said in a recent order.
In the appeal filed by one of the majority shareholders of Om Boseco Rail Products Ltd, the appellant had pleaded that the Kolkata Bench of the National Company Law Tribunal (NCLT) while admitting the insolvency proceeding against the corporate debtor failed to ‘appreciate that by reason of the amendment to Section 4 of the IBC increasing the default limit, the application was no longer maintainable in law and was barred by law and hence the authority should have dismissed the application because of the simple reason that the amendment in issue is having retrospective effect.
It argued that the total claim of the Operational Creditor — Foseco India Limited — is Rs 90,009,19 (Rupees ninety lakhs nine hundred and nineteen only), which is below the threshold limit of Rs one crore as the minimum amount of default for the purpose of preferring an application under Sections 7 or 9 and 10 of the IBC.
Foresco India had filed an insolvency application against Boseco Rail Product with the Kolkata Bench of NCLT on 5 September 2019. The date of first hearing was on 17 October 2019 and on 20 December 2019, an ex-parte order was passed giving the Corporate Debtor an opportunity to file its response on 17 January 2020. The corporate debtor asked for more time on 03 February 2020 etc. An order in the case was reserved on 13 March 2020 and the same pronounced on 20 May 2020.
The corporate debtor’s contention was that Section 4 of the IBC clearly gave the Central Government power to make such notification and that the Central Government is well within its rights to make the notification retrospective in its operation, because of the fact that the said proviso is not contrary to any specific provision of the IBC.
The Counsel of the operational creditor argued: “…in respect of the pending proceedings the ‘state of affairs’ remains unaffected by the changes in Law…Further, in the absence of clear indication of a contrary intention in the notification issued on 24 March 2020 by the Ministry of Corporate Affairs, government of India, then the substantive rights of individuals to an action is to be decided by the Law that existed when the action was initiated / commenced as the case may be.”
Deciding the matter in favour of the operational creditor, NCLAT observed that “from the tenor, spirit and the plain words employed in the notification by the Ministry of Corporate Affairs, one cannot infer an intention to take or make it retrospective as in this regard, the relevant words are conspicuously absent and besides there being no implicit inference to be drawn for such a construction in the context in issue.
It further noted that if the notification dated 24 March 2020 of the Ministry of Corporate Affairs increasing the default limit is made applicable to the pending applications of IBC (filed earlier to the notification in issue), it will create absurd results of wider implications/complications.
