COVID – 19 has brought the world to a halt, prompting governments around the world to take strict measures for its containment. India has also announced a 21-day lockdown, starting 25 March 2020. While it is difficult to anticipate the full impact of the lockdown on the economy, it is clear that no business, large or small will remain unaffected. Recognising that most businesses will face immediate financial stress, the Finance Minister, Nirmala Sitharaman made an omnibus announcement on 24 March 2020, providing certain relaxations in statutory and regulatory compliances under tax and corporate laws. Measures were also announced in respect of the Insolvency and Bankruptcy Code, 2016 (IBC) to give businesses a safety net to enable them to continue trading in the current period of uncertainty as opposed to facing imminent insolvency and eventual closure.
I. INCREASE IN THRESHOLD
At the media briefing held on 24 March 2020, the Finance Minister announced that the monetary threshold of default for filing an application for initiation of corporate insolvency resolution process under the IBC shall be increased to INR 1,00,00,000 (Indian Rupees One Crore) from the current threshold of INR 1,00,000 (Indian Rupees One Lakh), "so that we can prevent the triggering of defaults against MSMEs"
This change has been brought to force with immediate effect vide Notification dated 24 March 2020 by the Ministry of Corporate Affairs. Hence, section 7 (Initiation of corporate insolvency resolution process by financial creditor), section 9 (Application for initiation of corporate insolvency resolution process by operational creditor) and section 10 (Initiation of corporate insolvency process by corporate applicant) applications can be filed under the IBC only if the amount of default by the corporate debtor is INR One Crore or more.
A. Applicability Of Notification?
Interestingly, while the Finance Minister announced that the threshold shall be increased "so that we can prevent the triggering of defaults against MSMEs", the Notification itself does not state that the increased threshold will only apply to MSMEs. Hence, the way the Notification reads, the threshold applies to all corporate debtors (not just MSMEs). It may be noted that even previously, on the premise that the IBC is not meant to be solely a debt recovery tool and to keep frivolous applications at bay, there has been a demand for increase in this threshold from One Lakh (which was considered too low).
Further, the Notification does not mention any outer time period for applicability of the increased threshold and hence it is unclear if this threshold will be reduced subsequently once the economic condition stabilize.
B. Is The Notification Retrospective?
While there is a looming lack of clarity on the increased threshold being temporary or permanent, a more pressing question is whether the increased threshold is retrospective or prospective.
Significantly, the Notification does not clarify if the increased threshold would also apply to applications that have already been filed (but not admitted) under Section 7, 9 and 10 of the IBC, before the Hon'ble National Company Law Tribunal (NCLT) for initiation of insolvency resolution.
In December 2019, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 was passed that barred homebuyers less than 100 or 10 % of total homebuyers from moving insolvency proceedings against real estate developers. Under the ordinance, the home buyers who had petitions for initiation of insolvency pending before the various benches of Hon'ble NCLT were to comply with the minimum threshold by 28 January 2020. Protesting inter alia against such retrospective impact of the Ordinance on pending applications, the home buyers approached the Hon'ble Supreme Court. The Hon'ble Supreme Court, while taking cognizance of the matter, directed that status quo with respect to the pending applications be maintained in the meanwhile.1 The matter is yet to be decided finally.
It is well-established that a statute that affects substantive rights is presumed to be prospective in operation unless made retrospective, either expressly or by necessary intendment, whereas a statute which merely affects procedure, unless such a construction is textually impossible, is presumed to be retrospective in its application. Law relating to forum and limitation is procedural in nature, whereas law relating to right of action and right of appeal, even though remedial, is substantive in nature. Every litigant has a vested right in substantive law but no such right exists in procedural law.2
In the matter of Supraja Textiles Private Limited3, the Hyderabad bench of Hon'ble NCLT considered the retrospective application of the amendment brought in section 10 of the IBC by way of an ordinance, requiring shareholder resolution for filing of section 10 application. In the said case, the bench noted that the petition for initiation of insolvency under section 10 had been filed by the Corporate Applicant much prior to the amendment in Section 10 and thus it would not be just and proper to apply the amended section 10 on the Corporate Applicant retrospectively.
In the absence of any indication in the Notification, a question arises if the increase in filing threshold relates to substantive right of the applicant or is it merely procedural. It can be argued that if the application of the Notification is made retrospective, it would affect the existing substantive right of the applicants (relating to their right of action) who have filed petitions under the IBC as per the previous minimum threshold of default.
Another aspect that may be considered is that the Notification was passed in the wake of announcements made by the Finance Minister to mitigate the economic impact of measures taken to contain COVID-19 on the corporate debtors. Hence, whether the rights of the applicants who had filed section 7, 9 or 10 much before such measures were put in place should be affected?
II. CONTINGENCY PLAN
The Finance Minister also announced that if the situation continues to remain what it is, beyond 30 April 2020, the Government will consider suspension of section 7, section 9 and section 10 of the IBC for a period of six months.
It is to be noted while the first reform has been brought to effect vide the Notification, the second is a contingent plan in case the current situation continues (or becomes worse) post 30 April 2020.
WHAT THE FUTURE HOLDS
The economic and legal impact of COVID-19 and the measures taken to prevent its spread could see many otherwise profitable and viable businesses undergoing financial distress. Already, businesses across all industries are reporting cash shortages, sparking fear of failure amongst the companies and its employees. While businesses of all sizes are likely to suffer, MSMEs may have a more difficult time surviving. The measures announced by the Government have been designed to give confidence and assurance to the industry to continue their trade without the pressure that they might enter their enterprises into insolvency.
However, as of now, the full impact of COVID-19 and lockdown measures is not known. Other than economic relief packages, large scale bankruptcy reforms may need to be undertaken, to help both big and small companies that may become distressed in the very near future. Simultaneously, impetus and reforms are needed in the financial sector to not only prevent any bankruptcies in the sector but to also aid them in giving relief to the businesses. Besides this, the debtors and creditors would need to work together to find solutions that allow distressed companies to weather the crisis.
1. Manish Kumar v. Union of India, Writ Petition (Civil) No. 26 of 2020
2. Hitendra Vishnu Thakur v. State of Maharashtra, (1994) 4 SCC 602
3. In the matter of Supraja Textiles Private Limited v. Supraja Textiles Private Limited, CP (IB) No. 188/10/HDB/2018
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