Section 10A of IBC Bars CIRP in Respect of Default Post 25 March 2020, Even if CIRP Application Is Filed Before Section 10A Was Introduced: Supreme Court

Excerpt

This case concerns whether Section 10A introduced through the amendment can be retrospectively applied. 

Brief Facts

The Appellate jurisdiction of the Supreme Court under Section 62 of the Insolvency and Bankruptcy Code, 2016 was invoked to challenge the Decision and Order of the National Company Law Appellate Jurisdiction (NCLAT). The NCLAT asserted the decision of the National Company Law Tribunal (NCLT), which held that as per the provisions of Section 10A, inserted by Act 17 of 2020 (the Amending Act) with retrospective effect from 5 June 2020, the application filed under Section 9 of IBC by the Appellant (Ramesh Kymal) was not maintainable. 

Arguments of the Appellant 

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It was submitted that Section 10A will have no application because:

(i) Section 10A puts the bar on the filing of applications under Section 7,9 and 10 concerning the defaults committed on or after 25 March 2020 for a period of six months, which can be extended to one year. 

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(ii) The Ordinance and Act which replaced it, did not provide for retrospective application of Section 10A either expressly or by necessary implications to applications that had already been filed and were pending on 5 June 2020. 

(iii) Section 10A prohibits the filing of fresh applications in case of defaults occurring on or after 25 March 2020. 

(iv) The use of terms “shall be filed” and “shall ever be filed” in Section 10A indicates the prospective nature of the statutory provision. 

(v) The IBC made a clear demarcation between the “initiation date” under Section 5(11) and “insolvency commencement date” under Section 5(12). 

It was further argued that the onset of Covid-19, which was the reason for insertion of Section 10A, had nothing to do with the default of the Respondent to pay the outstanding operational debt of the Appellant, which owed its existence before the pandemic. 

Arguments of the Respondent 

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It was submitted by M/s. Siemens Gamesa Renewable Power Pvt. Ltd. that Section 10A was introduced to deal with an extraordinary event, the outbreak of the Covid-19 pandemic, which resulted in financial distress suffered by corporate entities. 

Section 10A with a non-obstante clause overrides sections 7,9 and 10 of the IBC. Section 10A provides for a cut-off date of 25 March 2020 and it is clear from the substantive part of the provision, the proviso, and the explanation, that no application can be filed for the initiation of the CIRP for a default occurring on and after 25 March 2020, for six months or as extended upon a notification. 

Observation by the Court

It was observed by the Court that the date of 25 March 2020 was consciously provided by the legislature in the recitals to the Ordinance and Section 10A since it coincides with the date of imposition of national lockdown in India due to the Covid-19 pandemic. In the case of Sardar Inder Singh vs. the State of Rajasthan, it was held by the Court that the decision relating to the date of enactment of the law, is a matter exclusively for the Legislature to determine and propriety of that determination is not open to question in Courts. 

The language of the provision is not always decisive to arrive at a determination whether the provision is applicable prospectively or retrospectively. Justice G.P. Singh in his commentary, Principles of Statutory Interpretation, stated that “ it cannot be stated as an inflexible rule that use of present tense or present perfect tense is decisive of the matter that the statute does not draw upon past events for its operation”. 

The Supreme Court has also clarified that the correct interpretation of Section 10A cannot be based merely on the language of the provision, rather it must take into account the object of the Ordinance and the extraordinary circumstances in which it was promulgated. However, the retrospective bar on the filing of an application does not extinguish the debt owed by the corporate debtor or the right of creditors to recover it. 

Section 10A does not contain any requirement that the NCLT has to look into the extent to which the financial health of the corporate debtor was affected by the onset of the Covid-19 pandemic. Parliament has stepped legislatively because of the ripe distress caused by an unheralded public health crisis. It was cognizant of the fact that the resolution applicants may not come forth to take insolvency resolution process, which would lead to events of the corporate debtors going under liquidation and no longer remaining a going concern. This would defeat the purpose of the IBC as noted in the case of Swiss Ribbons (P) Ltd. vs. Union of India

NCLAT has described the distinction between the initiation of the CIRP and its commencement when it observes, ” ‘initiation date’ is referring to the filing of an application by the eligible applicant, the later  ‘commencement date’ refers to the passing of the Order of admission of the application by the Adjudicating Authority”. 

The decision of the Court 

The Supreme Court agreed with the view of the NCLAT for the reasons that had been set out in the above judgment.  The conclusion of the NCLAT was affirmed and the appeal was dismissed. 

Click here to view full judgment.


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