Introduction
In 2016, the Indian parliament enacted the Insolvency and Bankruptcy Code, 2016 (Code), section 4 of which permitted initiation of Corporate Insolvency Resolution Process (CIRP) if the amount of default was over INR 1,00,000 and as per section 6 of the Code, such an application may be filed before the National Company Law Tribunal (NCLT) by either financial creditor, operational creditor, or a corporate debtor itself. The CIRP will be conducted in accordance with the provisions of the Code and Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
Subsequently, in the wake of the corona virus pandemic, a notification was issued by the central government under section 4 of the Code, increasing the minimum amount of default for which CIRP may be initiated against the corporate debtor to be INR 1,00,00,000 (“Notification”), in order to keep failing businesses afloat in times of crises. This gives rise to a very pertinent unanswered question. Where demand notice for an operational debt below INR 1,00,00,000 has been served before the Notification was issued, can an application to initiate CIRP for that operational debt be filed? This article attempt to find an answer to this question.
Application by an operational creditor – a two-fold process
The general triggering point for commencing CIRP is the occurrence of default[1]. Section 3(12) of the Code defines ‘default’ to mean non-payment of a debt (including financial debt, operational debt or claim in any form) or a part of the debt which has become due and payable, and continues to remain unpaid by the corporate debtor. The procedure for filing an application of CIRP by the operational creditor is a two-fold mechanism. Firstly, in terms of section 8(1) of the Code, on the occurrence of a default, an operational creditor is required to serve a demand notice to the corporate debtor as per Form 3 or Form 4 specified under rule 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (“Adjudicating Authority Rules”). Thereafter, an application for initiation of CIRP may be filed as per Form 5 specified under rule 6 of the Adjudicating Authority Rules, by the operational creditor, before the NCLT if he has not received any payment or notice of dispute from the corporate debtor even after the expiry of ten days from the date of issuing the demand notice.
It is noteworthy to mention that unlike financial creditors, the requirement of serving a demand notice under section 8 of the Code is a mandatory requirement for operational creditors willing to initiate CIRP against a corporate debtor, as is evident from usage of “shall” in section 8(1) of the Code. Therefore, an application by an operational creditor to initiate CIRP under section 9 of the Code, without satisfying the condition precedent specified hereinabove, shall fail. This position has been reiterated by the Supreme Court and NCLAT on numerous occasions.
The NCLAT has also clarified that, depending on the nature of the operational debt, Form 4 is to be used to serve a demand notice only in cases where invoices were generated during the course of the transaction, while for all other forms of operational debts, Form 3 shall be the accepted form of serving a demand notice. In the latter instance, invoices need not be mandatorily attached to prove the existence of a debt. The operational creditor, thus, has no workable discretion to choose between Form 3 and Form 4.
Therefore, from the aforementioned averments it may be derived that the application to initiate CIRP by an operational creditor commences at the instance of serving a demand notice in the manner prescribed by law, and with little discretion.
Effect of the Notification on applications by operational creditors
The Notification issued by the central government purports to increase the threshold limit for triggering CIRP against corporate persons to INR 1,00,00,000. It was issued on 24 March 2020 (“Effective Date”), and in absence of any specification to the contrary, shall be construed as effective from the date on which it was issued, i.e., prospective in nature[2]. However, the failure of the central government to specify the operation of the Notification has raised serious doubts regarding filing of application for CIRP by operational creditors with default of less than INR 1,00,00,000, where demand notice has already been served but the application awaits to be filed.
A mere reading of the Notification may create an impression that all applications for operational debt below INR 1,00,00,000 which await filing before the NCLT may be barred, pursuant to the increase in the threshold. However, upon a detailed reading, it may be demonstrated otherwise. The Notification was issued under the proviso to section 4 of the Code. Upon its enactment, section 4, as modified by the Notification reads as follows:
“This Part shall apply to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of the default is one crore rupees.”
Therefore, effective 24 March 2020, the minimum amount of default for which CIRP may be initiated shall be INR 1,00,00,000. (Emphasis supplied)
Section 3(12) of the Code defines ‘default’ at the touchstone of two prerequisites. The debt in question shall be due; and the debt so due shall be payable. Hence, for the purposes of the Code, a debt is defaulted on the day when it becomes payable and remains unpaid thereof by the corporate debtor. Accordingly, a demand notice under section 8 of the Code, shall be served by an operational creditor “on the occurrence of a default”[3], i.e., after the default with respect to an operational debt has accrued.
Hence, conjunctive reading of the aforementioned laws, direct us towards the proposition that for all operational debts (and financial debts) defaulted on or after Effective Date, the threshold limit to initiate CIRP stands to be modified as INR 1,00,00,000 whereas for defaults before the Effective Date, the threshold limit continues to be INR 1,00,000. In other words, the test for ascertaining the applicability of the Notification shall revolve around the date on which the default occurred, that is to say, if the default occurred before the Effective Date, the Notification is inapplicable while if the default occurred on or after the Effective Date, the Notification applies.
In light of the foregoing, it is pertinent to point out that for all such debts where demand notice has been served before the Effective Date, however the application for CIRP awaits to be filed, it is impossible for default in such cases to accrue after the Effective Date. Therefore, for such cases the threshold limit stipulating the “minimum amount of default”[4] continues to be INR 1,00,000, and an application to initiate CIRP may be maintainable before the NCLT even if the threshold amount is less than INR 1,00,00,000.
This intention of the central government can be further ascertained from its enactment of the ordinance introducing one section 10A to the Code. The section provides for an absolute prohibition on filing of an application initiating CIRP for all defaults arising on or after 25 March 2020. It further clarifies that no such bar will operate for defaults committed before 25 March 2020. Therefore, it is clear that the amendments to the Code were mechanisms by the central government to relief the distressed businesses on account of the unprecedented lockdown. Hence, the amendments in general and the Notification, in particular, should not apply to defaults occurred prior to the commencement of the lockdown. The Notification may also be read accordingly.
Conclusion
The cardinal rule for the construction of the law laid down by the competent authorities is that they should be construed in accordance with the intention expressed therein[5]. Even though the averments mentioned hereinabove surround a proposition which has not attained crystallization through judicial interpretations yet, it is imperative that the NCLT or its appellate forums give clarity on the issue no sooner than the lockdown is completely lifted and the courts and tribunals commence functioning normally. It is the considered opinion of the author that in doing so, the aforementioned averments and grounds may be considered.
[1] Sumant Batra, in Corporate Insolvency: Law and Practice 205 (2017).
[2] S. L. Srinivasa Jute Twine Mills (P) Ltd. v. Union of India and Another (2006) 2 SCC 740
[3] Insolvency and Bankruptcy Code, s 8(1)
[4] Insolvency and Bankruptcy Code, s 4
[5] Indian Dental Association, Kerala v. Union of India (2004) 1 Kant LJ 282
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Very informative and well structured