The Insolvency and Bankruptcy Code, 2016 defines the terms “debt”, “claim” and “default”. All these terms, although defined under the tenets of IBC itself, are not new to legal vocabulary. Broadly defined, a debt, be it financial or operational debt, is nothing but payment arising out of a contract, whether written or oral. A default is a failure to make payment of the debt as per the agreed terms, i.e. a breach of the contract. A claim is a debt, which may or may not have fallen due, in the context of IBC.
The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 introducing section 10A states that proceedings under IBC cannot be initiated for all defaults, which have occurred on or after 25th March, 2020 for a period of 6 months (at the moment). Further, the proviso to section 10A states that no application can ever be filed for a default occurring during the said period, i.e. for a six month period from 25th March, 2020. The explanation to section 10A clarifies that the amendment shall not apply to defaults, which occur before 25th March, 2020. The amendment raises several important questions, some of which are considered here.
1. Is the Ordinance Retrospective or Prospective?
The Amendment Ordinance states that it shall come into force, at once. This normally indicates that the amendment is prospective in nature. However, that does not mean that the provision will not apply to pending proceedings. The Hon’ble Supreme Court of India in Ramji Purshottam v. Laxmanbhai D. Kurlawala, (2004) 6 SCC 455, approved the following passage of Justice G.P. Singh in Principles of Statutory Interpretation (9th Edn., 2004, at p. 462)—
“[T]he fact that a prospective benefit under a statutory provision is in certain cases to be measured by or depends on antecedent facts does not necessarily make the provision retrospective. … the rule against retrospective construction is not always applicable to a statute merely ‘because a part of the requisites for its action is drawn from time antecedent to its passing’.”
The Amendment Ordinance must be interpreted, keeping in mind, these principles of statutory interpretation.
2. Whether deemed exclusion from default or mere bar of right to file under IBC for six months?
A reading of section 10A, introduced by the Ordinance suggests that the right to file for default under IBC has alone been suspended for a period of 6 months and after the period of six months, in the absence of any extension, parties may be free to proceed under IBC for defaults which have occurred during the six month period from 25th March, 2020. However, upon a reading of the proviso, confusion arises. The proviso to section 10A appears to suggest that no application can ever be filed for a default which arises during such period, i.e. for the six month period from 25th March, 2020. If such an interpretation is taken, then where the date of default is between 25th March, 2020 and 24th September, 2020, then in all such cases, proceedings under the Insolvency and Bankruptcy Code can never be invoked. The effect of the proviso would then be to exclude from the term “default”, all defaults occurring between the said period, i.e. the proviso would create a legal fiction as if defaults occurring during this period, cannot be termed default in law, for the sake of IBC, ever. It is unclear as to whether this was the intended effect of the amendment, especially in light of the stated objects and reasons in the Ordinance, namely (i) temporary non-availability of possible resolution applicants and (ii) extreme distress in the corporate sector, arising as a result of the COVID-19 pandemic. Thus, one needs to wait for decisions of the Hon’ble Court/ Tribunal, to clarify on this issue.
3. Whether “default” from the period from 25th March, 2020, for the six month period, can be considered as continuing wrong after the six month period for the purpose of triggering the IBC?
The Hon’ble Supreme Court of India in Vashdeo R Bhojwani vs Abhyudaya Co Operative Bank Ltd, Civil Appeal No. 11020 Of 2018, while considering the question of whether a debt due to a bank, which is in default, would constitute a continuous wrong, held that the same would not constitute a continuous wrong. The Court held that in cases of default arising out of Debt Recovery Certificate, the obligation to pay and the breach of the same, stands crystallised on the date of default and as such, the cause of action cannot be deemed to be continuing during the period of non-payment. However, this proposition may have to be considered on a case to case basis as in cases where the contract is executory in nature, it may be possible that there may be an independent default/breach under the same contract, after the period of 6 months, for which a fresh application under IBC may lie.
4. Whether the monies in default during the 6-month period, can be a part of the debt in default in an application filed after the 6-month period?
To understand this question, an example may be considered. Say a sum of Rs. 2 crores is availed a loan to be repaid in one year with monthly installments of Rs. 20 lakhs. Say for the period of 6 months from 25th March, 2020 to 24th September, 2020, no monies are paid. Thus, the amount in default is Rs. 1.20 crores, i.e. above the threshold limit for the IBC. Now, say for the 7th month, the sum of Rs. 20 lakhs falls due and is not paid. As per section 10A, there is no bar in filing under IBC for the 7th month’s default. But a question may arise as to whether for the 7th month, the liability for which default has occurred is Rs. 20 lakhs or whether the liability for which the default has occurred is Rs. 1.40 crores (being Rs. 1.20 crores plus Rs. 20 lakhs). If it is the former, the threshold limit is not met. But if it is the latter, the threshold limit is met. The wording of the proviso to section 10A amends itself to the argument that for no default from 25th March, 2020 to 24th September, 2020, fresh IBC proceedings can be initiated. Construed strictly, it can be argued that even for the purpose of determining threshold limits under IBC, the defaults during this period cannot be considered. Per contra, it can also be argued that there is no extinguishment of liability under section 10A and therefore, as long as a part of the cause of action, i.e. part of the default is after the exempted period, there is no requirement in law to establish that the whole of the amount in default was outside the exempted period. Again, one needs to wait for decisions of the Hon’ble Court/ Tribunal, to clarify on this issue.
5. Whether filing of “claims” under IBC would be barred for debts which fall in default during this period, if the Corporate Debtor is admitted into CIRP for a debt which which fell into default before 25th March, 2020?
A reading of section 10A suggests that it merely deals with the right to file for commencement of CIRP under the tenets of the Code and does not deal with the right to file a claim once CIRP has commenced. Therefore, the even for debts which have fallen in default after 25th March, 2020, claims can be filed. This position would be in consonance with the judgment of the Hon’ble NCLAT in Exim Bank v RP, JEKPL, Company Appeal (AT) (Insolvency) No. 304 of 2017, wherein the Hon’ble Appellate Tribunal held that claims can be filed with respect to all debts, whether matured, in default or not.
6. What is the effect of section 66(3) which has been introduced?
It appears that the intention behind section 66(3) is to create a COVID-19 exception to section 66(2) of the Code. Section 66(2) creates liability on director or partner of the Corporate Debtor, for failure to exercise due diligence, so as to avoid initiation of CIRP. Section 66(3) appears to provide for an exception to this due diligence obligation. However, there may be some confusion here as well. Section 66(3) bars filing of applications in relation to defaults occurring during the exempted period only. But by its very nature, section 66 is not based on transactions in particular, but regarding the conduct of business in general. Thus, whether section 66(3) will be interpreted in the context of specific transactions or whether it would be interpreted as a general exemption from section 66(2), altogether, for the exempted period, will have to be seen.
The author is an Advocate practicing before the High Court of Judicature at Madras & NCLT. The author acknowledges the inputs from Mr. Goutham Shivshankar, Advocate on Record. The views of the author are personal.