Bar & Bench Weekly IBC Diary #1: Prospective effect of threshold enhancement, restored appeal as a pre-existing dispute and more

The Bar & Bench Weekly IBC Diary aims to report crucial rulings of various courts and tribunals and important updates concerning the Insolvency & Bankruptcy Code (IBC), 2016.

1. DK Mohanty v. Jai Balaji Industries (NCLAT, Delhi)

Issue involved:

Whether restoration of an appeal filed under Section 37 of the Arbitration & Conciliation Act, 1996 after delivery of demand notice relates back to pre-demand notice status and constitutes a pre-existing dispute?

Provisions involved:

Section 8, 9 IBC

Facts:

Operational Creditor invoked the arbitration proceedings which culminated into favourable arbitral awards. The arbitral awards were assailed by the Corporate Debtor under Section 34 of Arbitration Act and were dismissed by separate orders dated February 27 and 29, 2012 respectively. Appeals preferred by the Corporate Debtor under Section 37 of Arbitration Act stood pending till November 22, 2019 on which date they were dismissed for non-prosecution. Thereafter, the demand notice under Section 8, IBC was issued on February 14, 2020. The application under Section 9, IBC was filed on March 2, 2020. Subsequently, the appeal under Section 37 was restored on the same date.

Decision:

What is relevant to be seen in this case is not whether any dispute was pending exactly on the cut-off date of the Section 8 notice, but whether any dispute was ‘pre-existing’ as on the date of issuance of the demand notice under Section 8. The litigant is restored to the position when the Court has initially dismissed the appeal for default. Once an appeal under Section 37 is restored, it relates back to the original date of filing.

IBC cannot be invoked in respect of an operational debt, where an arbitral award has been passed against the Corporate Debtor, but which has not yet been finally adjudicated upon. Further, the filing of Sections 34 and 37 applications against an arbitral award shows that a pre-existing dispute (under Section 8, IBC) which culminates at the first stage of proceeding in an award, continues even after the award, at least till the final adjudicatory process under Sections 34 and 37 is completed.

Quick Analysis:

This is an interesting decision that extends the proposition of law in K Kishan v. Vijay Nirman Co. Pvt. Ltd to cover under the term “pre-existing dispute” even the litigation which has been dismissed for non-prosecution but was later restored. The restoration relates back to the situation that existed prior to dismissal of the appeal, which results in revival of the pre-existing dispute as well.

2. Panch Tatva Promoters Pvt Ltd v. GPT Steel Industries Ltd & Ors (NCLAT, Delhi)

Issue involved:

Whether an un-adjudicated and sub-judice delay in implementation of a resolution plan in another Corporate Insolvency Resolution Process (CIRP) makes the resolution applicant ineligible to submit resolution plan in a separate CIRP?

Provisions involved:

Section 31, 33 – IBC

Regulation 38(1B) – CIRP Regulations

Facts:

Two competing groups submitted competing resolution plans in a CIRP. The appellant’s resolution plan was rejected by the Committee of Creditors (CoC). The appellant then challenged the approval of the successful resolution applicant’s plan by the CoC. The main ground of challenge was that the successful resolution applicant has failed to implement a previous resolution plan of a different corporate debtor, and hence, was ineligible to submit the resolution plan for this CIRP. The application adjudicating the failure of implementation of the previous resolution plan was pending before NCLT in a separate matter.

Decision:

As per Section 33 of IBC, it is the job of the Adjudicating Authority to “determine” if provisions of the Resolution Plan have been contravened. Admittedly, there does not exist any order under Section 33(4) holding the resolution applicant to have contravened provisions of the Resolution Plan in any other proceedings. Merely because in execution of the Resolution Plan, application for time is under consideration with regard to other CIRP, it would not be sufficient at this stage to say that ineligibility has already been incurred.

It is clear that the CoC deliberated on the eligibility and thereafter, considering the statement of the resolution applicant, took a conscious commercial decision in accepting its Resolution Plan. If there is some delay in implementing the Plan, it cannot be considered a failure in implementing the Resolution Plan, thereby making the applicant ineligible for submission of the Resolution Plan under Regulation 38 (1B) of the CIRP Regulations

Quick Analysis:

Effectively, the decision holds that unless there is an order from NCLT on resolution applicant’s failure to implement a plan, it will not be barred from submitting a resolution plan for other CIRPs. However, neither parties could point out to the bench that the only provision dealing with ineligibility to submit a resolution plan is Section 29A. Section 29A contains no such restriction even if the failure has been adjudicated upon. Regulation 38(1B) can be considered as a disclosure mechanism so that the CoC is aware of the past track record of the applicant and then apply their commercial wisdom. Regulation 38(1B) is not made for the purposes of excluding otherwise eligible resolution applicants from submitting plans. In my humble view, this aspect has been completely missed in this decision.

3. BLS Polymers Limited v. RMS Power Solutions Private Limited (NCLT, Delhi)

CP No. IB-340(ND)/2021

Issue involved:

Applicability of notification dated March 24, 2020 increasing the threshold limit from ₹1 lakh to ₹1 crore in cases where demand notice under section 8 has been issued by operational creditor pre/post this notification.

Provisions involved:

Section 4, 7, 8, 9, 10 – IBC

Facts:

The Corporate Debtor defaulted on dues of Operational Creditor to the tune of ₹35 lakh. The Operational Creditor issued demand notice under section 8 on March 16, 2020. The demand notice was received by the Corporate Debtor on March 21. On March 24, the notification enhancing the threshold limit for ‘default’ under Section 4, IBC was issued. The threshold was increased from ₹1 lakh to ₹1 crore. The Corporate Debtor raised a preliminary issue of maintainability of the Section 9 petition since the default was much below the enhanced limit.

Decision:

A bare perusal of the notification dated March 24, 2020 shows that nowhere in the notification the date of enforcement is mentioned. Having regard to the well established law, if no date of enforcement is shown, the notification shall have prospective effect only. A statute is presumed to have a prospective effect unless it is held to be retrospective, either expressly or by necessary implication.

A reading of Sections 7,8,9 and 10 of the IBC will show that the word “default” is common to all and the right to file application under the aforesaid provisions accrues only when the default has occurred. A right which has accrued cannot be taken away by exercising delegated powers through retrospective effect.

Quick Analysis:

NCLT, Delhi Bench applied the above reasoning and identified four scenarios where the notification will become relevant. The Bench has clearly held that the notification is applicable prospectively only on the defaults that have occurred post March 24, 2020. It ultimately stressed on the fact that what is important is the date of default and not the date of issuing demand notice or filing of Section 9 petition. Specific power is required to issue a notification under the delegated legislation power with retrospective effect.

The author has summarised the findings in the table below for a ready reference:

The intent behind the notification was to provide relaxations amidst the COVID-19 pandemic induced economic slowdown. As a matter of purposive interpretation, any default which happened prior to such notification cannot be given the same relaxation. Such a blanket protection would go contrary to the intent.

Further, the Supreme Court in BK Educational Services Private Limited Vs. Parag Gupta and Associates has held that the right to sue accrues to creditor when the default occurs. Hence, the accrued right cannot be taken away by delegated legislation. This decision, in essence, follows the ratio of the NCLAT’s ruling in Madhusudan Tantia v. Amit Choraria and Ors, though the same was in context of an application which was already pending before NCLT when the threshold enhancement notification was issued. While there have been various conflicting decisions, this probably is one of the first decisions across the country which has adjudicated interpretation with more clarity and explained various scenarios as well.

The author is a dually qualified professional. He is a Fellow Chartered Accountant and practices law in the courts of Delhi. He can be reached at mail@deepakjoshi.in