1.1 In an apparent bid to avoid large-scale insolvencies, especially against the MSMEs, as a result of the financial stress caused by Covid-19 pandemic, the Central Government had, vide notification bearing no. SO 1205(E) dated March 24, 2020 ("Notification"), increased the threshold of the minimum amount of default for the purpose of maintainability of an application for initiation of corporate insolvency resolution process ("CIRP") under Insolvency and Bankruptcy Code, 2016 ("IBC"), from a sum of Rs. 1,00,000 (Rupees One lakh only) to Rs. 1,00,00,000 (Rupees One Crore only).
1.2 The notification, which does not indicate any specific date from when the revised threshold is proposed to be effective, has created flutters amongst the industry and the legal community as to the potential impact of such revision on the pending proceedings initiated under the IBC, where the amount of default is lesser than the revised threshold. This has resulted in generation of multiple articles and commentaries, which have prima facie taken the view that the revision would be prospective in nature and would not impact such proceedings which have been initiated before the publication of the Notification in the gazette.
1.3 In this paper, we attempt to examine the applicability of the Notification to the following categories of proceedings, which may be pending before different Benches of adjudicating authority or the appellate authority:
- Demand notice under section 8 of IBC has been issued, but application under Section 9 has not been filed;
- Application filed under Section 7, 9 or 10 is pending; and
- An appeal against the decision of adjudicating authority admitting/refusing CIRP against a corporate debtor is pending before the appellate authority.
2. PRINCIPLE OF CONSTRUCTION OF AMENDING STATUTE- PROSPECTIVE, RETROSPECTIVE AND RETROACTIVE
2.1 An application of a new law (including changes to an existing law pursuant to an amendment, substitution or repeal) can be either prospective, retrospective or retroactive. For appreciating the contours of each of the expressions, we may refer to the following observations of a Full Bench of Bombay High Court in the case of Badrinarayan Shankar Bhandari v. Omprakash Shankar Bhandari,1 which stated that:
"38. (i) A prospective statute operates forwards from the date of its enactment conferring new rights on parties without reference to any anterior event, status or characteristic;
(ii) Retrospective statute, on the other hand, operates backwards, attaches new consequences, though for the future, but to an event that took place before the statute was enacted. It takes away vested rights. Substantive benefits which were already obtained by a party are sought to be taken away because of legislation being given effect to from a date prior to its enactment. The Rules of Interpretation of Statute raise a presumption against such retrospective effect to a legislation. In other words, if the Legislature has not expressly or by necessary implication given effect to a statute from a date prior to its enactment, the Court will not allow retrospective effect being given to a legislation so as to take away the vested rights. Statutes enacted for regulating succession are ordinarily not applicable to successions which had already opened, as otherwise the effect will be to divest the estate from persons in whom it had vested prior to coming into force of the new statutes. Muhammed Abdus Samad v. Qurban Hussain, ILR (26) All. 119 (129) P.C.
(iii) There is the intermediate category called "Retroactive Statute" which does not operate backwards and does not take away vested rights. Though it operates forwards, it is brought into operation by a characteristic or status that arose before it was enacted. For example, a provision of an Act brought into force on 1st January 2014, the Act applies to a person, who was employed on 1st January 2014 has two elements:
(a) That the person concerned took employment on 1st January 2014 - an event.
(b) That the person referred to was an Employee on that day - a characteristic or status which he had acquired before 1st January 2014.
Insofar as the Act applies to a person, who took employment on 1st January 2014, the Act is prospective. Insofar as the Act applies to a person, who had taken employment before 1st January 2014, the Act is retroactive."
2.2 It may, however, be noted that, a Constitution Bench of the Supreme Court in Shah Bhojraj Kuverji Oil Mills and Ginning Factory v. Subhash Chandra Yograj Sinha,2 enumerated that a section may be prospective in some parts and retrospective in other parts.
2.3 Now that we have understood the difference between the various concepts, we may refer to the following observations of the Supreme Court in Commissioner of Income Tax (Central)-I, New Delhi v. Vatika Township Private Limited,3 in the context of the general principles concerning 'prospective application of legislation':
"28. Of the various rules guiding how a legislation has to be interpreted, one established rule is that unless a contrary intention appears, a legislation is presumed not to be intended to have a retrospective operation. The idea behind the rule is that a current law should govern current activities. Law passed today cannot apply to the events of the past. If we do something today, we do it keeping in view the law of today and in force and not tomorrow's backward adjustment of it. Our belief in the nature of the law is founded on the bedrock that every human being is entitled to arrange his affairs by relying on the existing law and should not find that his plans have been retrospectively upset. This principle of law is known as lex prospicit non respicit: law looks forward not backward. As was observed in Phillips v. Eyre [(1870) LR 6 QB 1], a retrospective legislation is contrary to the general principle that legislation by which the conduct of mankind is to be regulated when introduced for the first time to deal with future acts ought not to change the character of past transactions carried on upon the faith of the then existing law."
2.4 A succinct summary of the principles dealing with prospective and retrospective application of a new law or a change in law can be found in the following observation of the Supreme Court in Hitendra Vishnu Thakur v. State of Maharashtra,4 wherein the Court held that:
"(i) A statute which 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, should not be given an extended meaning, and should be strictly confined to its clearly defined limits.
(ii) 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.
(iii) Every litigant has a vested right in substantive law, but no such right exits in procedural law.
(iv) A procedural statute should not generally speaking be applied retrospectively, where the result would be to create new disabilities or obligations, or to impose new duties in respect of transactions already accomplished.
(v) A statute which not only changes the procedure but also creates new rights and liabilities, shall be construed to be prospective in operation, unless otherwise provided, either expressly or by necessary implication."
2.5 Before we end the discussion, we may also highlight that a delegated or subordinate legislation can only be prospective and not retrospective, unless rule making authority has been vested with power under a statute to make rules with retrospective effect.5 Notably, the IBC does not authorise such power to make rules with retrospective effect.
2.6 With the benefit of the principles discussed aforesaid, let us now examine the effect of the Notification on proceedings pending under IBC.
3. SECTION 4 AND THE NOTIFICATION
3.1 Before delving into the issue at hand, for proper appreciation of the background, let us however note the content of Section 4 of IBC, pursuant to which the Notification was issued and the Notification itself.
3.2 Section 4 of IBC reads as follows:
4. Application of this Part.
(1) This Part shall apply to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of the default is one lakh rupees:
Provided that the Central Government may, by notification, specify the minimum amount of default of higher value which shall not be more than one crore rupees.
3.3 The Notification, increasing the threshold of default, reads as follows:
"In exercise of the powers conferred by the proviso to section 4 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), the Central Government hereby specifies one crore rupees as the minimum amount of default for the purposes of the said section."
3.4 As is apparent from the aforesaid extract, the Notification is silent as to the date from when it is intended to be effective. This may be contrasted against clear enumeration that the Legislature indicated in amendment to Section 7 of IBC [effected pursuant to Insolvency and Bankruptcy Code (Amendment) Act, 2020)], where the revision in criteria as to when a homebuyer can file an application under Section 7 was clarified as follows:
"Provided also that where an application for initiating the corporate insolvency resolution process against a corporate debtor has been filed by a financial creditor referred to in the first and second provisos and has not been admitted by the Adjudicating Authority before the commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2020, such application shall be modified to comply with the requirements of the first or second proviso within thirty days of the commencement of the said Act, failing which the application shall be deemed to be withdrawn before its admission."
1. Badrinarayan Shankar Bhandari v. Omprakash Shankar Bhandari [Second Appeal No. 566 of 2011, decided on August 14, 2014 (Bombay)].
2. See, ¶ 12 of Shah Bhojraj Kuverji Oil Mills and Ginning Factory v. Subhash Chandra Yograj Sinha [AIR 1961 SC 1596 (Supreme Court)].
3. Commissioner of Income Tax (Central)-I, New Delhi v. Vatika Township Private Limited [Civil Appeal No.8750 of 2014, decided on September 15, 2014 (Supreme Court)].
4. Hitendra Vishnu Thakur v. State of Maharashtra [Criminal Appeal No. 732-735 of 1993, decided on July 12, 1994 (Supreme Court)].
5. See, ¶ 108 of DGFT v. Kanak Exports [Civil Appeal No. 554 of 2006, decided on October 27, 2015 (Supreme Court)].
Originally published by LiveLaw.in 5 May 2020
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