NOTIFICATION DATED 24th MARCH 2020 OF MINISTRY OF CORPORATE AFFAIRS ENHANCING THRESHOLD OF DEFAULT TO OPERATE PROSPECTIVELY
With the imposition of nationwide lockdown due to the COVID-19 pandemic, the central government felt that small to medium enterprises may not be able to meet the timelines for repayment of their loans thereby getting dragged in insolvency and resolution proceedings under the IBC. To address this concern the central government in exercise of powers conferred by the proviso to section 4 of the Insolvency and Bankruptcy Code, 2016, vide a Notification dated 24.03.2020 increased the default threshold for invoking resolution process under the IBC from Rs. 1 lakh to Rs. 1 Crore. The decision was taken in the backdrop of the COVID-19 pandemic to give respite to small-time defaulters whose default has not crossed the Rs.1 Crore barrier.
In the light of this development, a question that arose before the National Company Law Appellate Tribunal (NCLAT for short) in the case of Madhusudhan Tantia vs Amit Choraria was whether this notification would apply to insolvency and resolution claims for defaults lesser than Rs.1 Crore that were filed prior to 24.03.2020.
NCLAT by applying the principle that a statute affecting substantive rights cannot operate retrospectively unless expressly provided held that the above notification would operate prospectively and would have no bearing on the pending claims for lesser than Rs. 1 Crore filed prior to 24.03.2020.
The judgment is likely to give substantial relief to the creditors whose claims have been filed prior to the date of the notification as a decision otherwise would have had a serious repercussion on the banking sector.
The premise of the judgment is also to deny any benefit to defaulters who were not affected by the vagaries of the Covid-19 pandemic. Since the notification has been issued at the imposition of the nationwide lockdown, any default prior thereto cannot be attributed to the economic slowdown as a result of the lockdown.
Author : Ananga Bhattacharyya, Principal Partner
Assisted by : Devahuti Tamuli, Senior Associate