Monday 7 February 2022

Tharakan Web Innovations Pvt. Ltd. Vs. Cyriac Njavally & Anr. - The application of Part II of the IBC itself, is taken away with effect from 24.03.2020 as far as defaults less than Rs.1 Crore are concerned and hence no application can be filed after 24.03.2020 regarding an amount where the default is less than Rs.1 Crore.

High Court Kerala (01.02.2022) in Tharakan Web Innovations Pvt. Ltd. Vs. Cyriac Njavally & Anr. [W.P.(C)Nos.27636 of 2020 & 14158 of 2021] held that;

  • The Appellate Tribunal found that on facts, in the case considered in Ext.P9 demand notice under Section 8 was issued on 31.7.2019 and the application under Section 9 was filed on 5.9.2019 which were both before 24.3.2020, on which date the threshold limit was increased to Rs.1 Crore. 

  • The Tribunal hence found that the said decision cannot be relied upon to decide whether a petition can be maintained for an amount of less than Rs.1 Crore after 24.3.2020. 

  • The Appellate Tribunal went on to hold that the threshold limit will be applicable for applications filed under Section 7 or Section 9 on or after 24.3.2020, even if the debt is on a date earlier than 24.3.2020. The above view of the Tribunal is in consonance with the decision of the Hon’ble Supreme Court in Manish Kumar (supra).

  • As such, from the date of amendment, Part II of the IBC can apply only to matters relating to insolvency and liquidation of corporate debtors, where the minimum amount of default is Rs.1 Crore. 

  • Once that is the position, the application of Part II of the IBC itself, is taken away with effect from 24.03.2020 as far as defaults less than Rs.1 Crore are concerned and hence no application can be filed after 24.03.2020 regarding an amount where the default is less than Rs.1 Crore. 

  • By application of Section 10A, even in cases where the default is more than Rs.1 Crore, an application cannot be filed for a period of six months from 24.3.2020.

 

Excerpts of the order;

# 8. The questions that arise for decision on the basis of the contentions raised on either side are as follows:

  • (a) Whether Ext.P1 application which relates to a defaulted amount less than Rs.1 crore can be filed after 24.3.2020, on which date Ext.P5 amendment to Section 4 was introduced ?

  • (b) Whether the prospectivity of Ext.P5 has to be decided on the basis of the defaulted amount or on the basis of the date of default ?

  • (c) Whether Ext.P7 order of the NCLT can be challenged in a proceedings under Article 226 or should the petitioner be relegated to the appellate remedy?

 

Analysis and consideration of the contentions;

# 17. I will first deal with the question of maintainability of the writ petition under Article 226 of the Constitution of India, to challenge Ext.P7 order of the Tribunal. It is well settled by a catena of decisions that exercising or not exercising jurisdiction under Article 226 on issues where an alternate remedy is available, it is more a rule of self restraint. It has been consistently held that alternate remedy will not be a reason for not exercising jurisdiction when the issue relates to enforcement of the fundamental right or violation of principles of natural justice or where the proceedings challenged are without jurisdiction or in cases where the validity of a Statute is challenged. Recently the Hon’ble Supreme Court has in the decision in Ghnashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd. reported in [(2021) 9 SCC 657] held in para.137 as follows;

  • “137. As held by this Court in a catena of cases including in Baburam Prakash Chandra Maheshwari v. Antarim Zila Parishad, Muzaffarnagar [Baburam Prakash Chandra Maheshwari v. Antarim Zila Parishad, Muzaffarnagar, (1969) 1 SCR 518 : AIR 1969 SC 556], Whirlpool Corpn. v. Registrar of Trade Marks [Whirlpool Corpn. v. Registrar of Trade Marks, (1998) 8 SCC 1] , Nivedita Sharma v. COAI [Nivedita Sharma v. COAI, (2011) 14 SCC 337 : (2012) 4 SCC (Civ) 947] , Embassy Property Developments (P) Ltd. v. State of Karnataka [Embassy Property Developments (P) Ltd. v. State of Karnataka, (2020) 13 SCC 308] and recently in Kalpraj Dharamshi [Kalpraj Dharamshi v. Kotak Investment Advisors Ltd., (2021) 10 SCC 401 : 2021 SCC OnLine SC 204] , that non-exercise of jurisdiction under Article 226 is a rule of self-restraint. It has been consistently held that the alternate remedy would not operate as a bar in at least three contingencies, namely,

  • (1) where the writ petition has been filed for the enforcement of any of the fundamental rights;

  • (2) where there has been a violation of the principle of natural justice; and

  • (3) where the order or proceedings are wholly without jurisdiction or the vires of an Act is challenged.”

 

It is hence not necessary to deal with all the decisions that have been cited at the Bar on the issue. The only question that has to be looked into is whether the Tribunal had jurisdiction to entertain Ext.P1 application in the light of Ext.P5 amendment.

 

# 18. Coming to the question of jurisdiction, the National Company Law Tribunal has been made the Adjudicating Authority for the purpose of the IBC by provisions of a Statute. Since the Adjudicating Authority is a creature of the Statute, its jurisdiction is only that which has been statutorily defined, recognised and conferred. The Adjudicating Authority as a body owing its existence to the Statute must abide by the nature and extent of its jurisdiction as defined in the Statute itself (See Pratap Technocrats (P) Ltd. v. Reliance Infratel Ltd. (Monitoring Committee) reported in [(2021) 10 SCC 623]. The corporate insolvency resolution process gets triggered the moment there is a default as mentioned in Section 4 of the IBC. The triggering can be at the instance of the corporate debtor itself or a financial creditor or an operational creditor. As far as an operational creditor is concerned, going by the statutory provisions, apart from the occurrence of a default, there is requirement of delivering the demand notice and a passage of 10 days thereafter during which time the corporate debtor is required to either bring to the notice of the operational creditor the existence of a dispute or to make payment of operational debt in the manner prescribed. The above statutory requirement has been noticed by the Hon’ble Supreme Court in the judgment in Kay Bouvet Engg. Ltd. v. Overseas Infrastructure Alliance (India) (P) Ltd. reported in [(2021) 10 SCC 483]. In the case on hand, a notice as required under Section 8 had been issued prior to the coming into force of Ext.P5 amendment. Since the amount is less than Rs.1 Crore, if an application had been filed before 24.3.2020, it would have conformed with the minimum default which had been prescribed at that point of time. However, admittedly, the application was filed six months after the amendment. It is in these circumstances that the 2nd respondent has raised a claim that for the purpose of setting in motion a corporate insolvency resolution process, what is required is the occurrence of a default of more than Rs.1 lakh prior to 24.3.2020. Since no time limit has been prescribed for preferring an application after the delivery of notice, it is submitted that the date of filing of application is not the material aspect that has to be looked into.

 

# 19. The Hon’ble Supreme Court has in its recent decision in Manish Kumar v. Union of India reported in [(2021) 5 SCC 1] considered the constitutionality of the amendments made to Section 7(1) and Section 11 of the IBC and the introduction of Section 32A in the IBC by Insolvency and Bankruptcy Code (Amendment) Act, 2020. The Hon’ble Supreme Court considered the scope and purpose of several provisions of the IBC. Confronted with the above judgment, the counsel for the 2nd respondent submitted that the judgment in Manish Kumar (supra) does not in any way affect the maintainability of Ext.P1 application. It is submitted that applications under Section 7 and Section 9 stand on different footings and the judgment deals with applications by financial creditors and does not consider the maintainability of an application under Section 9 by an operational creditor. It is submitted that the Apex Court was considering a case of class action while as far as operational creditors are concerned, it is not a class action and every operational creditor, to maintain an application, has to comply with the conditions required under Section 8 and Section 9. Reference is made to paragraphs 203 and 135 of the judgment to show that the Apex Court was dealing with “default” in cases of applications filed by financial creditors. It is further contended that as far as financial creditors are concerned, it is the occurrence of a default, while in the case of an operational creditor, it does not stop with that and further actions are required on the part of the operational creditor like sending notice as contemplated in Section 8. It is pointed out that the word occurrence of default is mentioned only in Section 8 and not in Section 9 and hence it can only be understood to mean that the default should be as on the date of the demand. It is contended that Section 9 permits action if the amount demanded in the notice under Section 8 is not paid within 10 days and hence action is only regarding the amount demanded. It is further contended that the Apex Court has found that in case of allottees even if they fail to satisfy the threshold criteria they have alternate remedies, but there is no such alternate remedy for recovery of the amounts for the operational creditor. It is further contended that the decision of the Supreme Court supports the contention of the 2nd respondent that wherever the Statute intended to give retrospective operation, it has done so and it is conspicuously absent in Section 4. Another contention raised is that the Hon’ble Supreme Court has held that subsequent repeal will not affect vested right and hence accrued right of the 2nd respondent cannot be taken away by the amendment. Reference is made to paragraphs 274, 275 and 346 of the judgment. It is contended that there is a complete ouster of jurisdiction of the NCLT by the amendment to Section 4 and hence it can only be understood to mean that the default should be determined solely on the basis of its occurrence with reference to the date of issuance of the mandatory demand notice under Section 8 of IBC.

 

# 20. The contentions put forward by the counsel for the 2nd respondent, though attractive at the first blush, do not appear to be fully correct. The Hon’ble Supreme Court while considering the scope of the IBC has considered Section 4 of the Code as amended by Ext.P5. Paras.161 and 168 of the judgment are extracted below;

  • “161. In this context, it is necessary to recapture Section 4 of the Code. It 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.”

  • The amount is now fixed at Rs 1 crore.

  • xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx

  • 168. It is, therefore, clear that the requirement of the Code in regard to an application by a financial creditor does not mandate that the financial debt is owed to the applicant in terms of the Explanation. This is for the reason that apparently that the CIRP and which, if unsuccessful, is followed by the liquidation procedure is in all a proceeding, in rem. The law giver has envisaged in the Code, an action, merely for setting in motion the process initially. The litmus test on the anvil of which, the adjudicating authority will scrutinise the matter, is only the existence of the default, as defined in Section 4 of the Code. As on date, the amount of default is pegged at Rs 1 crore. Present a financial debt which has not been paid, the doors are thrown open for the processes under the Code to flow in and overwhelm the corporate debtor. The further barrier is limitation, no doubt, as noticed in B.K. Educational Services (P) Ltd. v. Parag Gupta & Associates [B.K. Educational Services (P) Ltd. v. Parag Gupta & Associates, (2019) 11 SCC 633 : (2018) 5 SCC (Civ) 528] .”         (emphasis supplied)

 

# 21. Even though the Apex Court was referring the financial debt, it can be seen that the Hon’ble Supreme Court has clearly held that the existence of a default as defined in Section 4 of the Code is the litmus test on the anvil of which, the Adjudicating Authority gets jurisdiction to entertain an application. The litmus test cannot change depending on whether the application is filed under Sections 7 or 9 or 10. The litmus test is the test for the applicability of the entire Part II. Since applications under Sections 7 or 9 or 10 are all part of the resolution process contained in Part II, the litmus test necessarily applies to applications filed by the financial creditor, operational creditor and the corporate debtor themselves. The Hon’ble Supreme Court in the said decision also considered the effect of amendments of vested rights. The Hon’ble Supreme Court was considering the amendment of Section 7, where, by addition of three provisos, vested rights were taken away. Prior to the amendments that were in question, an application under Section 7 could have been filed by financial creditor on his own or along with others with regard to a default that had occurred not only as against the applicant alone. By addition of the provisos 1 and 2, certain restrictions were made as to the number of financial creditors who should join in the application. By the third proviso, it was made clear that even in case of applications that had been filed and are pending admission, the requirements of provisos 1 and 2 have to be complied with, failing which the applications shall be deemed to have been withdrawn. The result was that an applicant who had already approached the NCLT would face with a situation of the application being withdrawn, if he does not comply with the amended provision. The above aspect was considered by the Hon’ble Supreme Court. The Apex Court held that the proviso is in effect retrospective. It was held in paragraph 404 of the judgment that every sovereign legislature is clothed with competence to make retrospective laws. It is open to the legislature, while making retrospective law, to take away vested rights. It is further held that if a vested right can be taken away by a retrospective law, there can be no reason why the Legislature cannot modify the vested rights. The Court further held in paragraph 406 that if the existing right is modified or taken away and it is to have operation only from the date of new law, it would obviously have only prospective operation and it would not be a retrospective law. The above observations were made by the Hon’ble Supreme Court after noticing that even the right of action should conditions otherwise exist, can also be a vested right. The Court upheld the amendments. However, it was held that the withdrawal of the application which is the effect of a statutory provision, will not take away the right to approach the Tribunal again, after complying with the requirements of provisos 1 and 2. While holding so, the Apex Court also made clear in paragraph 435 that what is relevant for deciding the maintainability is the law which was in force at the time of filing the application. Paragraph 435 is extracted below.

  • “435. This is a case where the law giver has not left anything to speculation or doubt. We have already indicated about the effect of the proviso mandating the compulsory withdrawal of the application. We are of the view that this is a case, where the law, in question, is retrospective, in that, contrary to the requirement in the law, at the time, when the application was filed, a new requirement is placed, even though, it is sought to be done by superimposing this condition, not at the time, when the application was filed, which really is the relevant time to determine the question of maintainability of the application, with reference to what the law provided in regard to who can move the application but at the stage of the new law.”

 

# 22. The contention that the operational creditors will be left with no alternate and efficacious remedy also is not correct. As held by the Hon’ble Supreme Court in Manish Kumar (supra), the IBC is not enacted to provide for a manner of recovery of debts by the creditors. It is to provide for insolvency resolution. The purpose of the IBC is to protect the rights of the debtors as well as the creditors. It is in the above background that the provisions relating to the IBC have to be understood. By providing for insolvency resolution in case of corporate debtors whose debt is above a specified amount, it can be seen that the very purpose is not to include cases where the debt is lesser than the said amount. None of the rights available to a creditor as against a debtor are taken away in the process. So also the contention that in Manish Kumar (supra), the Apex Court has held that a right accrued cannot be taken away does not appear to be correct, in view of the findings regarding the manner in which a vested right can be modified.

 

# 23. In the case on hand, the petitioner could have filed an application before the Tribunal before 24.3.2020. But, after 24.3.2020, the right to approach the Tribunal stood modified and it is only when there is minimum default of Rs.1 Crore, an application can be filed. As such, Ext.P1 could not have been filed after the Ext.P5 amendment. Since Section 4 deals with applicability of the provisions of Part II, it is necessarily a provision which gives jurisdiction to the Adjudicating Authority. Once the application of Part II is taken away for debts more than Rs.1 Crore, there is no further jurisdiction available under the Statute to the NCLT to act as an Adjudicating Authority under the IBC. It is hence a clear case of total want of jurisdiction.

 

# 24. In Ext.P9 order, the Tribunal has held that the notification dated 24.03.2020 is prospective in nature and it is not retrospective or retro-active in nature. It is further stated by the Tribunal that notification will not apply to pending applications before the concerned Adjudicating Authority under the IBC prior to the issuance of the aforesaid notification. Ext.P9 was an order of the Tribunal at New Delhi and the issue was concerning an application which had been filed and was pending before the Tribunal. The order of the National Company Law Appellate Tribunal, Principal Bench, New Delhi in Company Appeal (AT) (Ins) No.813 of 2021 was placed before the Court in which the order Ext.P9 was also considered. The Appellate Tribunal found that on facts, in the case considered in Ext.P9 demand notice under Section 8 was issued on 31.7.2019 and the application under Section 9 was filed on 5.9.2019 which were both before 24.3.2020, on which date the threshold limit was increased to Rs.1 Crore. The Tribunal hence found that the said decision cannot be relied upon to decide whether a petition can be maintained for an amount of less than Rs.1 Crore after 24.3.2020. The Appellate Tribunal went on to hold that the threshold limit will be applicable for applications filed under Section 7 or Section 9 on or after 24.3.2020, even if the debt is on a date earlier than 24.3.2020. The above view of the Tribunal is in consonance with the decision of the Hon’ble Supreme Court in Manish Kumar (supra).

 

# 25. Even otherwise, the Tribunal has in my opinion, gone wrong in its interpretation of Section 4 of the Act. Section 4, after amendment on 24.3.2020 clearly says that Part II of the IBC shall apply to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of default is Rs.1 Crore. As per Section 3(12) of the IBC, “default” means nonpayment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be. What is to be noted is that Corporate debtors who are in default of less than Rs.1 lakh prior to the amendment and Rs.1 Crore after the amendment, also are defaulters. However, whether a proceeding for insolvency or liquidation of such corporate debtor should be initiated would depend on the amount in default. It is only if the Corporate debtor has incurred a default of at least the minimum amount stated in Section 4 that a proceeding under the provisions of the IBC under Part II can be initiated. The minimum amount of default is statutorily fixed, with power available to the Government to refix, upto a sum of Rs.1 Crore. Once the Government has exercised the said power by issuance of a notification fixing the minimum amount of default as Rs.1 Crore, the Section will have to be read by replacing the words “one lakh rupees” by “rupees one crore”. As such, from the date of amendment, Part II of the IBC can apply only to matters relating to insolvency and liquidation of corporate debtors, where the minimum amount of default is Rs.1 Crore. (emphasis supplied). Once that is the position, the application of Part II itself is taken away with effect from 24.03.2020 as far as defaults less than Rs.1 Crore are concerned and hence no application can be filed after 24.03.2020 regarding an amount where the default is less than Rs.1 Crore. By application of Section 10A, even in cases where the default is more than Rs.1 Crore, an application cannot be filed for a period of six months from 24.3.2020. There can be no other understanding of the statutory provisions, as there is no ambiguity in the language. It is well settled that the grammatical and ordinary sense of the words of the Statute should be adhered to, unless that would lead to absurdity, or some repugnance or inconsistency with the rest of the provisions of the statute. In the words of Viscount Simon L.C.The golden rule is that the words of a statute must prima facie be given their ordinary meaning…… Judges are not called upon to apply their opinions of sound policy so as to modify the plain meaning of statutory words, but where, in construing general words the meaning of which is not entirely plain there are adequate reasons for doubting whether the Legislature could have been intending so wide an interpretation as would disregard fundamental principles, then we may be justified in adopting a narrower construction” (see Nokes v. Doncaster Amalgamated Collieries Ltd., [(1940) AC 1014 (HL)], Chandvarkar Sita Ratna Rao v. Ashalata S.Guram [(1986) 4 SCC 447] and B.Parmanand v. Mohan Koikal [(2011) 4 SCC 266)]. The above observations are fully supported by the judgment of the Apex Court in Manish Kumar (supra), wherein the Hon’ble Supreme Court categorically held that the litmus test is whether there exists a default as defined in Section 4 of IBC, on the date of the application.

 

# 26. In the light of the view taken above regarding the jurisdiction of the Tribunal, the writ petition under Article 226 is maintainable and there is no necessity or purpose for relegating the petitioner to the alternate remedy. Nor is it necessary to decide on the question whether an appeal is maintainable under the IBC against the order of the Tribunal on a preliminary issue regarding jurisdiction.

 

# 27. In the result, W.P.(C)No.27636 of 2020 is allowed. Ext.P7 order of the NCLT is set aside and it is declared that Ext.P1 application cannot be entertained by the 1st respondent in the light of Ext.P5 amendment to Section 4. W.P.(C)No.14158 of 2021 is dismissed, since the declaration sought for cannot be granted in view of the finding that the litmus test on the anvil is whether there exists a default as defined under Section 4 of the IBC, which if answered in the affirmative alone will give rise to a petition under Sections 7, 8, 9 and 10 of the IBC.

 

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The sole purpose of this post is to create awareness on the "IBC - Case Law" and to provide synopsis of the concerned case law, must not be used as a guide for taking or recommending any action or decision. A reader must refer to the full citation of the order & do one's own research and seek professional advice if he intends to take any action or decision in the matters covered in this post.