This article is written by Bhavpreet Dhatt, pursuing a Certificate Course in Insolvency and Bankruptcy Code from Lawsikho.

Introduction

The Insolvency and Bankruptcy Code, 2016 (also referred to as the “Code”) was enacted to improve the mechanism of insolvency resolution and protect and maximise the asset value of companies. The Code provides for insolvency resolution of registered companies (under the Companies Act, 2013 or any other statutes), their personal guarantors, limited liability companies or any other incorporated body notified by the Central Government^[1]. The Micro, Small and Medium Enterprises (“MSME”) were also brought under the aegis of the Code subject to certain statutory concessions^[2]. An application for the insolvency resolution of MSME is maintainable under the Code^[3].

The onset of COVID-19 resulted in the imposition of a nationwide lockdown by the Central Government w.e.f. 25.03.2020 which adversely impacted businesses, and particularly, the MSMEs^[4]. Certain economic measures were taken to ameliorate the hardship which included the suspension of initiation of the corporate insolvency resolution process (“CIRP”) for a period of six months w.e.f. 25.03.2020^[5] (subsequently followed by a three-month extension^[6]). The Central Government had also issued a Notification dated 24.03.2020 (“Notification”) which increased the minimum amount of default required for the initiation of CIRP to INR 1 crore (from the earlier INR 1 lac)^[7]. The operation of the Notification and its impact on pending applications filed was raised before the various benches of National Company Law Tribunal (“NCLT”). This article focuses on the CIRP proceedings challenged before the Delhi High Court in Pankaj Aggarwal^[8] and the subsequent judgment passed by the National Company Law Appellate Tribunal (“NCLAT”) in Madhusudan Tantia^[9].   

Special provisions for MSMEs under the Code

What is an MSME and their importance in Indian economy?

The definition of MSME (under the Micro, Small and Medium Enterprises Development Act, 2006) is based upon the upfront investment made in terms of capital. MSMEs are enterprises wherein the capital investment made on plan and machinery ranges from INR 25 lacs to INR 5 crores or equipment ranges between INR 10 lacs to INR 2 crores^[10]. The MSME are vital to the Indian economy as they contribute nearly 30% of the nation’s Gross Domestic Product (GDP), 40% of the exports and provide employment to more than 11 crore people^[11].

Relaxations for MSME under the Code

Section 240-A was inserted in the Code^[12] making certain special provisions and granting certain relaxations for MSMEs by removing the bar on certain categories of persons to become resolution applicants. The Insolvency Law Committee Report of March 2018 had recommended the grant of certain concessions to MSMEs due to their vital role in the economy.  The promoters of MSMEs and their corporate guarantors were permitted to become resolution applicants and participate in the insolvency resolution^[13]. The rationale for this exemption was that ordinarily, the business of MSMEs principally attracts interest only from its promoters^[14]. Additionally, the Central Government is empowered to restrict the application of certain provisions of the Code by issuing a notification^[15].

Issues arising from the notification

The Notification has increased the threshold for default for the initiation of CIRP to INR 1 crore lac (from the earlier INR 1 lac). An important issue arising therefrom relates to its applicability to pending proceedings under the Code i.e. matters wherein the applications for admission of CIRP were pending before the NCLT or where the default had occurred prior thereto but the applications had not yet been filed^[16].

Decision in Pankaj Aggarwal and Madhusudan Tantia

Pankaj Aggarwal

An application was filed before the NCLT (New Delhi Bench) by an operational creditor (Panoli Intermediates (India) Pvt Ltd.) for the initiation of CIRP against the corporate debtor-VMA Enterprises Pvt Ltd. The facts were that the corporate debtor defaulted on payments against the invoices raised by the operational creditor and its cheques were dishonoured. A demand notice was issued on 01.10.2018 for the total outstanding amount of INR 68,13,945/. The application for CIRP was admitted by the NCLT vide its order dated 29.05.2020 by holding that there was no pre-existing dispute or prior repayment of the amount and that all the statutory requirements under Section 9 were fulfilled. It is pertinent to note that the issue of applicability of increased threshold of default or the suspension of IBC proceedings was not raised by the parties or gone into by the NCLT.

This order dated 29.05.2020 was challenged by a promoter-director of the corporate director before the Delhi High Court in a civil writ petition. The Court granted interim relief to the corporate debtor vide an interim order dated 23.06.2020 and stayed the operation of the impugned admission order passed by the NCLT. The Court held that the NCLT had failed to consider the Notification and observed that the purpose of the increase in threshold was to protect MSMEs from insolvency proceedings since they were adversely impacted by the lockdown. The writ petition is still pending and is now listed for 03.12.2020.

Madhusudan Tantia

An application for the initiation of CIRP was filed by an operational creditor before NCLT Kolkata. The arguments on admission of CIRP were heard on 13.03.2020 and the order was reserved for pronouncement. A nationwide lockdown was imposed w.e.f. 25.03.2020 due to the onset of COVID-19 and the Notification was made applicable w.e.f. 24.03.2020. The matter was again listed before the NCLT wherein the corporate debtor relied upon the Notification and contended that it would apply and the application under Section 9 was no longer maintainable (since the default amount was less than INR 1 crores). The NCLT rejected this contention and admitted the CIRP by holding that the legislative intention was not to apply the Notification retrospectively.

This order was challenged in appeal and upheld by the NCLAT. The NCLAT observed that the legislative intention was required to be adhered and that the Notification could not be granted retrospective operation in the absence of such an intention nor could it be conferred an automatic retrospective effect. Importantly, the NCLAT observed that the occurrence of a default gave a valuable power and right to creditors to initiate proceedings under the Code which could not be taken away by the Central Government. The NCLAT clarified that application of the Notification to pending cases would result in absurdities and have widespread implications and, therefore, could not be applied to pending applications awaiting admission before the NCLT.

Adjudication of the matter by the High Court

The decision in Pankaj Aggarwal is contrary to the view taken by the NCLAT in Madhusudan Tantia. In Pankaj Aggarwal, the High Court interfered with the admission of CIRP in a writ petition and granted interim relief. This raises an important issue as to whether the High Court ought to have entertained an writ petition under Article 226 of the Constitution of India despite the availability of an efficacious statutory remedy.

The interference by the High Court through the issuance of an interim order is a transgression of the legislative intent and provisions of the Code. Section 60(5) provides that any question or issue arising out of related to the insolvency resolution under the Code must be decided by the NCLT and it is empowered to hear and decide all questions of fact and law relating to the insolvency resolution^[17]. A statutory appeal has been provided before the National Company Law Appellate Tribunal^[18] and a further appeal to the Supreme Court^[19] on a question of law.

The jurisdiction of the High Courts is barred under the Code (except under Articles 226 or 227 of the Constitution of India in limited circumstances^[20]). It is a settled law that the High Courts do not exercise writ jurisdiction if an efficacious alternative remedy is available under the statute to the parties^[21]. The legislature has consciously created a single specialised statutory forum for the hearing of appeals from the orders passed by the NCLT and interference by the High Court violated this important objective sought to be achieved by the Code^[22]. It is pertinent to note that there was no challenge to the vires of the Notification and no issue of public law had arisen for the determination of the High Court. Even if the High Court felt that the NCLT had erroneously overlooked the Notification while passing the admission order, it ought to have simply remanded the matter back to the NCLT and directed it to decide afresh.

Conclusion

The burgeoning size of MSMEs in India^[23] and their vital contribution to the Indian economy cannot be overstated^[24]. The Supreme Court in Swiss Ribbons^[25] rejected a challenge made to the validity of Section 240-A of the Code and stressed on the economic importance of MSMEs and its introduction in the Code to protect them from getting liquidated. The provision for a higher threshold of default was recommended by the Insolvency Law Committee Report of February 2020 and was followed through the Notification. However, it was not specified if the Notification was retrospectively applicable.

The application of the notification to pending cases was an important issue since it would have wide ramifications in the applications pending for the initiation of CIRP. The issue of retrospectivity was raised before several benches of the NCLT including the Kolkata Bench. The Delhi High Court interfered with the admission of CIRP in an interim order merely to hold that it would apply retrospectively although no issue of public law or vires was raised before it. The NCLAT undertook a detailed examination of the Notification and observed that it would not apply to pending cases. The detailed analysis of the NCLAT judgment makes it appear that the view taken by the Delhi High Court order is bad law. Importantly, the High Court violated the self-imposed restraint of not interfering in cases where an alternative efficacious statutory remedy was available to the parties and acted contrary to the legislative intention of not leaving it to the specialised forum created under the Code.

References

^[1] Under Section 2(e) of the Code

^[2] Under Section 240-A of the Code

^[3] It is settled law that an application for the CIRP of MSMEs is maintainable under the Code. Refer to “Bannari Amman Spinning Mills Ltd. v. Choice Knit & Apparels Pvt. Ltd.”, CA (AT) (Insolvency) No. 513 of 2019 decided on 03.09.2019

^[4] https://economictimes.indiatimes.com/news/economy/policy/govt-raises-default-threshold-to-rs-1-cr-for-invoking-insolvency-proceedings-against-firms/articleshow/74796076.cms?from=mdr

^[5] Through the introduction of Section 10-A under the Code

^[6] The period of six months w.e.f. 25.03.2020 was further increased by another three months vide Notification No. S.O. 3265(E) dated 24.09.2020 issued by the Ministry of Corporate Affairs, Government of India

^[7] Notification No. S.O. 1205(E) dated 24.03.2020 issued by the Ministry of Corporate Affairs, Government of India

^[8] Interim order dated 23.06.2020 passed by the Delhi High Court in “Pankaj Aggarwal v. Union of India and Ors.”, Writ Petition (Civil) No. 3685 of 2020

^[9] “Madhusudan Tantia v. Amit Choraria”, CA (AT) (Insolvency) No. 557 of 2020 decided on 12.10.2020

^[10] Under Section 7(1) of the Code

^[11] https://www.livemint.com/news/india/msmes-the-growth-engines-of-the-indian-economy-11597923225239.html

^[12] Inserted by Act No. 26 of 2018 and made effective with 06.06.2018

^[13] Under Section 240A(1) of the Code

^[14] Report of the Insolvency Law Committee (March 2018)

^[15] Under Section 240A(2) of the Code

^[16] Section 238-A of the Code provides for a limitation period of three years for the filing of an application from the date of default. Therefore, the applicability of the Notification to proceedings wherein the default had occurred prior thereto but applications had not yet been filed was an important issue.

^[17] Under Section 60(5) of the Code

^[18] Under Section 61 of the Code

^[19] Under Section 62 of the Code

^[20] An exception has been carved out by the Supreme Court in “Embassy Property Developments Pvt Ltd. v. State of Karnataka and Ors.”, Civil Appeal No. 9170-9172 of 2019 decided on 03.12.2019 wherein it was held that matters arising out of public law are not to be determined by the NCLT but rather by the High Courts and the Supreme Court

^[21] Union of India v. Satyawati Tondon and Ors., (2010) 8 SCC 110

^[22] The Bankruptcy Law Reforms Committee Report (2015) had recommended that a single fora to deal with matters related to insolvency resolution for preservation of economic value and providing better expertise in decision-making

^[23] https://timesofindia.indiatimes.com/business/india-business/99-businesses-in-india-now-in-msme-category/articleshow/76844933.cms

^[24] Insolvency Law Committee Report (March 2018)

^[25] “Swiss Ribbons Private Limited and Anr. v. Union of India and Ors.”, (2019) 4 SCC 17

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