NCLT Kolkata holds enhancement of minimum default value to one crore as prospective

The National Company Law Tribunal, Kolkata Bench (NCLT) has held that the enhancement of the ‘minimum default value’ for triggering insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC), from one lakh rupees to one crore rupees will not apply retrospectively.

This judgment, which was pronounced on May 20 through video conference, appears to be the first judgment on the issue, after the notification was issued by the Ministry of Corporate Affairs on March 24. The notification states:

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.

The corporate debtor had defaulted in repayment of around 90 lakh rupees. NCLT had earlier proceeded ex-parte against the corporate debtor. This order was later recalled subject to payment of cost. The corporate debtor, though paid the cost, its failed to file its objections. Rejecting the prayer for an opportunity to settle the matter, on March 13, NCLT reserved its judgment.

The normal functioning of the NCLT came to be suspended from March 23, due to the Covid-19 outbreak. On April 14, NCLT issued a circular concerning pronouncement of orders during the lockdown. In its judgment the NCLT observed:

However, the matter was heard, giving assurance to the CD that I will not pronounce the orders within 7 days, but reserved the matter for orders. In the meanwhile CoronaVirus Pandemic has disrupted the entire working of the country including judicial work and thereby I was unable to pronounce the judgment immediately after 7 days or within one month.

On the date of pronouncement of judgment, relying on the March 24 notification, Corporate Debtor claimed that the notification being retrospective in nature, NCLT lacked pecuniary jurisdiction to pass an order in the insolvency proceedings against it. Rejecting this argument, the NCLT held:

So question raised by the Ld. Counsel is that whether Notification u/s 4 of the Code raising the minimum default limit be applicable to the applications pending for admission? It is a well-settled law that a statute is presumed to be prospective unless it is held to be retrospective, either expressly or by necessary implication. When the amendment to section 4 of IBC was, inserted a proviso enhancing the pecuniary jurisdiction
for filing applications as against small and medium scale industries nowhere in the notification mentioned that its application will be retrospective. Therefore, it appears to me that the amendment shall be considered as prospective and not retrospective.

It should be noted, however, that contrary to the NCLT’s observation, the March 24 notification does not limit its applicability to MSMEs. This observation was made by the Union finance minister Nirmala Sitharaman during her press conference on March 24. The official press release stated:

Due to the emerging financial distress faced by most companies on account of the large-scale economic distress caused by COVID 19, it has been decided to raise the threshold of default under section 4 of the IBC 2016 to Rs 1 crore (from the existing threshold of Rs 1 lakh). This will by and large prevent triggering of insolvency proceedings against MSMEs.

Finance Minister announces several relief measures relating to Statutory and Regulatory compliance matters across Sectors in view of COVID-19 outbreak – Press Information Bureau

A similar observation was again made by the finance minister on May 17 during the presentation on government reforms under the Aatma Nirbhar Bharat Abhiyaan.

4. Further enhancement of Ease of Doing Business through IBC related measures
Minimum threshold to initiate insolvency proceedings has been raised to Rs. 1 crore (from Rs. 1 lakh, which largely insulates MSMEs). Special insolvency resolution framework for MSMEs under Section 240A of the Code will be notified soon.

Finance Minister announces Government Reforms and Enablers across Seven Sectors under Aatma Nirbhar Bharat Abhiyaan – – Press Information Bureau

Read the judgment here.