2021 (2) TMI 394 - SC - Insolvency and Bankruptcy

Initiation of CIRP - Cut of date for deferring IBC provisions due to COVID-19 - Financial Distress or not - insertion of section 10A of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 - Whether the provisions of Section 10A stand attracted to an application under Section 9 which was filed before 5 June 2020 (the date on which the provision came into force) in respect of a default which has occurred after 25 March 2020? - HELD THAT - The onset of the Covid-19 pandemic is a cataclysmic event which has serious repercussions on the financial health of corporate enterprises. The Ordinance and the Amending Act enacted by Parliament, adopt 25 March 2020 as the cut-off date. The proviso to Section 10A stipulates that no application shall ever be filed for the initiation of the CIRP for the said default occurring during the said period . The expression shall ever be filed is a clear indicator that the intent of the legislature is to bar the institution of any application for the commencement of the CIRP in respect of a default which has occurred on or after 25 March 2020 for a period of six months, extendable up to one year as notified. The explanation which has been introduced to remove doubts places the matter beyond doubt by clarifying that the statutory provision shall not apply to any default before 25 March 2020. The substantive part of Section 10A is to be construed harmoniously with the first proviso and the explanation - it is evident that Parliament intended to impose a bar on the filing of applications for the commencement of the CIRP in respect of a corporate debtor for a default occurring on or after 25 March 2020; the embargo remaining in force for a period of six months, extendable to one year. Acceptance of the submission of the appellant would defeat the very purpose and object underlying the insertion of Section 10A. For, it would leave a whole class of corporate debtors where the default has occurred on or after 25 March 2020 outside the pale of protection because the application was filed before 5 June 2020. The correct interpretation of Section 10A cannot be merely based on the language of the provision; rather it must take into account the object of the Ordinance and the extraordinary circumstances in which it was promulgated. It must be noted, however, that the retrospective bar on the filing of applications for the commencement of CIRP during the stipulated period does not extinguish the debt owed by the corporate debtor or the right of creditors to recover it - Section 10A does not contain any requirement that the Adjudicating Authority must launch into an enquiry into whether, and if so to what extent, the financial health of the corporate debtor was affected by the onset of the Covid-19 pandemic. Parliament has stepped in legislatively because of the widespread distress caused by an unheralded public health crisis. It was cognizant of the fact that resolution applicants may not come forth to take up the process of the resolution of insolvencies (this as we have seen was referred to in the recitals to the Ordinance), which would lead to instances of the corporate debtors going under liquidation and no longer remaining a going concern. The date of the initiation of the CIRP is the date on which a financial creditor, operational creditor or corporate applicant makes an application to the adjudicating authority for initiating the process. On the other hand, the insolvency commencement date is the date of the admission of the application. This distinction is also evident from the provisions of sub-section (6) of Section 7, sub-section (6) of Section 9 and sub-section (5) of Section 10. Section 7 deals with the initiation of the CIRP by a financial creditor; Section 8 provides for the insolvency resolution by an operational creditor; Section 9 provides for the application for initiation of the CIRP by an operational creditor; and Section 10 provides for the initiation of the CIRP by a corporate applicant. Appeal dismissed.

Summary

Issues Involved:
1. Applicability of Section 10A of the Insolvency and Bankruptcy Code (IBC), 2016.
2. Retrospective application of Section 10A.
3. Distinction between "initiation date" and "insolvency commencement date."

Issue-wise Detailed Analysis:

1. Applicability of Section 10A of the Insolvency and Bankruptcy Code (IBC), 2016:
The primary issue in this case is whether the provisions of Section 10A of the IBC apply to an application under Section 9, which was filed before 5 June 2020, in respect of a default occurring after 25 March 2020. Section 10A was inserted into the IBC by the Ordinance 9 of 2020, promulgated on 5 June 2020, to suspend the initiation of the Corporate Insolvency Resolution Process (CIRP) for defaults arising on or after 25 March 2020, for a period of six months or as extended up to one year. The appellant filed an application under Section 9 on 11 May 2020, citing a default date of 30 April 2020. The NCLT dismissed the application based on the newly inserted Section 10A, a decision upheld by the NCLAT. The Supreme Court affirmed this interpretation, stating that the legislative intent behind Section 10A was to provide relief to corporate debtors affected by the Covid-19 pandemic and to prevent them from being pushed into insolvency proceedings during the specified period.

2. Retrospective Application of Section 10A:
The appellant argued that Section 10A should not apply retrospectively to applications filed before 5 June 2020. However, the Court held that the language of Section 10A, particularly the phrases "shall be filed" and "shall ever be filed," indicates a clear legislative intent to bar the initiation of CIRP for defaults occurring on or after 25 March 2020, regardless of the filing date of the application. The Court emphasized that the interpretation of Section 10A must consider the extraordinary circumstances of the Covid-19 pandemic and the legislative intent to provide a moratorium on insolvency proceedings during this period. The Court concluded that accepting the appellant's argument would defeat the purpose of Section 10A and leave a class of corporate debtors unprotected.

3. Distinction between "Initiation Date" and "Insolvency Commencement Date":
The Court clarified the distinction between the "initiation date" and the "insolvency commencement date" as defined in Section 5(11) and Section 5(12) of the IBC. The "initiation date" is the date on which an application for initiating CIRP is filed by a financial creditor, operational creditor, or corporate applicant, while the "insolvency commencement date" is the date on which the application is admitted by the Adjudicating Authority. The Court noted that Section 10A refers to the initiation of CIRP and bars the filing of applications for defaults occurring on or after 25 March 2020. The NCLAT correctly interpreted this distinction, and the Supreme Court affirmed its view, stating that the bar on filing applications for defaults during the specified period is retrospective, effective from 25 March 2020.

Conclusion:
The Supreme Court dismissed the appeal, upholding the decisions of the NCLT and NCLAT. The Court emphasized that Section 10A of the IBC, inserted to address the financial distress caused by the Covid-19 pandemic, bars the initiation of CIRP for defaults occurring on or after 25 March 2020, for a specified period. The Court's interpretation aligns with the legislative intent to provide temporary relief to corporate debtors during the pandemic, ensuring that the provision is applied retrospectively from the specified cut-off date. The appeal was dismissed with no order as to costs, and any pending applications were disposed of.