2022 (4) TMI 428 - Tri - Insolvency and Bankruptcy

Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - Operational Creditors - existence of debt and dispute or not - Service of demand notice - pecuniary jurisdiction of this Tribunal - HELD THAT - The claim amount in this Application is below the limits of the pecuniary jurisdiction of this Tribunal and hence, the Application cannot be entertained. Demand notice under Section 8 of IBC - HELD THAT - The Counsel for the Operational Creditor relies on the judgment of Supreme Court in Macquarie Bank Ltd. Vs. Shilpi Technologies Limited, 2017 (12) TMI 850 - SUPREME COURT wherein the Supreme Court held that a conjoint reading of Section 30 of Advocates Act and Section 8 and 9 of the Code together with the Adjudicating Authority Rules and Forms thereunder would yield the result that a notice sent on behalf of an Operational Creditor by a lawyer would be in order. It held that it has been held in Gariwala Case 1991 (9) TMI 349 - SUPREME COURT , the expression an Operational Creditor may on the occurrence of a default deliver a demand notice under Section 8 of the Code must be read as including an Operational Creditor's authorized agent and lawyer, as has been fleshed out in Form Nos. 3 and 5 appended to the Adjudicating Authority Rules. In this case the Power of Attorney was given to one Mr. A.M. Sridhar by the Operational Creditor to issue notice in Form No. 3. The Counsel for the Operational Creditor contends that the said Power of Attorney would also empower the Power of Attorney Agent to appoint any Advocate practicing to issue notice. However, irrespective of the said Power of Attorney, in view of the Judgment cited above the notice issued by the Advocate would be a valid notice. Whether any debt is due to the Operational Creditor from the Corporate Debtor and whether the Corporate Debtor has committed any default in respect of the said debt and whether CIRP can be initiated against the Corporate Debtor? - HELD THAT - There is no dispute that the debt is due to the Operational Creditor by the Corporate Debtor. But, for the said debt and default committed by the Corporate Debtor the initiation of CIRP cannot be done due to the debt being less than the pecuniary Limits of jurisdiction of this Tribunal. It however can recover the same by moving the appropriate forums. Petition dismissed.

Summary

Issues Involved:
1. Pecuniary jurisdiction of the Tribunal.
2. Validity of the demand notice under Section 8 of IBC.
3. Existence of debt and default by the Corporate Debtor and the initiation of CIRP.
4. Final result of the application.

Issue-wise Detailed Analysis:

I. Pecuniary Jurisdiction of the Tribunal:

Section 4(1) of the IBC specifies the pecuniary limit as ? 1 Lakh but the 2nd proviso provides that the pecuniary limit can be raised by the Central Government by way of notification up to not more than ? 1 Crore. The pecuniary limit was raised to ? 1 Crore by way of notification dated 24.03.2020.

This application is filed on 26.03.2021 i.e., after the said notification. The application seems to have been filed for a claim which is less than the pecuniary limits of this Tribunal. But the contention of the Counsel for the Operational Creditor is that it is the date of default which has to be taken as the date for the application of the said notification. He contends that the application is filed for admitting the Corporate Debtor into Corporate Insolvency Resolution Process (CIRP) and not for adjudicating it as an insolvent as it is deemed to be insolvent by not paying the debts which became due and payable on 14.04.2018 and 30.04.2018. Therefore, the default presupposes the filing of the application hence, it has to be seen what was the minimum amount prescribed by Section 4 on the date of occurrence of default. He contends that Section 4 does not employ the words "the date of the application" unlike Section 2(g) of Recovery of Debts and Bankruptcy Act, 1993 or the words "at the time the petition is presented" unlike Section 267 of the UK Insolvency Act, 1986. He contends that Recovery of Debts and Bankruptcy Act is also a Central Act and there is a need to employ those words in RDB Act because application can be filed for the debts which are payable in future also under Section 19 of the said Act. He contends that the definition of debt is more on the lines of definition of debt under Section 3(11) of IBC.

He also relies on Section 10 of the Presidency-Towns Insolvency Act, 1909 and Section 7 of the Provincial Insolvency Act, 1920, where under a debtor is judged as insolvent pursuant to the act committed under Section 9 and 6 of those Acts respectively. He contends that under IBC the Corporate Debtor is not adjudged as insolvent, rather an application only for initiating CIRP is filed deeming the debtor to be an insolvent on committing a default. He argues that if the definition of default is substituted for the word default in Section 4(1) it does not produce any absurd result. He submits that if such substitution is made Section 4(1) reads as under:

"this part shall apply to matters relating to insolvency and liquidation of Corporate Persons where the minimum amount of non-payment debt when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the Corporate Debtor as the case may be ? 1 Lakh".

Hence, according to him what was the minimum amount prescribed under Section 4(1) i.e., the date on which the debt became due and payable but not is paid has to be seen for the purpose of filing an application under Section 7 and 9 of IBC. He contends that the notification came into effect from 24.03.2020 hence, the applications filed in respect of the default arising prior to 24.03.2020 cannot be applied with the said notification. He contends that the cause of action arises on the commission of the default. He also compares Section 4 with Section 10A and contends that prior to 24.03.2020 the minimum amount of default is only ? 1 Lakh. He submits that the words "the date of application "or" at the time the petition is presented" are not expressly or impliedly used to be read in Section 4(1) of the IBC. Otherwise it would amount to applying the minimum amount of ? 1 Crore retrospectively to the date of notifying Section. He also contends that the Supreme Court time and again held that the code is triggered when the default takes place. He relies on judgment of the Hon'ble Supreme Court of India in Deena Bank Vs. P. Siva Kumar Reddy and another 2021 IBC Law. in 69 SC, wherein it is observed as follows:

"While it is true that default in payment of a debt triggers the right to initiate the Corporate Resolution Process, and a Petition under Section 7 or 9 of the IBC is required to be filed within the period of limitation prescribed by law, which in this case would be three years from the date of default by virtue of Section 238A of the IBC read with Article 137 of the Schedule of the Limitation Act, the delay in filing a Petition in the NCLT is condonable under Section 5 of the Limitation Act unlike delay in filing a suit."

From this observation the Counsel makes an effort to draw support to his contention that it is the date of default which triggers the right to initiate the CIRP process. The judgment of Supreme Court in Asset Reconstruction Company (India) Limited vs. Bishal Jaiswal, Aironline 2021 SC 267 is relied upon wherein it is held that the trigger for filing the application is the default of a debt above INR 1 Lakh. He also relies on a judgment of Supreme Court in Swiss Ribbons Private Limited vs. Union of India, AIR 2019 Supreme Court 739, wherein it is observed that the trigger for Financial Creditors application is non-payment of dues when they arise under loan agreements. The judgment rendered by the NCLAT, New Delhi Bench in Madhusudan Tantia vs. Amit Choraria, (2020) ibclaw.in 294 is relied upon, wherein it was held that the notification dated 24.03.2020 is prospective in nature and not retrospective one. It held that if the said notification, is made applicable to the pending applications of IBC it will create absurd results. But the said judgment does not throw any light on the issue involved in this case.

The judgment of NCLT, New Delhi Bench in BLS Polymers Limited vs. M/s. RMS Power Solutions Private Limited (2021) ibclaw.in 407 has discussed about the applicability of the notification to various situations. It was observed that there are certain circumstances for which no direction is given in the notification regarding its applicability. The circumstances are:

(i) In the case of an operational Debt where demand notice under Section 8 of IBC has already been delivered prior to the notification dated 24.03.2020 but the application is filed after 24.03.2020.

(ii) Where the default has occurred prior to the issuance of the notification dated 24.03.2020 but no demand notice was sent in case of the application filed under Section 9.

(iii) Where the application has already been filed but not admitted by the Adjudicating Authority against the Corporate Debtor.

(iv) Where the application has been admitted for initiation of CIRP against the Corporate Debtor.

In this case the demand notice is delivered not prior to the said notification but only after the notification hence. It does not come within situation (i). In order to come under the situation (ii), no demand notice should have been issued. But since the demand notice is issued in this case, it does not fall under situation (ii), situations (iii) & (iv) are not applicable to the facts of this case. From the situation (ii), enumerated by the NCLT, New Delhi Bench what flows is that if demand notice is issued after the notification it would attract the applicability of the notification and the threshold limit in such case would be not ? 1 Lakh but ? 1 Crore, in spite of the default occurring prior to the notification, meaning to say that the default has to be construed from the date of issuance of the demand notice and not from the date of default.

It can be noted that the NCLAT, New Delhi in BLS Polymers case at para Nos. 27 and 28 in the judgment observed that when we read all the provisions under Section 7, 8, 9 and 10 of IBC together we observe that the word default is common to all. The right to file an application under any of the Sections 7, 8, 9 & 10 of IBC accrues only when the default has occurred and in addition to that application under Section 9 can only be filed if demand notice is delivered under Section 8 of the IBC, 2016 and 10 days' time is given to the Corporate Debtor to bring to the notice of the Operational Creditor the existence of dispute if any. Therefore, even if the default has occurred, an application under Section 9 of the IBC can only be filed if an opportunity is given to the Corporate Debtor to file a reply to the notice issued. At para No. 30 it further held that the question is whether by issuance of notification dated 24.03.2020 under proviso of Section 4 of the IBC, can a right which has already accrued to a person be taken away by that notification which is admittedly issued thereafter. Every notification has prospective effect and so far as filing of the Application either under Section 7, 9 or 10 is concerned it can only be filed when the default in making payment has occurred, except in the matter of Section 9 of IBC where demand notice has to be delivered after the default. From the above we can understand that the issuance of demand notice under Section 8 is mandatory for an application which is filed under Section 9 of the IBC. Since, the NCLAT held that the issuance of demand notice is mandatory and it is only on the failure of the Corporate Debtor to repay the debt or to bring to the notice of the Operational Creditor the pre-existing dispute that the debt becomes due and the right to proceed against the Corporate Debtor for CIRP arises.

In conclusion also the NCLT, New Delhi Bench in the same judgment, at paragraph 39 held that in the matter in which the default has occurred prior to the issuance of the notification dated 24.03.2020 and no demand notice (as in the case of section 9 of IBC) was delivered prior to that notification, in that case too, the said notification is not applicable. It concluded by saying that the notification is applicable only in respect of default which has occurred on or after 24.03.2020 and not prior to that.

The judgement of NCLT, Kochi Bench in IBA/35/KOB/2020 between Al Sadiq Sweets vs. Krisenter Impex P Ltd., held that the notification is prospective in nature and not a retrospective one. Since it does not expressly speak about the applicability of retrospective or retroactive operation. It observed that the notification dated 24.03.2020 does not save the Applicant from the initiation of insolvency especially in cases where default towards creditors have taken place before the pandemic and the resultant financial crisis and such an interpretation would be contrary to the intention of the executive in exercise of its power of delegated legislation. It is also observed that if the intention was to provide for a blanket protection to the Corporate Debtors