In BLS Polymers Limited v M/s RMS Power Solutions Private Limited,(1) the National Company Law Tribunal, New Delhi Bench (the NCLT), admitted an application made under section 9 of the Insolvency and Bankruptcy Code 2016 (the Code), wherein the debt had arisen prior to the notification dated 24 March 2020 (the "threshold notification date"), which provided for an increase of the threshold limit from 100,000 rupees to 10,000,000 rupees (the "threshold notification") for filing applications under section 9 of the Code.
In an order dated 27 July 2021, the NCLT clarified the law's position on the applicability of threshold notifications in cases where a debt was due before the notification came into force, and the demand notice under section 8 of the Code has been issued by the operational creditor prior to the notification.
The operational creditor, BLS Polymers Limited, filed an application under section 9 of the Code to initiate the corporate insolvency resolution process against the corporate debtor, M/s RMS Power Solutions Private Limited, for a total default amount of 3,574,942 rupees. In the present case, the invoices were raised by the operational creditor against the corporate debtor on 7 August 2019 and 4 September 2019, respectively. Due to non-payment of dues by the corporate debtor, a demand notice was issued by the operational creditor on 16 March 2020, which was delivered to the registered address of the corporate debtor on 21 March 2020 (ie, prior to the threshold notification date).
Corporate debtor's submissions
During the hearing, the counsel for the corporate debtor raised an objection that pursuant to the threshold notification issued by Ministry of Corporate Affairs, the threshold amount for initiating corporate insolvency proceedings against any corporate debtor had been increased from 100,000 rupees to 10,000,000 rupees, and therefore the present application was liable to be dismissed.
Operational creditor's submissions
On the other hand, the counsel for the operational creditor contended that the invoices were payable after 15 days from the date of the invoices. The corporate debtor had issued two cheques towards the payment of its debt, on 15 December 2019 and 30 December 2019, amounting to 1,604,800 rupees and 1,623,880, respectively. The operational creditor argued that, in a letter dated 12 March 2020, the corporate debtor had duly acknowledged and undertaken to pay their dues by mid-April 2020. Accordingly, the counsel for the applicant contended that the cause of action for initiating the application under section 9 of the Code had accrued on the date of the corporate debtor's default of payment, as defined under section 3(12) of the Code (ie, prior to the threshold notification date). This argument was based on the dates indicated on the invoices. The demand notice was also served on the corporate debtor before the notification came into force. Therefore, the operational creditor contended that the threshold notification was not applicable to the matters in which the default had occurred as the demand notice was served on the corporate debtor prior to the threshold notification date.
Pursuant to the parties' submissions, the NCLT was of the view that when reading the threshold notification, there is no mention of the date of enforcement, and it is a well-settled legal principle that if the date of a law's enforcement is not mentioned in the notification, it has a prospective effect.
While considering the issue of the threshold notification's applicability, the NCLT observed that the threshold notification may not apply where:
- a demand notice under section 8 of the Code has already been delivered prior to the threshold notification, but the application has then been filed after the threshold notification date (point one);
- the default has occurred prior to issuance of threshold notification date, but a demand notice for an application under section 9 of the Code has not been sent (point two);
- an application has already been filed but not admitted by the NCLT against a corporate debtor (point three); and
- an application has been admitted for the initiation of the corporate insolvency resolution process against a corporate debtor (point four).
Based on the above, the NCLT held that as far as the circumstances of points three and four are concerned, there was no dispute regarding the threshold notification's lack of applicability because every notification has a prospective effect unless the notification specifically mentions that it will have retrospective effect.
In relation to the conditions envisaged in point one, the NCLT was of the view that all of the three relevant sections (ie, sections 7, 9 and 10 of the Code) are triggered only once a default occurs. It is only when section 9 of the Code has been triggered due to a default occurring that a demand notice under section 8 of the Code must be sent to the corporate debtor. Based on the NCLT's clarification of the law's position regarding this scenario, it can be seen that a default occurring is a prerequisite to such proceedings. The NCLT opined that the application contexts outlined above can be filed if a default has occurred prior to the threshold notification date.
In relation to the conditions envisaged at point two, the NCLT was of the view that in cases where the default has occurred prior to the date that the threshold notification is issued on, and no demand notice (as provided for in section 9 of the Code) was delivered prior to the date of notification, the notification will not be applicable. The NCLT held that the minimum threshold in such cases, as per section 4 of the Code, is 100,000 rupees.
Thus, the NCLT held that the threshold notification is applicable only in respect of defaults which occurred on or after the threshold notification date.
For further information on this topic please contact Shwetabh Sinha or Rohan Kaushal at Clasis Law by telephone (+91 11 4213 0000) or email ([email protected] or [email protected]). The Clasis Law website can be accessed at www.clasislaw.com.
(1) Company petition (IB) – 340 (ND)/2021, order dated 27 July 2021.