The Supreme Court held that Section 10A IBC is retrospective in operation but does not extinguishes the debt during the stipulated period

 RAMESH KYMAL

VERSUS

 M/S SIEMENS GAMESA RENEWABLE POWER PVT LTD.

 Civil Appeal No. 4050 of 2020, Decided on February 9^th, 2021

JUDGES:  Dr Dhananjaya Y Chandrachud & MR Shah, JJ.

FACTS: 

The appellant claimed that a sum of INR 104,11,76,479 was due and payable to him pursuant to his resignation “from all capacities held by him in the respondent in accordance with the various Employment Agreements/Incentive Agreements” entered into by him with the respondent during his tenure as Chairman and Managing Director. The appellant entered into an Employment Agreement with the respondent and signed another Employment Agreement coupled with an Incentive Agreement which superseded it. The new Employment Agreement was amended after which the appellant submitted his resignation to the respondent. The respondent acknowledged receipt of the letter of resignation and requested the appellant to continue in employment beyond the 60 days’ notice period. They communicated via mail, the respondent confirmed the payments which were due and payable to him under the letter of resignation. Finally, a termination letter was addressed to the appellant. The appellant issued a demand notice which specified that the date of default was 30th April and filed an application under Section 9 of the IBC for default in the payment of his operational dues on May 11th. During the pendency of the application, an Ordinance was promulgated by the President by which Section 10A was inserted into the Insolvency and Bankruptcy Code ( hereinafter referred as “IBC”). The respondent filed an application seeking the dismissal of the appellant’s application on the basis of the newly inserted provisions of Section 10A. The NCLT upheld the submission of the respondent, holding that a bar had been created by the newly inserted provisions of Section 10A. This decision was upheld in appeal by the NCLAT. Hence, this appeal to Supreme Court.

Timeline of Events

• 30 April 2020 – date of default;

• 11 May 2020 – date of institution of the application under Section 9; and

• 5 June 2020 – date on which Section 10A was inserted in the IBC by means of ordinance.

[See Section 10A. Suspension of initiation of corporate insolvency resolution process.— Notwithstanding anything contained in sections 7,9 and 10, no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25th March, 2020 for a period of six months or such further period, not exceeding one year from such date, as may be notified in this behalf:

Provided that no application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the said default occurring during the said period.

Explanation – For the removal of doubts, it is hereby clarified that the provisions of this section shall not apply to any default committed under the said sections before 25th March, 2020.”]

ISSUE: Whether initiation and the commencement of the Corporate Insolvency Resolution Process are two different things are two different legal event in IBC?

ARGUMENTS

HELD:

The Supreme Court dismissing the appeal and affirming the judgment of NCLAT said that the provision engrafted in Section 10A clearly bars filing of such application by the eligible applicant for initiation of CIRP of Corporate Debtor. The Court further said that bar created is retrospective as the cut-off date has been fixed as 25th March, 2020 while the newly inserted Section 10A introduced through the Ordinance has come into effect on 5th June, 2020. It is also stated that the object of the legislation has been suspended operation of Sections 7, 9 & 10 in respect of defaults arising on or after 25th March, 2020 i.e. the date on which Nationwide lockdown was enforced disrupting normal business operations and impacting the economy globally. Furthermore, the explanation removes the doubt by clarifying that such bar shall not operate in respect of any default committed prior to 25th March, 2020.

It was observed by the Supreme Court that Section 5(11) stipulates that the date on which a financial creditor, corporate applicant or operational creditor makes an application to the adjudicating authority for initiating the CIRP is the “initiation date”. Furthermore, the Court distinguished from this the “insolvency commencement date”, which is the date on which the application for initiating the CIRP under Sections 7, 9 or 10, as the case may be, is admitted by the Adjudicating Authority.

The Supreme Court also said that the substantive part of Section 10A adverts to an application for the initiation of the CIRP and it stipulates that for any default arising on or after 25 March 2020, no application for initiating the CIRP of a corporate debtor shall be filed for a period of six months or such further period not exceeding one year “from such date” as may be notified in this behalf. It was observed that the expression “from such date” is evidently intended to refer to 25 March 2020 so that for a period of six months (extendable to one year by notification) no application for the initiation of the CIRP can be filed. The Supreme Court rejected the submission of the appellant  that the expression “shall be filed” is indicative of a legislative intent to make the provision prospective so as to apply only to those applications which were filed after 5 June 2020 when the provision was inserted.

[ Editor’s Note: The Supreme Court even though has held that S.10A IBC has retrospective operation and does not apply upon the debt during lockdown period but a ray of hope is also given by Supreme Court[in paragraph 24] stating 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.  This mean that once the Ordinance lapses, then the Creditor, including Financial and Operational, can file CIRP proceeding against Corporate Debtor.]