By virtue of notification dated March 24, 2020 bearing No. S.O. 1205(E), the Central Government has increased the threshold limit for initiation of CIRP from 1 lakh to 1 crore and specified the minimum amount of default for the purpose of Section 4 of Insolvency & Bankruptcy Code, 2016 to be Rs.1 crore.

After the aforesaid notification came into effect, it was contended by the Creditors that in case the date of default is prior to the date of the notification, an application shall be maintainable even if the amount claimed to be in default is below Rs. 1 crore.

The issue of Maintainability of applications under the IBC for initiation of Corporate Insolvency Resolution Process wherein the amount claimed to be default is below Rs. 1 crore and which are filed after coming into force of the MCA Circular dated 24.03.2020 was first addressed to by the NCLT, Kochi Bench in its judgment and order passed in the matter of M/S Al-Sadiq Sweets vs M/s Krisenter Impex Private Limited.

In its judgment and order passed in the matter of M/S Al-Sadiq Sweets vs M/s Krisenter Impex Private Limited. In the said matter the main contentions of Al-Sadiq were that on 30th April 2020, Al-Sadiq requested Krisenter Impex Private Limited (KIPL) to return the advance amount. Though KIPL had agreed to do so, the amount was not repaid / refunded. The amount of INR 74.87 lakhs remained outstanding till the filing of the Section 9 application after having complied with due procedures.

KIPL has challenged maintainability of this application on the following grounds:

• Application is not maintainable as it does not meet the pecuniary limit for filing application under Section 4 of the IBC.
• The application is not maintainable under Section 10A of Insolvency and Bankruptcy Code, 2016.
• Applicant is not an operational creditor, and the Application is liable to be dismissed.
• Pre-existing dispute between the Applicant and Respondent. KIPL stated that Al-Sadiq filed the application on16th September 2020 which is after the aforesaid notification was passed.

KIPL stated that the total claim of Al-Sadiq was USD 1 Lakh (equivalent to INR 74.87 lakhs). Since this amount is less than INR 1 Crore, the application will not be maintainable. They further stated that initiation of date does not mean the date of default, it is the date when actually the application is filed before this Tribunal.

Considering the objections raised by KIPL, the Kochi Bench observed as follows:

• Section 4 of the IBC grants delegatory powers to the central government to increase the threshold of the minimum default amount to an amount not exceeding INR 1 Crore. This power will not deny the right which had already accrued to an Operational Creditor at the time of default of the debt.
• The notification dated 24th March 2020 increases the minimum amount of default from INR 1 lakh to INR 1 Crore. The Notification was issued by the Central government in order to protect the MSME’s who were impacted due to the Covid-19 pandemic from further being adversely impacted due to litigation.
• In the absence of a clear indication to the contrary in the notification, the substantive rights of individuals to an action are to be decided by law that existed when the action was initiated.
• The Notification dated 24th March 2020 is only ‘prospective in nature’ and not ‘retrospective’ in nature due to no express mention of the same.
• However, the intention of the Notification is not to save the corporate debtors from defaults which took place before the Covid-19 pandemic and resultant financial crisis.
• With respect to this case, the Tribunal noted that on 3rd January 2020, KIPL acknowledged receipt of payment and was supposed to have initiated despatch of the consignment. This is the day when cause of action arose. Since this happened prior to the date of notification (24th March 2020), the application will very much be maintainable.
• Section 10 A of the IBC expressly makes it clear that no insolvency proceedings can be instituted against any entity for defaults arising on or after 25th March 2020 upto a maximum period of 25th March 2021. Section 10A suspended institution of insolvency action for a whole period of 1 year. This implies that insolvency proceedings can be initiated for default occurring prior to 24th March 2020.

Accordingly, the application under Section 9 of IBC filed by Al Sadiq was admitted.

Although the operation of the aforesaid judgment of NCLT, Kochi Bench was stayed by the Kerela High Court but conflicting judgments were passed by the NCLT, New Delhi, in the decision reported in Rakesh Kumar Mediratta Vs. Asian Hotels (North) Ltd case and Chennai NCLT Benches in the decision reported in the cases M/s Mahaveer Wires Sales Corporation Vs M/s Arempee Compressors Private Limited and JK Food Products Vs Hocaps Facility Management Pvt Ltd, while interpreting the applicability of MCA Circular dated 24th March, 2020.

However, the aforesaid issue has been put to rest by the Hon’ble NCLAT in its judgment in the matter of Jumbo Paper Products (Appellant) vs Hansraj Agrofresh Pvt. Ltd. (Respondent) In the said case, the Adjudicating Authority (NCLT, Allahabad Bench) had vide its order dated 23.7.2021, dismissed the application filed by the Appellant under section 9 of the Insolvency and Bankruptcy Code, 2016 in view of notification S.O 1205(E) dated 24.3.2020 issued by the Ministry of Corporate Affairs, Government of India on the ground that the alleged debt that is claimed to be payable in application under section 9 is below the threshold limit stipulated in the said notification.

The aforesaid judgment of Jumbo Paper Products narrates the correct position of law inasmuch as Section 5 (11) of IBC provides that- ‘initiation date’ means the date on which a financial creditor, corporate applicant or operational creditor, as the case may be, makes an application to the Adjudicating Authority for initiating corporate insolvency resolution process”.

From this definition, it would be evident that the date of filing of an application either under Section 7, 9 or 10 of IBC is the date of initiation for initiating CIRP and hence any application filed post 24.03.2020, irrespective of the claimed date of default, all such applications post 24.03.2020 have to mandatorily comply with the condition of the minimum default amount of Rs.1 crore.

Considering the provisions of Section 4 of the IBC as amended by virtue of the notification dated 24.03.2020, the NCLAT, inter alia, held that “It is seen that notification dated 24.3.2020 (supra) makes it unambiguously clear that the threshold limit to be considered for section 9 application will be Rs. 1 crore. This threshold limit will be applicable for application filed u/s 7 or 9 on or after 24.3.3020 even if debt is of a date earlier than 24.3.2020. Since the application under section 9 which is the subject matter of this appeal was filed on 13.9.2020, therefore the threshold limit of Rs. 1 crore of debt will be applicable in the present case.” and accordingly, the appeal was dismissed.