Retrospective bar on filing plea for start of insolvency process does not extinguish debt: Supreme Court

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New Delhi: The Supreme Court has said that the retrospective bar on the filing of applications for the commencement of insolvency process put in place by the Centre by an ordinance in view of COVID-19 pandemic does not extinguish the debt owed by the company or the right of lenders to recover it.

The apex court said that Section 10A, which was inserted into the Insolvency and Bankruptcy Code (IBC) by an ordinance, does not contain any requirement that the Adjudicating Authority must launch an enquiry into whether, and if so to what extent, the financial health of the corporate debtor was affected by the onset of the pandemic.

A bench of Justices DY Chandrachud and MR Shah said that Parliament has stepped in legislatively because of the widespread distress caused by an unheralded public health crisis. “It must be noted, however, that the retrospective bar on the filing of applications for the commencement of CIRP (Corporate Insolvency Resolution Process) during the stipulated period does not extinguish the debt owed by the corporate debtor or the right of creditors to recover it,” the bench said.

The top court said that Parliament was cognizant of the fact that resolution applicants may not come forth to take up the process of the resolution of insolvencies, which would lead to instances of the corporate debtors going under liquidation and no longer remaining a going concern.

The top court’s ruling came on a plea by one Ramesh Kymal, who has challenged the decision of NCLAT upholding the findings of NCLT that the application filed by him as an operational creditor under Section 9 was not maintainable.

Kymal, who was CMD of a company M/s Siemens Gamesa Renewable Power Pvt Ltd had pursuant to his resignation claimed that a sum of over Rs 104 crore is due and payable to him.

He issued a demand notice on April 30, 2020 under the IBC. On May 11, 2020, Kymal filed an application under Section 9 of the IBC on the ground that there was a default in the payment of his operational dues.

During the pendency of his application, an Ordinance was promulgated by the President of India on June 5, 2020 by which Section 10A (Suspension of initiation of corporate insolvency resolution process) was inserted into the IBC.

The bench said that the financial distress caused by the outbreak of COVID-19 provides the backdrop to the insertion of Section 10A and its rationale has been explained in the recitals to the Ordinance.

It said that provision stipulates that for any default arising on or after March 25, 2020, no application for initiating the Corporate Insolvency Resolution Process (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.

“The date of March 25, 2020 has consciously been provided by the legislature in the recitals to the Ordinance and Section 10A, since it coincides with the date on which the national lockdown was declared in India due to the onset of the Covid-19 pandemic,” it said.

The bench said that the onset of the Covid-19 pandemic is a cataclysmic event which has serious repercussions on the financial health of corporate enterprises and adopting the construction which has been suggested by the appellant would defeat the object and intent underlying the insertion of Section 10A.

Kymal has submitted that Section 10A will have no application and in each case it is necessary for the Court and the tribunals to deduce as to whether the cause of financial distress is or is not attributable to the Covid-19 pandemic.

He has submitted that the onset of Covid-19, which was the reason for the insertion of Section 10A, has nothing to do with the default of the company to pay his outstanding operational debt, which owes its existence even before the onset of the pandemic.

The bench said that the acceptance of the submission of the appellant would defeat the very purpose and object underlying the insertion of Section 10A as it would leave a whole class of corporate debtors where the default has occurred on or after March 25, 2020 outside the pale of protection because the application was filed before June 5, 2020, when the ordinance came into effect.

The top court upheld the order of National Company Appellate Tribunal and dismissed the appeal.