Bar under Section 10A IBC on initiation of CIRP applies retrospectively, Even if CIRP Application Filed Before introduction of Section 10A: Supreme Court [Read Judgment]

Bar under Section 10A IBC on initiation of CIRP applies retrospectively, Even if CIRP Application Filed Before introduction of Section 10A: Supreme Court [Read Judgment]

Bar - IBC - CIRP - CIRP Application Filed - Supreme Court - Taxscan

The Supreme Court held that Section 10A of the Insolvency and Bankruptcy Code (IBC) bars initiation of the Corporate Insolvency Resolution Process (CIRP) with respect to a default that occurred on or after March 25, 2020, even if the application for CIRP was filed before June 5, 2020, when Section 10A was inserted in the IBC.

The appellant, Ramesh Kymal contended that Section 10A creates a bar to the filing of applications under Sections 7, 9, and 10 in relation to defaults committed on or after 25 March 2020 for a period of six months, which can be extended up to one year.

The Ordinance and the Act which replaced it do not provide for the retrospective application of Section 10A either expressly or by necessary implication to applications that had already been filed and were pending on 5 June 2020.

Section 10A prohibits the filing of a fresh application in relation to defaults occurring on or after 25 March 2020, once Section 10A has been notified (i.e., after 5 June 2020).

Section 10A uses the expressions “shall be filed” and “shall ever filed” which are indicative of the prospective nature of the statutory provision in its application to proceedings that were initiated after 5 June 2020.

The IBC makes a clear distinction between the “initiation date” under Section 5(11) and the “insolvency commencement date” under Section 5(12).

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.

On the other hand, the respondent urged that the legislative intent in the insertion of Section 10A was to deal with an extraordinary event, the outbreak of the COVID-19 pandemic, which led to financial distress faced by corporate entities. Section 10A is prefaced with a non-obstante clause that overrides Sections 7, 9, and 10 and 9.

Section 10A provides a cut-off date of 25 March 2020 and it is evident from the substantive part of the provision, as well as from the proviso and the explanation, that no application can be filed for the initiation of the CIRP for a default occurring on and after 25 March 2020, for a period of six months or as extended upon a notification.

The division bench of Dr. DY Chandrachud and MR Shah has held that there is nothing wrong with the bar imposed under Section 10A of Insolvency and Bankruptcy Code, 2016 on the filing of applications for the commencement of the CIRP in respect of a corporate debtor for a default occurring on or after 25 March 2020 retrospectively to an application filed before June 5, 2020.

The court has clarified that the Parliament has stepped in legislatively because of the widespread distress caused by an unheralded public health crisis. It 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.

“Acceptance of the submission of the appellant would defeat the very purpose and object underlying the insertion of Section 10A. For, it would leave a whole class of corporate debtors where the default has occurred on or after 25 March 2020 outside the pale of protection because the application was filed before 5 June 2020,” the Apex Court said.

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