[Vinisha and Damini are students at Institute of Law, Nirma University.]
As an uninvited guest, the COVID-19 pandemic created a huge roadblock in achieving the objectives outlined in the Insolvency and Bankruptcy Code 2016 (Code). To smoothen this path, several changes had been made and one such key change was the insertion of Section 10A into the Code. The rationale behind this insertion was to prevent businesses from the aftershock of the nationwide lockdown. The government believed that by suspending the applicability of Sections 7, 9, and 10 in the matter of defaults occurring on or after 25 March 2020, it would be able to paddle the tumbling corporate debtors (CDs) through this global catastrophe. However, though it was a sigh of relief for the CDs, it left the creditors high and dry. The recent case of Ramesh Kymal v Siemens Gamesa Renewable Power Private Limited, 2021 (Ramesh Kymal) aptly depicts how Section 10A is asymmetrical and inadvertent towards creditors.
The Tale in a Nutshell
The Supreme Court has given the final word on Section 10A in the case of Ramesh Kymal, wherein the appellant was an operational creditor (OC) and a former employee of the respondent company. The appellant handed in his resignation on 21 January 2020 and claimed the dues owed to him. He was required to complete a notice period of 60 days and he agreed to continue in his position till 30 April 2020, although the notice period ended on 23 March 2020. The respondent company failed to pay the due amount on 30 April 2020 and the appellant accordingly filed an application under Section 9(1) of the Code for initiation of the corporate insolvency resolution process (CIRP) on that date. The application was dismissed by NCLT pursuant to Section 10A that was applicable with a retrospective effect from 25 March 2020. The issues before the court included the validity of the retrospective effect of Section 10A and its applicability to this particular case. The Supreme Court ruled that the demand date was 30 April 2020, as on this date the demand notice was delivered by the appellant to the respondent. Appellant’s contention that the actual date of default ought to be 23 March 2020 was rejected on the basis of a strict interpretation of Section 8(1). The said provision requires an OC to deliver a demand notice to the CD asking for repayment of operational debt. In the opinion of the bench, the retrospective construction of Section 10A was construed to be in harmony with the proviso and the legislative intent behind its introduction in the Code. Further, the purpose of Section 10A was reiterated multiple times which is to prevent corporate debtors from being pushed into insolvency proceedings due to economic stress caused by the pandemic. The Supreme Court, therefore, dismissed the appellant’s application and upheld the NCLAT’s judgment that Section 10A was applicable to the default in the impugned case.
Analysis
Through this judgment, the Supreme Court has created a labyrinth of paradoxical interpretations.
First, it was believed that current times necessitate a flexible interpretation of Section 10A to prevent the objective of its insertion and that of the code, from being defeated. On the contrary, Section 8(1) was strictly interpreted, disregarding the legislative intent behind it. In the present case, even though the appellant did not formally demand it, the debt was acknowledged through e-mail and the disability to repay had commenced on 23 March 2020. Therefore, the date of default must have been accepted to be 23 March 2020 in congruence with the legislative intent of Section 8(1) which is to have precocious notice of any economic stress and effectuate its timely resolution. Moreover, such interpretation amounts to having double standards for two provisions under the same legislation.
Second, the bench noted in conclusion that the Adjudicating Authority is not required to scrutinize whether the default was caused by COVID-19 or not. This opinion of the court itself begs the question of whether the enforcement of the provision should involve the determination of the cause of default. Since the rationale for dismissal of appellants’ application is the protection of CDs from the insolvency stress resultant from the COVID-19, coherently, the benefit is not to be provided wherein a default is not consequent to the COVID-19 situation. In the present case, as stated above, the stress existed before the pandemic had taken effect. Moreover, the respondent company is involved in the production and supply of wind energy and was therefore unlikely to be economically affected directly by the lockdown in the initial phase of the pandemic. Ironically, in the present case, the benefit of Section 10A has been provided to a CD who committed a default prior to and inconsequent to the pandemic situation.
Summing up both the observations, it is explicit that the claim of the appellant OC was based on quite logical grounds and was in consonance with the objectives of the Code as well. However, the CD was able to get away with the default by merely relying on technicalities.
Conclusion
If creditors are denied remedy under the Code, they will be forced to institute normal civil proceedings under alternative statutes which is a lot more likely to end up with liquidation of CDs. Such neglect of the creditors’ concern shall render the Code defunct for the time being anyway and defeat the objective of resolving stress. Moreover, turning a blind eye to the cause and applying Section 10A as an umbrella provision to all defaults whether or not they are caused by COVID-19 is providing an escape to defaulting CDs. This has simply augmented the chances of their liquidation due to the lost trust of gloom-ridden creditors. Further, in the wider context, suspension of proceedings under Sections 7, 9 and 10 has the potential to further negatively impact the credit availability, as the money invested in these CDs is blocked and may not be re-invested in the market for some time owing to the fears in the minds of creditors. Therefore, though the section is inherently ostrich-like, its interpretation could have been made more cautiously.