Case title:
Cyriac Njavally vs Union of India
Date of Order:
1 February 2022
Bench:
Justice T. Ravi
Parties:
Petitioner - M/S. Tharakan Web Innovations Pvt. Ltd
Respondent - Cyriac Njavally
National Company Law Tribunal
SUBJECT
The Insolvency and Bankruptcy Code, 2016 is a comprehensive piece of legislation that seeks to ensure all stakeholders' interests are protected. The primary objective of this act is to resolve cases of insolvency and bankruptcy. This act was a need of the hour in our country due to the massive load of non-performing loans from a bank and delays in the resolution of debts. Insolvency resolution in India took 4.3 years on average against other countries which further necessitated the implementation of this act.
IMPORTANT PROVISIONS
- Insolvency and Bankruptcy Code, 2016
- Section 4
- Section 5
- Section 6
- Section 7
- Section 8
- Section 10A
- National Company Law & Tribunal Rules
- Rule 32
OVERVIEW
- The petitioner is a Private Limited Company engaged in developing software and promoting advancement in the field of Information Technology.
- It was claimed that the application indented to discredit the company and its shareholder since it was filed by the 2nd respondent who was a former director and shareholder of the company.
- The second respondent claims to be the operational creditor and claimed the petitioner to be the corporate debtor for non-payment of money.
- Based on the petitioner's contention, the petition cannot be maintained under the law because he has disputed all debts.
- According to them, the amounts due were from the second respondent to the first.
- Reliance was given to the amended section 4 of the IBC where the minimum default amount was made to Rs. 1 crore.
- The National Company Law) has on 01.12.2020 that the application filed by the second respondent is maintainable.
- The first respondent reasoned that the notification under Section 4 would not save the petitioner from the insolvency proceedings concerning defaults that had taken place before the pandemic.
- The present petition challenges the order of the Adjudicating Authority under Insolvency and Bankruptcy.
- It was prayed in the petition that notification specifying the minimum default as Rs.1 crore is prospective and would apply only to cases where the default occurred on or after 24.3.2020.
- It was also put forth that the notification wouldn’t be applicable if mandatory notice under Section 8 of the IBC has been issued by the operational creditor and the stipulated 10 days period had passed before the date of notification.
ISSUES RAISED
- Is the petitioner's application under Rule 32 of the National Company Law & Tribunal Rules maintainable?
- Whether the amendment of Section 4 will apply to cases where the default occurred before the date of amendment?
ARGUMENTS ADVANCED BY THE PETITIONER
- The counsel representing the petitioner contended that the petitioner can’t be a defaulter since the amendment came into effect on 24.03.2020 and the application was filed on 25.09.2020
- It was submitted that only if the debt is more than Rs. 1 Crore, a person can be declared insolvent. It is submitted that the petition cannot be maintained since the debt involved is less than Rs.1 Crore and the application has been filed after the amendment was introduced in Section 4 of the IBC.
- The counsel referred to Section 5(7), and Section 5(20) of the code to point out that the 2nd respondent is only an operational creditor and not a financial creditor
- Only the financial creditor can initiate proceedings in the event of default and an operational creditor can only deliver a demand notice in case of default.
- It was further submitted that the petition was filed before the elapse of 10 days and that the debt is arguable.
- Counsel also pointed out that a corporate insolvency resolution process shall commence only on the date the application is admitted. However, the tribunal failed to notice that, an insolvency petition cannot be filed in cases where there is a cause of action for demanding an amount.
ARGUMENTS ADVANCED BY THE RESPONDENT
- Sri Hari Kumar G. Nair represented the second respondent.
- The case of Embassy Property Developments Pvt. Ltd. v. State of Karnataka & Ors [(2020) 13 SCC 308] was cited by the counsel where it was held that the primary question concerned is whether there is a lack of jurisdiction on the part of NCLT or a mere wrongful exercise of a recognized jurisdiction like asking a wrong question or applying a wrong test or granting wrong relief.
- The counsel contended that in the present case, there is a wrongful exercise of jurisdiction and hence the petition cannot be sustained.
- It was submitted that the object of the Code is to prevent large-scale insolvencies due to the financial stress caused by the pandemic. It is hence submitted that the amendment was not brought in to save cases where default had occurred before the pandemic, but the amendment can be effective in cases even before the amendment.
- The counsel referred to Sulochana Gupta v. RBG Enterprises [W.A.1083 of 2020] where the court held that a petition made under article 226 cannot be maintained against an NCLT order.
JUDGEMENT ANALYSIS
- The high court set aside the NCLT order and held that the petition made under Article 226 is maintainable.
- The bench consisting of Justice T. Ravi held that an alternate remedy will not be a reason to not exercise jurisdiction when the issue is concerned with the enforcement of the fundamental right or violation of principles of natural justice or where the proceedings challenged are without jurisdiction or in cases where the validity of a statute is challenged.
- The court pointed out that the only issue before it was determining whether the Tribunal had jurisdiction to hear the present petition.
- The court cited Pratap Technocrats (P) Ltd. v. Reliance Infratel Ltd. (Monitoring Committee) [(2021) 10 SCC 623] where it was held that the adjudicating body must comply with the statute and the nature and extent of its jurisdiction defined in the statute.
- It was submitted that the date of filing of the application is not a material aspect of the case since no time limit has been prescribed for filing an application after the issuance of notice.
- It was ruled that the existence of a default as defined in Section 4 of the Code is the litmus test based on which the Adjudicating Authority gets jurisdiction to hear an application. The litmus test is the test for the applicability of the entire Part II and cannot change depending on whether the application is filed under Sections 7 or 9 or 10. The litmus test also applies to applications filed by the financial creditor, operational creditor, and corporate debtor.
CONCLUSION
The present case focused predominantly on Section 4 of the Insolvency and Bankruptcy Code, 2016, and its applicability. The Hon’ble Kerala High Court in the judgment stated that the National Company Law Tribunal was wrong in its interpretation of Section 4. t. It is only if the corporate debtor has incurred a default of at least the minimum amount stated in Section 4 that a proceeding under the IBC provisions under Part II can be initiated
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