NCLAT Establishes Rigorous Criteria for Section 10A Applicability under IBC

Introduction

The case of Anil Kaushal v. Colliers International (India) Property Services Private Limited And Others was adjudicated by the National Company Law Appellate Tribunal (NCLAT) on August 2, 2022. This appeal arose from the application of Section 9 of the Insolvency & Bankruptcy Code, 2016 (IBC), leading to the initiation of the Corporate Insolvency Resolution Process (CIRP) against Logix City Developers Pvt. Ltd. (CD), the corporate debtor. The primary contention revolved around the applicability of Section 10A of the IBC, which was introduced as a relief measure during the COVID-19 pandemic to suspend insolvency proceedings for certain defaults.

Summary of the Judgment

The NCLAT reviewed the appellant's challenge against the order dated March 22, 2022, which admitted the petition under Section 9 of the IBC filed by Colliers International (India) Property Services Private Limited (OC). The appellant, Mr. Anil Kaushal, argued that the CIRP should not have been initiated as the claimed debt either fell below the threshold of ₹1 crore stipulated under Section 4 of the IBC or was barred by Section 10A of the IBC due to the timing of the default during the COVID-19 suspension period.

After a detailed examination, the NCLAT upheld the appellant's arguments, finding that the total outstanding amount claimed by the OC, after excluding two disputed invoices issued post-March 25, 2020, did not meet the ₹1 crore threshold necessary to initiate CIRP under Section 9 of the IBC. Consequently, the tribunal set aside the impugned order, effectively halting the insolvency proceedings initiated by the OC.

Analysis

Precedents Cited

The judgment referenced several key precedents to substantiate its decision:

• Kodeboyina Srinivas Krishna v. PVM Innvensys Pvt. Ltd. & Anr.: This case highlighted the necessity for demand notices under Form-3 to explicitly mention the date of default to ascertain the debt amount and default chronology effectively.
• 'Ramesh Kymal v. M/s Siemens Gamesa Renewable Power Pvt. Ltd.': The Supreme Court's ratio in this case was pivotal in interpreting the scope of Section 10A, particularly concerning defaults arising post the specified COVID-19 relief period.
• Rajkumar Brothers and Production Private Limited v. Harish Amilineni Shareholder and Erstwhile Director of Amilionn Technologies Private Limited & Anr.: This judgment from the Supreme Court dealt with the costs associated with the Interim Resolution Professional (IRP) in similar insolvency scenarios, influencing the handling of CIRP costs in the present case.

These precedents collectively reinforced the tribunal's stance on strict adherence to the IBC provisions, especially regarding procedural accuracy and the temporal applicability of Section 10A.

Legal Reasoning

The NCLAT's legal reasoning encompassed a meticulous examination of both the procedural and substantive aspects of the IBC. Key points included:

• Locus of Appellant: The tribunal affirmed that the appellant, despite not being a direct party to the initial Section 9 proceedings, had sufficient aggrievance as a financial creditor representing numerous homebuyers, thereby establishing locus standi.
• Applicability of Section 10A: The tribunal scrutinized the dates of default and the issuance of invoices. It concluded that two invoices amounting to ₹7,02,100/- and ₹4,36,600/- were issued post-March 25, 2020, thus falling under the protective ambit of Section 10A. Moreover, the absence of explicit default dates in the demand notice further bolstered the argument for Section 10A applicability.
• Threshold Compliance: Even after adjusting for the excluded invoices under Section 10A, the remaining debt claimed by the OC did not surpass the ₹1 crore threshold mandated by Section 4 of the IBC. This underscored the non-viability of initiating CIRP under the current circumstances.
• Malafide Allegations: The appellant's claims of collusion between the OC and CD were not substantiated with concrete evidence, leading the tribunal to dismiss such assertions.

Impact

This judgment has significant implications for future insolvency proceedings under the IBC, particularly concerning the following:

• Strict Threshold Enforcement: Reinforces the necessity for creditors to ensure that their claims genuinely meet the financial thresholds before initiating insolvency proceedings.
• Section 10A Clarity: Provides clearer guidelines on the applicability of Section 10A, emphasizing the exclusion of certain debts arising during the COVID-19 suspension period.
• Protecting Financial Creditors: Empowers financial creditors, especially those representing large groups of stakeholders like homebuyers, to challenge potentially frivolous or non-compliant insolvency petitions effectively.
• Procedural Rigor: Highlights the importance of adherence to procedural norms, such as the accurate portrayal of default dates and the substantiation of claims with valid documentation.

Complex Concepts Simplified

Section 4 of the Insolvency & Bankruptcy Code (IBC)

Section 4 of the IBC mandates that a default is required for initiating insolvency proceedings against a corporate debtor. Initially, the threshold for such defaults was set at ₹1 lakh, but it was subsequently raised to ₹1 crore through a government notification (S.O 1205 (E) dated March 24, 2020) to reduce the number of frivolous insolvency cases during the pandemic.

Section 9 of the IBC

This section allows Operational Creditors (those who supply goods or services to the corporate debtor) to initiate CIRP against the debtor. However, the claims must meet the minimum threshold specified in Section 4 of the IBC.

Section 10A of the IBC

Introduced as a COVID-19 relief measure, Section 10A temporarily suspends the initiation of CIRP for defaults arising from March 25, 2020, for a period of six months, extendable to a maximum of one year. This provision aims to provide breathing space to businesses affected by the pandemic.

Corporate Insolvency Resolution Process (CIRP)

CIRP is a time-bound process initiated by creditors to resolve the insolvency of a corporate debtor, aiming to maximize the debtor’s assets and ensure fair treatment to all stakeholders.

Conclusion

The NCLAT's decision in Anil Kaushal v. Colliers International (India) Property Services Pvt. Ltd. And Others underscores the judiciary's commitment to upholding the structural integrity of the IBC. By enforcing the ₹1 crore threshold and the protective provisions of Section 10A, the tribunal ensures that insolvency proceedings are both justified and procedurally sound. This judgment serves as a crucial reference for financial creditors and operational creditors alike, delineating the boundaries within which insolvency mechanisms should operate, especially in extraordinary circumstances like a pandemic.