[IBC] Embargo In Section 10A Must Receive Purposive Construction In Order To Advance Legislative Intent Of Statute: Supreme Court

  • Sakshi Shukla
  • 07:13 PM, 09 Feb 2021

The Supreme Court has observed that the embargo stipulated in terms of Section 10A of the Insolvency and Bankruptcy Code must be given a purposive interpretation.

A Division Bench of Justice D.Y. Chandrachud and Justice M.R. Shah, while dismissing the present petition and acknowledging the legislative intent behind Section 10A IBC, said, “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.”

Facts

On 11 May 2020, Appellant 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 the application, an Ordinance was promulgated by the President of India on 5th June, 2020 by which Section 10A was inserted into the IBC. Section 10A reads as follows;

Section 10A. Suspension of initiation of corporate insolvency resolution process

Notwithstanding anything contained in sections 7,9 and 10, no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25th March, 2020 for a period of six months or such further period, not exceeding one year from such date, as may be notified in this behalf: Provided that no application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the said default occurring during the said period.

Explanation – For the removal of doubts, it is hereby clarified that the provisions of this section shall not apply to any default committed under the said sections before 25th March, 2020.

The respondent herein filed an application for dismissal of the appellant’s application on the ground of the newly inserted provision. NCLT appreciated the submission of the respondent, which was later upheld by NCLAT in appeal.

Issue

Whether the provisions of Section 10A IBC, would be attracted to an application under Section 9, filed before 5th June, 2020 (date on which the provision was made applicable) in respect of a default which has occurred after 25th March, 2020?

Observation

While answering the aforementioned question in the affirmative, court noted,
 “The date of 25 March 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.”  

Rejecting the construction adopted by the Appellant, Court acknowledged the onset of COVID 19 pandemic as a ‘cataclysmic event’ bearing grave consequences on the financial health of corporate enterprises.

Court elaborated by stating that the substantive part to Section 10A should be construed harmoniously with the first proviso and the explanation. It was said, “Reading the provisions together, it is evident that Parliament intended to impose a bar 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; the embargo remaining in force for a period of six months, extendable to one year. 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.”

Furthermore it was said that, “…the correct interpretation of Section 10A cannot be merely based on the language of the provision rather it must take into account the object of the Ordinance and the extraordinary circumstances in which it was promulgated. It must be noted, however, that the retrospective bar on the filing of applications for the commencement of CIRP during the stipulated period does not extinguish the debt owed by the corporate debtor or the right of creditors to recover it.”

Placing reliance over the observation made in Swiss Ribbons v. Union of India, (2019) 4 SCC, Court concurred with the findings of the NCLAT and concluded that the restriction contained in Section 10A must receive a purposive construction in order to advance the object sought to be achieved.

Case Title: Ramesh Kymal v. M/s Siemens Gamesa Renewable Power Pvt. Ltd.

Provision/Statute involved: Section 10A Insolvency and Bankruptcy Code, 2016

Access Copy of Judgment Here