Supreme Court clarifies the applicability of Section 10A of the Insolvency and Bankruptcy Code in cases of default during COVID-19: Ramesh Kymal vs. Siemens Gamesa (9 February 2021)

LEGAL ISSUE: Whether Section 10A of the Insolvency and Bankruptcy Code, 2016 (IBC) applies to applications filed before the provision came into force, for defaults occurring after March 25, 2020.

CASE TYPE: Insolvency Law

Case Name: Ramesh Kymal vs. M/s Siemens Gamesa Renewable Power Pvt Ltd.

[Judgment Date]: 9 February 2021

Date of the Judgment: 9 February 2021

Citation: 2021 INSC 57

Judges: Dr Dhananjaya Y Chandrachud, J and MR Shah, J

Can a company avoid insolvency proceedings if it defaulted on payments during the COVID-19 lockdown? The Supreme Court of India addressed this question while interpreting Section 10A of the Insolvency and Bankruptcy Code (IBC). The core issue was whether the newly inserted Section 10A, which suspended the initiation of insolvency proceedings for defaults occurring after March 25, 2020, applied to cases where the application was filed before the provision came into effect but the default occurred after the specified date. A two-judge bench of the Supreme Court, comprising Justices Dr. Dhananjaya Y Chandrachud and MR Shah, delivered the judgment, with the opinion authored by Justice Dr. Dhananjaya Y Chandrachud.

Case Background

The appellant, Ramesh Kymal, claimed that M/s Siemens Gamesa Renewable Power Pvt Ltd. (the respondent) owed him INR 104,11,76,479 due to his resignation from his position as Chairman and Managing Director. This claim was based on various employment and incentive agreements. Kymal resigned on January 21, 2020, and his resignation was acknowledged by the respondent on January 28, 2020. He agreed to continue his services until April 30, 2020. The respondent confirmed the payments due to him, except for one point, via an email on March 27, 2020. Kymal sent a final reminder on April 27, 2020, three days before his extended notice period ended. On April 28, 2020, the respondent terminated Kymal’s employment. Subsequently, Kymal issued a demand notice on April 30, 2020, citing the same date as the date of default. He then filed an application under Section 9 of the IBC on May 11, 2020, alleging a default in the payment of his operational dues.

Timeline:

Course of Proceedings

The National Company Law Tribunal (NCLT) dismissed the appellant’s application, citing the newly inserted Section 10A of the IBC, which bars applications for defaults occurring on or after March 25, 2020. The National Company Law Appellate Tribunal (NCLAT) upheld this decision, leading to the present appeal before the Supreme Court.

Legal Framework

The core legal provision in question is Section 10A of the Insolvency and Bankruptcy Code, 2016, which was inserted by Act 17 of 2020. It states:

“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.”

Section 8 of the IBC outlines the process for insolvency resolution by an operational creditor, stating that:

“8. Insolvency resolution by operational creditor.—(1) an operational creditor may, on the occurrence of a default, deliver a demand notice of the unpaid operational debt or a copy of an invoice demanding payment of the amount involved in the default to the corporate debtor in such form and manner as may be prescribed.”

Section 9(1) of the IBC allows an operational creditor to file an application for initiating the Corporate Insolvency Resolution Process (CIRP) after ten days from delivering the demand notice, if no payment or notice of dispute is received.

Section 5(11) of the IBC defines “initiation date” as the date on which an application is made to the Adjudicating Authority for initiating the CIRP, while Section 5(12) defines “insolvency commencement date” as the date of admission of the application by the Adjudicating Authority.

Arguments

Appellant’s Submissions:

• Section 10A bars the filing of applications under Sections 7, 9, and 10 for defaults occurring on or after March 25, 2020, for a specified period.
• The law does not explicitly apply Section 10A retrospectively to applications already filed before June 5, 2020.
• Section 10A prohibits fresh applications for defaults after March 25, 2020, once the provision is notified (after June 5, 2020).
• The use of “shall be filed” and “shall ever be filed” indicates a prospective application to proceedings initiated after June 5, 2020.
• The IBC distinguishes between the “initiation date” and the “insolvency commencement date.”
• The cause of financial distress must be assessed to determine if it is attributable to the COVID-19 pandemic. In this case, the default was not due to the pandemic.
• The appellant argued that the actual first date of default was January 21, 2020, when the resignation was tendered, or March 23, 2020, when the 60-day notice period ended.

Respondent’s Submissions:

• Section 10A was introduced to address the financial distress caused by the COVID-19 pandemic.
• Section 10A has a non-obstante clause, overriding Sections 7, 9, and 10.
• Section 10A sets a cut-off date of March 25, 2020, barring applications for defaults on or after this date for a specified period.

Innovativeness of the argument: The appellant’s argument that the actual default occurred before March 25, 2020, by linking it to the resignation date or the end of the notice period, was an innovative attempt to circumvent the bar imposed by Section 10A. However, this argument was rejected due to the clear date of default specified in the demand notice.

Issues Framed by the Supreme Court

The primary issue for determination was:

1. Whether the provisions of Section 10A apply to an application under Section 9 filed before June 5, 2020, for a default occurring after March 25, 2020.

Treatment of the Issue by the Court:

Authorities

The Court considered the following authorities:

Cases:

• Sardar Inder Singh vs State of Rajasthan [1957 SCR 605] – The Court relied on this case to emphasize that the preamble of a statute provides the context for its interpretation. The Court referred to the recitals of the Ordinance to understand the legislative intent behind Section 10A.
• Swiss Ribbons (P) Ltd. v. Union of India [(2019) 4 SCC 17] – This case was cited to reiterate the objectives of the IBC, which include reorganization and insolvency resolution of corporate debtors to maximize the value of their assets.

Legal Provisions:

• Section 5(11) of the IBC – Defines “initiation date” as the date of application to the Adjudicating Authority.
• Section 5(12) of the IBC – Defines “insolvency commencement date” as the date of admission of the application by the Adjudicating Authority.
• Section 7 of the IBC – Deals with the initiation of CIRP by a financial creditor.
• Section 8 of the IBC – Provides for the insolvency resolution by an operational creditor.
• Section 9 of the IBC – Provides for the application for initiation of the CIRP by an operational creditor.
• Section 10 of the IBC – Provides for the initiation of the CIRP by a corporate applicant.
• Section 10A of the IBC – Suspends the initiation of CIRP for defaults on or after March 25, 2020.

Judgment

How each authority was viewed by the Court:

• Sardar Inder Singh vs State of Rajasthan [1957 SCR 605] – The Court used this case to emphasize the importance of the preamble in interpreting a statute. It highlighted that the recitals of the Ordinance provided the context for understanding the legislative intent behind Section 10A.
• Swiss Ribbons (P) Ltd. v. Union of India [(2019) 4 SCC 17] – The Court referred to this case to underscore the objectives of the IBC, which include the reorganization and resolution of corporate debtors. This was used to support the view that Section 10A was intended to prevent unnecessary liquidation during the pandemic.

What weighed in the mind of the Court?

The Court’s decision was primarily influenced by the legislative intent behind Section 10A, which was to provide relief to corporate debtors facing financial distress due to the COVID-19 pandemic. The Court emphasized that the provision was not merely a procedural bar but a substantive measure to prevent unnecessary insolvency proceedings during a period of economic disruption. The Court also noted that the date of March 25, 2020, was deliberately chosen to coincide with the start of the national lockdown, indicating a clear intention to address the specific challenges posed by the pandemic.

Logical Reasoning

The Court rejected the argument that Section 10A only applied prospectively to applications filed after June 5, 2020. It reasoned that such an interpretation would defeat the purpose of the provision, which was to protect corporate debtors from insolvency proceedings during the pandemic. The Court emphasized that the cut-off date of March 25, 2020, and the intent behind the provision clearly indicated that it applied to all defaults occurring on or after that date, regardless of when the application was filed.

The Court also clarified that Section 10A does not require an inquiry into the extent to which the financial health of the corporate debtor was affected by the pandemic. The provision was a blanket measure to address the widespread economic disruption caused by COVID-19. The Court stated that the bar on filing 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.

The Court quoted from the judgment in Swiss Ribbons (P) Ltd. v. Union of India [ (2019) 4 SCC 17]:

“27. As is discernible, the Preamble gives an insight into what is sought to be achieved by the Code. The Code is first and foremost, a Code for reorganisation and insolvency resolution of corporate debtors. Unless such reorganisation is effected in a time -bound manner, the value of the assets of such persons will deplete. Therefore, maximisation of value of the assets of such persons so that they are efficiently run as going concerns is another very important objective of the Code. This, in turn, will promote entrepreneurship as the persons in management of the corporate debtor are removed and replaced by entrepreneurs. When, therefore, a resolution plan takes off and the corporate debtor is brought back into the economic mainstream, it is able to repay its debts, which, in turn, enhances the viability of credit in the hands of banks and financial institutions. Above all, ultimately, the interests of all stakeholders are looked after as the corporate debtor itself becomes a beneficiary of the resolution scheme—workers are paid, the creditors in the long run will be repaid in full, and shareholders/investors are able to maximise their investment. Timely resolution of a corporate debtor who is in the red, by an effective legal framework, would go a long way to support the development of credit markets. Since more investment can be made with funds that have come back into the economy, business then eases up, which leads, overall, to higher economic growth and development of the Indian economy. What is interesting to note is that the Preamble does not, in any manner, refer to liquidation, which is only availed of as a last resort if there is either no resolution plan or the resolution plans submitted are not up to the mark. Even in liquidation, the liquidator can sell the business of the corporate debtor as a going concern.”

The Court also noted that the NCLAT had correctly distinguished between the “initiation date” and the “commencement date” of the CIRP, emphasizing that the bar under Section 10A applies to the initiation of the process, not just its commencement.

The Court concluded that the legislative intent was to bar the institution of any application for the commencement of the CIRP in respect of a corporate debtor for a default occurring on or after 25 March 2020, for a period of six months, extendable up to one year.

Key Takeaways

• Section 10A of the IBC applies to all applications for defaults occurring on or after March 25, 2020, regardless of when the application was filed.
• The provision was enacted to provide relief to corporate debtors facing financial distress due to the COVID-19 pandemic.
• The bar on filing applications does not extinguish the debt or the right of creditors to recover it.
• No inquiry is required into the extent to which the pandemic affected the financial health of the corporate debtor.

Directions

No specific directions were given by the Supreme Court in this case.

Specific Amendments Analysis

There is no specific amendment analysis in this judgment.

Development of Law

The ratio decidendi of this case is that Section 10A of the IBC bars the filing of applications for the initiation of the Corporate Insolvency Resolution Process (CIRP) for defaults occurring on or after March 25, 2020, regardless of whether the application was filed before or after the provision came into force. This clarifies the retrospective application of Section 10A and provides a clear interpretation of the legislative intent behind its enactment.

Conclusion

The Supreme Court dismissed the appeal, affirming the NCLAT’s decision. The Court held that Section 10A of the IBC bars the initiation of CIRP for defaults occurring on or after March 25, 2020, even if the application was filed before the provision came into force. This decision provides clarity on the applicability of Section 10A and its purpose in addressing the financial distress caused by the COVID-19 pandemic.