High Court DecisionsInsolvency & BankruptcyStay on NCLT Order Initiating CIRP against MSME

IN THE HIGH COURT OF DELHI AT

NEW DELHI

Pankaj Aggarwal v. Union of India & ors.

W.P.(C) 3685/2020 & CM APPLs. 13194/2020,

13195/2020, 13196/2020 | Date: 23.06.2020

FACTS 

The present petition has been filed by Mr. Pankaj Aggarwal (hereinafter referred as the Petitioner) challenging the order passed by the NCLT on 29.05.2020. The Petitioner is one of the Promoter-Directors of the Company M/s VMA Enterprises Pvt. Ltd. (hereinafter referred as the Petitioner company) against which Corporate Insolvency Resolution Process (CIRP) was initiated by Panoli Intermediates (India) Pvt. Ltd. under section 9 of the Insolvency and Bankruptcy Code, 2016 (I&B Code) read with Rule 6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016.

An order was passed by NCLT against the Petitioner Company on 29.05.2020 for initiation of the CIRP and also the moratorium was declared since the defaulted amount was more than Rs. 1 Lakh.

The Petitioner Company falls under the category of Micro, Small & Medium Enterprise (MSMEs) and as per the Petitioner if CIRP is initiated, the Petitioner Company would go out of business overnight. Also, the NCLT did not consider the fact that from 24.03.2020 onwards, the pecuniary limit of the applications to be filed in NCLT was increased to Rs. 1 Crore from Rs. 1 Lakh.

ISSUE BEFORE THE HIGH COURT

The following issues were considered by the High Court:

Whether the NCLT was correct in passing an order of initiation of the CIRP against a MSME without considering the fact that the minimum threshold limit of filing application in NCLT has been increased to Rs. 1 Crore?

CONCLUSION 

The Court considered the notification increasing the jurisdiction of NCLT and analysed the intent of such notification which is clear as the purpose of increasing the jurisdiction of the NCLT to Rs. 1 Crore was essentially to ensure that MSMEs are not inflicted with sudden insolvency proceedings, as they may have faced a set-back to their businesses during the lockdown period.

The Court also discussed the NCLT’s order and observed that:

“18. In the light of the submissions made on behalf of the parties when we shall consider the case in hand then we find that the respondent has failed to raise the dispute or failed to produce the documents to show that the unpaid operational  debt has already been paid by the Corporate Debtor to the Operational Creditor. We further find that application filed on behalf of the Operational Creditor is complete and applicant also proposed the name of the IRP and consent of the IRP is also enclosed at page 78-81 and there is no disciplinary proceeding is pending against him and the defaulted amount is more than Rs. 1,00,000/- is being the minimum threshold limit fixed under IBC, 2016. Under such circumstances this Adjudicating Authority is inclined to admit this petition and initiate CIRP against the respondent. Accordingly, this petition is admitted. …….”

The operative part of the NCLT’s order clearly shows that the NCLT proceeded on the basis that the defaulted amount was more than Rs.1 lakh, and therefore had exercised jurisdiction.

But the notification dated 24.03.2020 has changed the minimum amount of default from Rs. 1 Lakh to Rs. 1 Crore in respect of Insolvency Resolution and Liquidation for Corporate Persons in Part II of the Code and the proceedings in the present case have been commenced under section 9 of the Code which is in Part II of the Code.

The Court held that, somehow an error has been committed by the NCLT, as the notification dated 24th March 2020 was clearly applicable and therefore the Court held that:

“Subject to the Petitioner depositing an amount of Rs.10 lakhs with the ld. Registrar General of this Court, the order of the NCLT dated 29th May, 2020 shall remain stayed till the next date of hearing. The deposit shall be made within two weeks.”

The Court came to a conclusion after satisfying itself that there is a prima facie case in favour of the Petitioner and therefore stayed the order till the next date of hearing and permitted the Petitioner Company to carry on its day to day operations.

AMLEGALS REMARKS 

Analysing the decision taken by the Court, it can be easily established that what persuaded the Court to take such a decision was the protection of MSME’s from the Insolvency Proceedings. The Court has not at any point discussed the question of prospective or retrospective application of the notification dated 24.03.2020.

Therefore, the doubt will persist on this issue till the next date of hearing unless the other party challenges it or some other Court issues an order on this aspect.

Another question which needs to be considered is that whether the High Court should have entertained the Writ Petition on non-consideration of notification, since there exists an alternative provided in the Code in the form of appeal before NCLAT.

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