Amendment to IBC Section 4: Implications for Defaulted Amounts

The court held that applications for defaulted amounts less than Rs. 1 crore filed after the amendment to Section 4 of the IBC are not maintainable. It ruled that the amendment applies to applications filed after 24.03.2020, regardless of when the default occurred. The court emphasized that the NCLT lacks jurisdiction to entertain such applications post-amendment and set aside the NCLT's order, declaring the application not entertainable under the amended Section 4.

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Issues Involved
1. Whether an application relating to a defaulted amount less than Rs. 1 crore can be filed after the amendment to Section 4 of the IBC on 24.03.2020.
2. Whether the prospectivity of the amendment to Section 4 should be determined based on the defaulted amount or the date of default.
3. Whether the order of the NCLT can be challenged under Article 226 or if the petitioner should be relegated to the appellate remedy.

Issue-wise Detailed Analysis

Issue 1: Filing an Application for Defaulted Amount Less Than Rs. 1 Crore Post-Amendment
The core dispute in W.P.(C) No. 27636 of 2020 revolves around the maintainability of an application filed under the IBC after the amendment to Section 4, which raised the minimum default amount to Rs. 1 crore. The petitioner argued that since the application was filed on 25.09.2020, after the amendment came into effect on 24.03.2020, the application should not be maintainable as the defaulted amount was less than Rs. 1 crore. The NCLT had earlier found the application maintainable, reasoning that the notification under Section 4 would not save the petitioner from insolvency proceedings for defaults occurring before the pandemic.

Issue 2: Determining Prospectivity Based on Defaulted Amount or Date of Default
The petitioner contended that the amendment should apply prospectively based on the date of filing the application, not the date of default. The argument was that the IBC’s provisions, especially after the amendment, should apply to defaults of Rs. 1 crore or more, irrespective of when the default occurred. Conversely, the respondent argued that the right to file an application should be based on the occurrence of the default and the issuance of the demand notice before the amendment.

Issue 3: Challenging NCLT Order Under Article 226
The petitioner also questioned whether the NCLT's order could be challenged under Article 226 of the Constitution. The petitioner argued that the Tribunal lacked jurisdiction to entertain the application post-amendment, making the writ petition maintainable. The respondent countered that a writ petition should not be entertained due to the availability of an alternate remedy and that the NCLT's order was not issued without jurisdiction but was a wrongful exercise of jurisdiction.

Analysis and Consideration

Maintainability of the Writ Petition
The court held that the writ petition under Article 226 was maintainable. It emphasized that the NCLT, being a statutory body, must operate within the jurisdiction defined by the statute. The court referenced the Supreme Court's decision in Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., which reiterated that non-exercise of jurisdiction under Article 226 is a rule of self-restraint and not an absolute bar.

Jurisdiction of NCLT Post-Amendment
The court found that the NCLT lacked jurisdiction to entertain applications for defaults less than Rs. 1 crore post-amendment. It noted that Section 4 of the IBC, as amended, clearly stipulates that Part II of the IBC applies only to defaults of Rs. 1 crore or more. The court referenced the Supreme Court's decision in Manish Kumar v. Union of India, which held that the litmus test for the applicability of the IBC is the existence of a default as defined in Section 4 at the time of filing the application.

Interpretation of the Amendment
The court emphasized that the statutory language of the amendment was clear and unambiguous. It held that the amendment to Section 4, which raised the minimum default amount to Rs. 1 crore, applied to all applications filed after 24.03.2020, regardless of when the default occurred. The court rejected the respondent's argument that the right to file an application should be based on the date of default and the issuance of the demand notice.

Conclusion
The court allowed W.P.(C) No. 27636 of 2020, setting aside the NCLT’s order and declaring that the application could not be entertained under the amended Section 4. It dismissed W.P.(C) No. 14158 of 2021, stating that the declaration sought could not be granted as the litmus test for maintainability is the existence of a default as defined under Section 4 of the IBC.

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