By Dr. Anup P. Shah, Chartered Accountant
Introduction
The Insolvency
and Bankruptcy Code, 2016 (“the Code”) has been hailed by many as the
messiah for resolving India’s sick company scene. It has been seen as the
saviour which would rescue India’s ailing companies and entities and provide a
speedy resolution for the creditors. Let us make an in-depth examination as
to whether the Code actually has the teeth to provide a simple one-window
clearance for creditors and the sick debtors or is it just another legislation
in India’s overcrowded regulatory scene!
Replaces Old Acts
The Code replaces
the archaic Sick Industrial Companies (Special Provisions) Act, 1985.
Although this Act was repealed long ago, it has only now been given a formal
burial. The Code even amends the Companies Act, 2013 and has deleted all
provisions relating to winding-up of companies. Provisions relating to
winding-up (voluntary or compulsory) and sickness resolution for corporate
bodies are now enshrined in the Code itself. Even the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002 (SARFAESI Act) has been made subject to the Code. Thus, bankers cannot
resort to the SARFAESI Act when an application under the Code has been
admitted. Thus, the Code even gives a major breather to borrowers.
Eventually,
provisions relating to bankruptcy / financial sickness of individuals, and
firms would also be governed by the Code. However, these sections have not yet
been notified. As and when that happens, the
Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920
would be repealed. Thus, the Code would eventually become a one-shop law to
deal with financial sickness in all entities, corporate and non-corporate.
The Code is
divided into Five separate Parts, with the important ones being, Part II which
deals with Insolvency Resolution and Liquidation for Corporate Persons, Part
III which deals with Insolvency Resolution and Liquidation for
Individuals and Firms(this has not yet been made operational) and Part
IV which deals with the Regulation of Insolvency and Bankruptcy Board of
India, Insolvency Professional Agencies, Insolvency Professionals, etc.
The Code
constitutes an Insolvency and Bankruptcy Board of India (IBBI). The IBBI
would exercise regulatory oversight over insolvency professional agencies,
insolvency professionals, etc. and prescribe Regulations and Standards for
various purposes. The Scheme of the legislation is – the Code – the Rules
framed by the Central Government – the Regulations framed by the IBBI.
The Adjudicating
Authority under the Code is the National Company Law Tribunal (NCLT) and an
Appeal lies against an NCLT Order to the National Company Law Appellate
Tribunal (NCLAT). It may be noted that there is a barrage of
applications before the NCLT and the NCLAT has also been very active.
Triggering the
Code for Corporate Debtors
The Code gets
triggered when a corporate debtor commits a default provided the
default is Rs. 1 lakh or more. Thus, a very low threshold has been kept for the
creditors to access the Code. Even corporate debtors from the SME sector could
get covered within the ambit of the Code. The meaning of several important
terms has been defined by the Code:
a) A corporate
debtor is a corporate person (company, LLP, etc.,) which owes a debt
to any person. Here it is interesting to note that defined financial
service providers are not covered by the purview of the Code. Thus,
insolvency and bankruptcy of NBFCs, banks, insurance companies, mutual funds,
etc., are not covered by this Code. However, if these financial service
providers are creditors against any corporate debtor, then they can seek
recourse under the Code.
b) A debt
means a liability or obligation in respect of a claim and could be a financial
debt or an operational debt. A financial debt is defined to mean a debt
along with interest, if any, which is disbursed against the consideration for
the time value of money. An operational debt is defined as a claim for
provision of goods or services or employment dues or Government dues. The NCLAT
in the case of Neelkanth Township & Construction P. Ltd. vs. Urban
Infrastructure Trustees Ltd., CA(AT) (Insolvency) 44-2017 has
held that the law of limitation does not apply to the institution of an
insolvency process in respect of a financial debt in the nature of a debt with
interest. It further held that issue of debentures would fall within a
financial debt. Interestingly, the IBBI has come out with Regulations for other
creditors who are neither financial nor operational for submitting proof of
their claims.
c) A claim
which is one of the most important definitions is defined to mean a right to
payment or right to remedy for breach of contract under any law if such breach
gives rise to a right to payment. The right could be reduced to judgement,
fixed, disputed, undisputed, legal, equitable, secured or unsecured.
d) It is also
relevant to note the meaning of the term default which is defined to
mean non-payment of debt when whole or any part has become due and payable and
is not repaid by the debtor.
Initiating
Corporate Insolvency Resolution Process
The initiation (or starting) of the corporate insolvency resolution
process under the Code, may be done by a financial creditor (in respect of
default of a financial debt) or an operational creditor (in respect of default
of an operational debt) or by the corporate itself (in respect of any default).
Depending upon the type of initiator, the process may be summarised as
explained in Table-1 below.
Table-1: Types of
Insolvency Resolution
Insolvency Resolution by Financial Creditor |
Insolvency Resolution by Operational
Creditor
|
Insolvency Resolution by the
Corporate itself
|
|
One or more financial creditors can file an application before
the NCLT once a default (for a financial debt) occurs for initiating a
corporate insolvency resolution process against a corporate debtor. The
Gujarat High Court has, in the case of Essar Steel Ltd. vs. RBI, C/SCA/12434/2017,
held that banks can initiate insolvency proceedings even without waiting for
directions from the RBI under the Banking Regulation Act.
|
Any operational creditor can, once a default (for an operational
debt) occurs, deliver a demand notice on a corporate debtor.
|
Once a corporate debtor commits any default, it may on its own,
file an application for initiating corporate insolvency resolution
proceedings before the NCLT.
|
|
The NCLT would decide within 14 days whether or not a default
has occurred and whether to admit the application.
|
The debtor must, either pay the sum demanded within 10 days of
receipt of the notice or point out any pending dispute in
respect of the notice and pending arbitration / suit which has been filed before
the receipt of such notice. The dispute could be qua the
quality of goods / service or breach of any representations and warranties.
The NCLAT in Kirusa Software P. Ltd. vs. Mobilox Innovations P. Ltd,
CA(AT)(Insolvency) 6-2017 has held that dispute cannot be confined to
pending arbitration or a civil suit alone. It must include disputes pending
before every judicial authority including mediation, conciliation etc. as
long there are disputes as to existence of debt or default etc., it would
satisfy the conditions of a dispute. It could be in the form of a notice
prior to institution of a suit, notice under the Sale of Goods Act relating
to the quality of goods, etc.
|
The
NCLT would decide within 14 days whether or not to admit the application.
|
|
The
resolution process commences from the date of admission of the application by
the NCLT.
|
If
the corporate debtor does neither of the above, then the operational creditor
may file an application before the NCLT. Only if the Operational Creditor
does not receive payment or notice of dispute can he file an application
before NCLT. The NCLAT in Uttam Galva Steels
Ltd vs. DF Deutsche Forfait AG CA (AT) (Insolvency) 39-2017 has held
that right of an operational creditor to file an application accrues after
expiry of 10 days from the delivery of demand notice.
|
The
resolution process commences from the date of admission of the application by
the NCLT.
|
|
|
The
NCLT would decide within 14 days whether or not to admit the application.
|
|
|
|
The
resolution process commences from the date of admission of the application by
the NCLT.
|
|
The NCLAT in JK
Jute Mills vs. Surendra Trading Co Ltd, CA(AT) 09-2017 has held that
the 14 days’ period available to the NCLT to admit or reject an application
must be counted from the date of receipt of the application by the NCLT and not
from the date of filing of the application. There would be a time gap between
the two, since the Registry will check whether the application filed is proper
in all respects. Further and importantly, it held that the 14 day period was
not a mandate of law since it was procedural in nature. Hence, in appropriate
cases, the NCLT could admit a petition even after this 14 days’ period. This is
a very crucial decision since it hits against the early resolution process for
which the Code is reputed. However, the NCLAT added that the time-bound
resolution within 180 + 90 days is mandatory since time is of the essence under
the Code.
The Calcutta High
Court in Sree Metaliks Ltd. vs. Union of India, WP 7144 / 2017
considered an interesting issue as to whether the NCLT must grant a hearing to
the corporate debtor before admitting any insolvency proceedings against it.
NCLT acting under the provisions of the Act, 2013 while disposing off any
proceedings before it. It held that NCLT was not to bound by the procedure laid
down under the Code of Civil Procedure, 1908. However, it is to apply the
principles of natural justice in the proceedings before it. It can regulate its
own procedure, however, subject to the other provisions of the Companies Act of
2013 or the Insolvency and Bankruptcy Code of 2016 and any Rules made
thereunder. The Code of 2016 read with the Rules 2016 is silent on the
procedure to be adopted at the hearing of an application u/s. 7 presented
before the NCLT, that is to say, it is silent whether a party respondent has a
right of hearing before the adjudicating authority or not. The Court held that
based on principles of natural justice a corporate debtor must be given an
opportunity of being heard and rebutting the claim of default against him. A
similar view has also been held by the NCLAT in Innoventive Industries
Ltd, CA(AT) (Insolvency) 1&2-2017.
Once an
application is admitted by the NCLT in either of the above three scenarios, the
corporate insolvency resolution process is set in motion and it must be
completed within a maximum period of 180 days subject to a further (maximum)
extension of up to 90 days. Thus, there is a specific time bound process within
which the corporate must be rehabilitated or else the NCLT would order its
liquidation / winding-up. This is one of the unique features of the Code.
Interestingly, once the Code has been triggered and a corporate insolvency
resolution process commences, there is no mechanism for its withdrawal and it
must be carried forward to its logical end, i.e., either the corporate is
rehabilitated or the resolution plea is rejected and liquidation proceedings
against the corporate commence. The Supreme Court has recently given a somewhat
distinguishing judgment in the case of Lokhandwala Kataria Construction
P. Ltd. vs. Nisus Finance and Investment Managers LLP, CA No. 9279/2017,
where it determined whether the NCLT has powers to admit a compromise between
the creditor and the corporate debtor once a resolution proceeding commences?
The NCLT held that it could not do so and the Supreme Court stated that this
was the correct position in law. However, its Order went on to state that since
all the parties were before it, by virtue of the powers conferred upon the
Supreme Court under Art. 142 of the Constitution, it was admitting the consent
terms. A similar view was again taken by it in Mothers Pride Dairy P.
Ltd. vs. Portrait Advertising and Marketing P. Ltd., CA No. 9286/2017. One
wonders whether for every consent terms would the parties have to approach the
Supreme Court for admission? Would this not be an unnecessary cost and time
burden on all parties concerned? Would it not be better to have a provision for
entertaining a consent applications by the NCLT itself? It is yet early days
for the Code and hopefully, these teething troubles would be resolved soon. It
may be noted that prior to admission, the Rules framed under the Code permit an
applicant to withdraw the applicant prior to its admission by the NCLT. This
view has also been held by NCLAT in its Order in the case of Ardor Global
P. Ltd. vs. Nirma Industries P. Ltd., CA (AT) (Insolvency) No. 135-2017.
The Gujarat High
Court in the case of Essar Steel Ltd. vs. RBI, C/SCA/12434/2017
has laid down the following guidelines to be followed by the NCLT while
considering any application under the Code:
1. It should not
act mechanically and that all provisions may not be treated mandatory but it
could be treated as a directive only based upon facts, circumstances and
evidence available before the NCLT;
2. It should act without being guided by any advice or
directions in any form or nature by RBI or any other authority.
3. The NCLT may proceed in accordance with Law and there
should not be undue pressure on it by the administration
(… to be continued)
