Option 3 Insolvency and Bankruptcy Code- Corporate Debt Recovery

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CORPORATE INSOLVENCY RESOLUTION PROCESS UNDER INSOLVENCY AND BANKRUPTCY CODE, 2016

Kindly refer to the link in the title to access the full Act

STAGE-WISE PROCESS FOR INSOLVENCY:-

  1. In case a corporate debtor makes a default in repayment of dues of the creditors, the financial creditor/s, an operational creditor or a corporate debtor through Corporate applicant or any authorised member, a person who has the controlling capacity over the financial affairs of the corporate debtor has the power to start the insolvency resolution process. In order to initiate the resolution process, an application has to be made to National Company Law Tribunal (NCLT) under (Section 10, IBC, 2016 in case of Corporate Debtor, Section 7 and 9 of IBC, 2016 in case of Financial Creditors and Operational Creditors).
  2. A ten days demand notice under (Section 8(2) of IBC, 2016 in case of Operational Creditors) has to be given to the corporate debtor by the Operational Creditors before he approaches the NCLT under Section 9 of IBC, 2016). However, an operational creditor can directly approach the NCLT if the corporate debtor does not repay the outstanding dues or fails to show any existing difference. (Kindly refer to Section 8: Insolvency resolution by operational creditor. & Section 9: Application for initiation of corporate insolvency resolution process by operational creditor.)
  3. The new code states that the insolvency process of a Corporate Debtor must be concluded within 180 days from the date of initiation in the NCLT (Section 12, IBC of 2016). The claims of the Creditors shall be frozen for a period of six months on admission of application by NCLT. During this time, the NCLT shall listen to the options to revive and decide the future course of action. It is further clarified that unless a resolution plan is made or liquidation process is initiated, no legal claim shall be sought against the corporate debtor in any other forum or Court (Section 14 of IBC, 2016).
  4. When the application for insolvency is accepted under Section 7/9/10 of IBC, 2016 the NCLT within fourteen days appoints an Insolvency Resolution Professional (IRP) on receiving a confirmation from Board of Insolvency and Bankruptcy.The appointed IP then takes up the responsibility of the debtor’s properties and functioning. He also collects all the information that is relevant with regard to the financial condition of the debtor from information utilities. IP is appointed for a term of thirty days only within which he does all the necessary scrutinization (Section 18, IBC, 2016).
  5. The next step is to make a public announcement about the commencement of corporate insolvency process so that claims from any other creditors can also come forward, if any. A creditor’s committee is constituted by the IRP post receiving any claims by public announcement (Section 13 of IBC, 2016). In the event any financial creditor is a related party of the defaulting debtor, such a creditor will not have the right to represent, participate or vote in the committee of creditors so constituted by the IP. In order to be a part of the Creditor’s Committee, the average dues of the operational creditors must be at least ten percent of the debt. The Committee of Creditors shall first seven days of its incorporation decide through seventy five percent votes whether the interim IRP should be used as a Resolution Professional or should be replaced with someone else.
  6. After the Committee finalizes the Resolution Professional he is appointed by the NCLT (Section 16 of IBC, 2016). The Resolution Professional so appointed can be replaced anytime by the Creditor’s Committee with a majority of seventy five percent votes. In the interim, i.e. till the appointed of any new Resolution Professional, the Creditor’s Committee can take decisions with regard to insolvency resolution by seventy five percent majority voting.
  7. In the event majority (75%) of the financial creditors are of the view that the case is very complex and more time extension is required, the NCLT may grant a one-time extension of up to a maximum of 90 days over and above the pre decided tenure of 180 days. It shall be the sole responsibility of the Resolution Professional to manage and conduct the corporate insolvency resolution procedure during such a term (Section 18 of IBC, 2016).
  8. To enable the resolution applicant for preparing a resolution plan, the Resolution Professional shall compile a statistics note. A resolution applicant can be defined as an individual who has the duty and responsibility to submit a resolution plan to the Resolution Professional. The Creditor’s Committee further receives the plan from the Resolution Professional for its approval.
  9. On the resolution being approved, the next step by the Creditor’s Committee is to come up with options on restructuring which can be either coming up with a modified repayment plan or to simply liquidate the properties of the company in order to recover dues. If the Creditor’s Committee fails to take any binding decision with regard to the repayment by the debtor, the debtor’s assets are liquidated in order to pay back the creditors. If there is a plan prepared for resolution, the same shall be sent to NCLT for approval and implementation.

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Please Note:

The Supreme Court in Mobilox Innovations Private Limited (“Mobilox“) Vs. Kirusa Software Private Limited (“Kirusa“), considered questions raised as to the triggering of the Code when it comes to debts owed to operational creditors and as to what would constitute a ‘dispute’ entitling the debtor company to have the Adjudicating Authority reject the application.

Brief Facts

Kirusa issued a demand notice to Mobilox as an Operational Creditor under the Code, demanding payment of certain dues. Mobilox issued a reply to the demand notice (“Mobilox Reply“) inter alia stating that there exists certain serious and bona fide disputes between the parties and alleged a breach of the terms of a non-disclosure agreement by Kirusa. Kirusa filed an application under Section 9 of the Code (“Application“) before the National Company Law Tribunal, Mumbai (“NCLT“) for initiation of the corporate insolvency resolution process (“CIRP“) against Mobilox. This was dismissed by the NCLT, which expanded the scope of an ‘existing dispute’ under the Code to hold that a valid notice of dispute had been issued by Mobilox.

Kirusa filed an appeal before the National Company Law Appellate Tribunal (“NCLAT“), which allowed Kirusa’s appeal and inter alia, held that the notice of dispute does not reveal a genuine dispute between the parties. Mobilox filed an appeal before the Supreme Court impugning the order of the NCLAT.

 

Brief facts about The Insolvency And Bankruptcy Code, 2016

The Insolvency and Bankruptcy Code, 2016 (IBC) was passed by the Parliament on 11 May 2016, received Presidential assent on 28 May 2016 and was notified in the official gazette on the same day.

Erstwhile legislative framework

  1. Chapter XIX & Chapter XX of Companies Act, 2013
  2. Part VIA, Part VII & Section 391 of Companies Act, 1956
  3. RDDBFI Act, 1993
  4. SARFAESI Act, 2002
  5. SICA Act, 1985
  6. The Presidency Towns Insolvency Act, 1909
  7. The Provincial Insolvency Act, 1920
  8. Chapter XIII of the LLP Act, 2008

Non-statutory guidelines/out-of-court mechanism:

  • Bilateral restructuring
  • One-time settlement
  • JLF/CDR/SDR
  • Sale of loan to ARC

New framework

The Insolvency and Bankruptcy code (Provisions of this Code to override other existing laws on matters pertaining to Insolvency and Bankruptcy)

“An act to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto.”

– Objective section of the Act

The Insolvency and Bankruptcy Code ecosystem

Insolvency and Bankruptcy Board (IBB)

NCLT – The adjudicating authority (AA)

IBB – apex body for promoting transparency & governance in the administration of the IBC; will be involved in setting up the infrastructure and accrediting IPs & IUs.

IUs – centralised repository of financial and credit information of borrowers; would accept, store, authenticate and provide access to financial data provided by creditors.

IPs– persons enrolled with IPA and regulated by Board and IPA will conduct resolution process; to act as Liquidator/ bankruptcy trustee; appointed by creditors and override the powers of board of directors.

Adjudicating authority (AA) – would be the NCLT for corporate insolvency; to entertain or dispose any insolvency application, approve/ reject resolution plans, decide in respect of claims or matters of law/ facts thereof.

IPA – registered by the board shall enroll IPs.

Corporate Insolvency Resolution and Liquidation

Resolution timeline and process

Key highlights

Corporate insolvency resolution process

Application on default – Any financial or operational creditor(s) can apply for insolvency on default of debt or interest payment

Appointment of IP – IP to be appointed by the regulator and approved by the creditor committee. IP will take over the running of the Company.

From date of appointment of IP, power of Board of directors to be suspended and vested in the IP. IP shall have immunity from criminal prosecution and any other liability for anything done in good faith

Moratorium period – Adjudication authority will declare moratorium period during which no action can be taken against the company or the assets of the company. Key focus will be on running the Company on going concern basis. A Resolution plan would have to be prepared and approved by the Committee of creditors

Credit committee – A credit committee of creditors will be constituted. Related party to be excluded from committee. Each creditor shall vote in accordance to voting share assigned if 75% of creditor approve the resolution plan same needs to be implemented.

Liquidation process

Initiation – Failure to approve resolution plan within specified days will cause initiation of Liquidation. Debtor can also opt for voluntary liquidation by a special resolution in a General Meeting.

Liquidator – The IP may act as the liquidator, and exercise all powers of the BoD. The liquidator shall form an estate of the assets, and consolidate, verify, admit and determine value of creditors’ claims.

Order of priority for distribution of assets

  • Insolvency related costs
  • Secured creditors and workmen dues upto 24 months
  • Other employee’s salaries/dues up to 12 months
  • Financial debts (unsecured creditors)
  • Government dues (up to 2 years)
  • Any remaining debts and dues
  • Equity

Key aspects of the Insolvency and Bankruptcy Code

  1. IBC proposes a paradigm shift from the existing ‘Debtor in possession’ to a ‘Creditor in control’ regime.
  2. IBC aims at consolidating all existing insolvency related laws as well as amending multiple legislation including the Companies Act.
  3. The code would have an overriding effect on all other laws relating to Insolvency & Bankruptcy.
  4. The code aims to resolve insolvencies in a strict time-bound manner – the evaluation and viability determination must be completed within 180 days.
  5. Moratorium period of 180 days (extendable upto 270 days) for the Company. Insolvency profressional to take over the managemnent of the Company.
  6. Clearly defined ‘order of priority‘ or the waterfall mechanism.
  7. The waterfall to render government dues junior to most others is significant.
  8. Antecedent tranactions can be investigated and in case of any illegal diversion of assets personal contribution can be ordered by court.
  9. Introduce a qualified insolvency professional (IP) as intermediaries to oversee the Process
  10. Establishment of Insolvency and Bankruptcy board as an independent body for the administration and governance of Insolvency & bankruptcy Law; and Information Utilities as a depository of financial information.

The Code, at best, is a plan currently awaiting execution. Appropriate information-flow, establishment of a tribunal process and the provision to bring in responsible professionals. The Ministry of Finance has indicated that they are aiming to make IBC operational by 31 March 2017.

The IBC envisages a “creditor in control” regime with financial creditors exercising control through IPs in the event of a single default in repayment of any loan or interest. This can be effected without any notice and the law is very stringent as compared to the SARFAESI Act, 2002. As a result, stressed/ distressed corporates need to implement an accurate cash flow forecasting mechanism to identify mismatches of inflows with commitments on a timely basis. If there is a possibility of a potential default that can trigger IBC, an effective turnaround plan should be devised and communicated to all stakeholders in advance – including financial and operating creditors, employees, etc. Such a plan should include aspects of financial restructuring, operational improvement and sale of assets which can be monetised.

 The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Option 2 ARBITRATION – Corporate Debt Recovery

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Option 2:

THE ARBITRATION AND CONCILIATION ACT, 1996

(Kindly refer to the link in the title to access the full Act)

This option is available only if there is an Arbitration Clause in the contract signed between the parties.

The Indian Arbitration and Conciliation Act, 1996 is the statute governing arbitration law in India. Erstwhile passing of this 1996 Act, the provisions on arbitration law were contained in Arbitration Act, 1940 the Arbitration (Protocol and Convention) Act, 1937 and the Foreign Awards (Recognition and Enforcement) Act, 1961. There was a strong need felt for restructuring the 1940 Act which dealt only with regards to the Domestic Arbitration. Likewise, the 1940 Act was repealed and the present Act was introduced in patronage of rise of India as a Global Economic Power and to further embrace provisions regarding International Commercial Arbitration, Foreign Awards, Conciliation, etc. The Arbitration and Conciliation Act, 1996 is based on the 1985 Model Law on International Commercial Arbitration adopted by the United Nations Commission on International Trade Law (UNCITRAL).

The principal benefit of the Arbitration and Conciliation Act, 1996 is that there is least intervention and reduced supervisory role of courts in the Arbitration Award and Arbitral Proceedings. By means of abundant flexibility with regards to the number of Arbitrators, venue, language, etc. The Act also provides that the Arbitral Tribunal is not bound to follow the Code of Civil Procedure, 1908 or the Evidence Act, 1872 and leaves it to the parties to agree on the procedure to be followed. This alternative dispute mechanism has witnessed virtuous response. The parties prefer also due to its low cost, lesser formalities, expeditious and flexible means of dispute resolution.  

Option 1 Commercial Courts – Corporate Debt Recovery

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Option 1

THE COMMERCIAL COURTS, COMMERCIAL DIVISION AND COMMERCIAL APPELLATE DIVISION OF HIGH COURTS ACT , 2015

(Kindly refer to the link in the title to access the full Act)

As per Section 6, Commercial Courts can try suits relating to commercial transactions having the “specified value”.  Section 2(i) of the Act defines “specified value”.

Salient Features:

  1. Establishment of specialized commercial courts for speedy and effective dispute resolution

  2. Total time from filing of Suit till final decree prescribed to be approximately 16 months

  3. ‘Cost to follow event’ concept introduced

  4. Arbitration matters to go before specialized commercial courts

  5. Limited Right To Appeal/Revision

  6. Fresh Procedure For Hearing Suits

  7. Strict Timelines

Structure of Commercial Courts:

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Indicative timelines/measures have been prescribed to ensure that speedy resolution such as:

  1. Closure of arguments not later than six (6) months from the date of first case management hearing;

  2. Written arguments to be submitted before four (4) weeks of the oral hearing following revised written arguments, if any post oral hearing within one (1) week.

  3. Judgment to be pronounced within ninety (90) days of the conclusion of arguments;

  4. Recording of evidence on a day to day basis;

  5. Six (6) month period for disposal of appeals;

  6. Adjournments not permitted on account of appearing advocate not being present;

Flow of the Case (Indicative Timeline):

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Corporate Debt Recovery

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India is infamous for having an overburdened legal system that leads to indefinite delays in the disposal of cases. Inefficiencies in its legal infrastructure have made it all the more difficult for foreign as well as domestic investors to protect their investments in India. In fact, as seen in the famous case of White Industries Australia Ltd. vs Union of India1, inordinate delays in the legal process was viewed as breach of investment treaty obligation by India.

Thus, there has always been a long standing requirement for a stable and efficient dispute resolution system ensuring quick enforcement of contracts, easy recovery of monetary claims and award of just compensation for damages suffered, all of which are critical in encouraging investment and economic activity.

There were already following remedies available but they lagged badly in their effectiveness: 

  1. Civil remedies – The most common civil remedy for recovering money is Order 37 of the Civil Procedure Code, which allows a creditor to file a summary suit. Compared to normal suits, summary suits are disposed of faster. Once the suit is instituted and the summons are issued, the defendant has 10 days to make an appearance, failing which the court assumes the plaintiff ’s allegations to be true and, accordingly, awards the plaintiff. If the defendant makes an appearance, the court accepts his defence only if it is convinced that it is substantial to the case in question. Where the matter concerns penalties or any other uncertain amount, one cannot file a summary suit.
  2. Another option is the Negotiable Instruments Act, 1881, which only deals with the recovery of money arising from instruments such as bills of exchange or cheques. The Act contains several sections, each outlining the procedure for recovering money under a specific instrument . For instance, Section 138 explains the procedure to deal with a bounced cheque, whereby a legal notice is to be sent to the defaulter within 30 days of receiving the cheque return memo. If the cheque issuer fails to make a fresh payment within 30 days of receiving the notice, the payee has the right to file a criminal complaint under this Section. However , the complaint should be registered in a magistrate’s court within a month of the expiry of the notice period, otherwise your suit will be time-barred . If found guilty, the defaulter can be punished with a prison term of two years and/or a fine, which can be as high as twice the cheque amount.

After more than a decade of extended deliberations, and given a fresh impetus by the current Government’s mission to improve India’s image as an investment destination, there are four milestone developments that can help you resolve the commercial dispute/recovery of dues: 

  1. The Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015
    which was cleared by the parliament of India having received the assent of the President on the 31st December, 2015    .
  2. Arbitration and Conciliation (Amendment) Act, 2015 (“Act of 2015”), 
    one major amendment is by way of insertion of Section 29 B which provides for ‘Fast Track Procedure’ which articulates that the parties to the dispute may agree that their dispute be resolved through fast track procedure with sole arbitrator and also proposes that ‘Award’ in such cases shall be given within six months’ period.
  3. Insolvency and Bankruptcy Code, 2016
    The Code has repealed a number of outdated acts like the Provincial Insolvency Act, 1920, the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920. It further amends certain legislation like the Indian Partnership Act, 1932, the Companies Act 2013, Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, Limited Liability Partnership Act 2008 and Sick Industrial Companies (Special Provisions) Repeal Act 2003. In order to sidestep any further litigation in insolvency proceedings, this new Code shall overrule all other laws and Acts.
  4. MSME SAMADHAAN- DELAYED PAYMENTS TO MICRO AND SMALL ENTERPRISES UNDER MICRO, SMALL AND MEDIUM ENTERPRISE DEVELOPMENT (MSMED) ACT, 2006The Micro, Small and Medium Enterprise Development (MSMED) Act, 2006 contains provisions of Delayed Payment to Micro and Small Enterprise (MSEs). (Section 15- 24). State Governments to establish Micro and Small Enterprise Facilitation Council (MSEFC) for settlement of disputes on getting references/filing on Delayed payments. (Section 20 and 21)

    MSEFC of the State after examining the case filed by MSE unit will issue directions to the buyer unit for payment of due amount along with interest as per the provisions under the MSMED Act 2006.

LODGMENT OF CRIMINAL PROCEEDINGS 

You also have the option of initiating criminal proceedings against the defaulter under the Indian Penal Code, 1860. You can either file a case of criminal breach of trust or cheating, or even mischief.

  • Section 406 covers criminal breach of trust under the Indian Penal Code: Under Section 406 of the Indian Penal Code. Seller can file a suit for breach of trust. Seller have to prove that the customer has breached his trust by not paying the money against the product or services provided. “Punishment for criminal breach of trust.—Whoever commits criminal breach of trust shall be punished with imprisonment of either description for a term which may extend to three years, or with fine, or with both”. Punishment is given to the person who breaches the trust.
  • Section 417 of Indian Penal Code: This section deals with the cheating. Cheating can be in any sense between seller and buyer or between any two people.”Punishment for cheating.—Whoever cheats shall be punished with imprisonment of either description for a term which may extend to one year, or with fine, or with both”.
  • Section 420 of Indian Penal Code: This section gives relief to the person who is being cheated by someone. This section also includes cheating same as section 417. This section can be one provision on which seller can take action for non payment from the customer.

But, one has to be very careful that in absence of any specific allegation in the complaint that the accused had, at the very inception, induced the complainant with dishonest intention and further the inability of the accused to make payment of the amounts due would not attract the ingredients of Sections 406 and 420 IPC.

For More info please refer to:

  • V.P. Shrivastava Vs Indian Explosives Ltd., (2010) 10 SCC 261;
  • V.Y.Jose Vs State of Gujarat, (2009) 3 SCC 78.

And also note that in practice legal remedy has to be determined depending upon the facts of each case, for which appropriate legal guidance may be taken from concerned professional.