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Summary Suits

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Introduction

Summary suit or summary procedure is given in order XXXVII of the Code of Civil Procedure, 1908. Summary procedure is a legal procedure used for enforcing a right that takes effect faster and more efficiently than ordinary methods. [1] Its object is to summarise the procedure of suits in case the defendant is not having any defence.

A summary suit can be instituted in High Courts, City Civil Courts, Courts of Small Causes and any other court notified by the High Court. High Courts can restrict, enlarge or vary the categories of suits to be brought under this order. [2]

Classes of suits where summary procedure is applied

Summary suits can be instituted in case of certain specified documents such as a bill of exchange, hundies, and promissory notes. Summary procedure is applicable to recover a debt or liquidated demand in money arising on a written contract, an enactment or on a guarantee.[3]

What is a bill of exchange?

A bill of exchange is a written unconditional order by one party (the drawer) to another (the drawee) to pay a certain sum either immediately or on a fixed date for payment of goods and/or services received. [4] If the sum is to be paid immediately it is called a sight bill. Term bill is the bill of exchange where the sum is to be paid on a fixed date.

Hundies

A Hundi is an unconditional order in writing made by a person directing another to pay a certain sum of money to a person named in the order. It is a financial instrument evolved on the Indian sub-continent and used for trade and credit purposes.[5]

Promissory notes

A promissory note contains an unconditional promise to pay a certain sum to the order of a specifically named person or to bearer—that is, to any individual presenting the note. A promissory note can be either payable on demand or at a specific time. [6]

Liquidated demand in money

Liquidated demand is a demand for a fixed sum e.g. a debt of Rs. 50. It is distinguished from a claim of unliquidated damages, which is a subject of the discretionary assessment by the court. [7]

Institution of summary suits

In order to institute a suit under summary procedure, the nature of suit must be among the following classes:-

Suits upon bill of exchange, hundies and promissory notes

Suits for recovering a debt or liquidated demand in money, with or without interest, arising:-

  1. On a written contract, or
  2. On an enactment (the recoverable sum should be fixed in money or it should be in the nature of a debt other than a penalty), Or
  3. On a guarantee (here the claim should be in respect of a debt or liquidated demand only)

A summary suit is instituted by presenting a plaint in an appropriate civil court.

Contents of plaint for summary procedure

Apart from facts about the cause of action, the plaint must contain a specific affirmation that the suit is filed under this order. It should also contain that no such relief has been claimed which does not fall under the ambit of rule XXXVII of the CPC. In the title of the suit, following inscription must be there under the number of the suit:-

“(Under Order XXXVII of the Code of Civil Procedure, 1908)”  [8]

Procedures after institution of Summary suit

Under summary procedures, the defendant has to get the leave to defend from the court. A burden is placed upon the defendant to disclose the facts sufficient to entitle him to defend in the application for leave to defend.

Detailed procedures

  • After institution of a summary suit, the defendant is required to be served with a copy of the plaint and summons in the prescribed form.
  • Within 10 days of service of summons, the defendant has to enter an appearance.
  • If the defendant enters an appearance, the plaintiff shall serve on the defendant a summons for judgment.
  • Within 10 days of service of such summons, the defendant has to apply for leave to defend the suit.
  • Leave to defend may be granted to him unconditionally or upon such terms as may appear to the Court or Judge to be just.
  • If the defendant has not applied for leave to defend, or if such an application has been made and refused, the plaintiff becomes entitled to the judgment forthwith.
  • If the conditions on which leave was granted are not complied with by the defendant then also the plaintiff becomes entitled to judgment forthwith.
  • Sub-rule (7) of Order 37 provides that save as provided by that order the procedure in summary suits shall be the same as the procedure in suits instituted in an ordinary manner. [9]

Can a summary suit be tried after the institution of an ordinary suit on the same cause of action?

According to section 10 of the CPC, a court cannot proceed with the trial of a suit in which the matter in issue is also directly and substantially in issue in a previously instituted suit between the same parties. It is called the principle of res sub-judice.The provision contained in the section is mandatory and no discretion is left with the court.[10]

However, the word trial, in this case, has not been used in its widest sense. The concept of res sub-judice is not applicable to subsequently instituted summary suits.

The Court or the Judge dealing with the summary suit can proceed up to the stage of hearing the summons for judgment. Judgment can also be passed in favor of the plaintiff if:-

(a) The defendant has not applied for leave to defend or if such application has been made and refused, or,

(b) The defendant who is permitted to defend fails to comply with the conditions on which leave to defend is granted. [11]

When a leave to defend is granted

The following principles are applicable in the matter of grant or refusal of leave to defend in summary suits:

(a) If the defendant satisfies the court that he has a substantial defence, the defendant is entitled to an unconditional leave of appeal.

(b) If the defendant raises triable issues indicating that he has a fair or reasonable defence, although not a positively good defence, the defendant is ordinarily entitled to unconditional leave to defend.

(c) Even if the defendant raises triable issues, if a doubt is left with trial judge about the defendant’s good faith, conditional leave to defend is granted.

(d) If the defendant raises a defence which is plausible but improbable, the trial judge may grant conditional leave to defend with conditions as to time or mode of trial, as well as payment into court, or furnishing security.

(e) If the defendant has no substantial defence and raises no genuine triable issue, then no leave to defend is granted.

(f) Where part of the amount claimed by the plaintiff is admitted by the defendant to be due from him, leave to defend shall not be granted unless the amount so admitted to be due is deposited by the defendant in Court.[12]

Decree in summary suits

The plaintiff is entitled to a decree of a sum not exceeding the sum mentioned in plaint, together with interest and cost in following conditions:-

  1. If the defendant does not enter an appearance (ex parte decree)
  2. If the defendant has not applied for leave to defend
  3. If the defendant has applied for leave to defend but it is refused
  4. If the leave to defend is granted then the suit proceeds as an ordinary suit and decree is granted as per the CPC.[13]

Setting aside decree in summary suits

In the CPC, rule 13 of order IX deals with setting aside the ex parte decree. The defendant has to satisfy the court that the summons was not duly served or he was prevented by any sufficient cause from appearing in the hearing.

Rule 7 of Order 37 says that except as provided in the order, the procedure in suits under Order 37 shall be the same as the procedure in suits instituted in an ordinary manner. Rule 4 of Order 37 specifically provides for setting aside the decree, therefore, provisions of Rule 13 of Order 9 will not apply to a suit filed under Order 37.

Under rule 4 of order XXXVII, the court has the power to set aside the ex parte decree passed in summary suit. The court is empowered to stay the execution of such a decree. Under this rule, an application is made either because the defendant did not appear in response to summons and limitation expired, or having appeared, did not apply for leave to defend the suit in the prescribed period. To set aside ex parte decree, the defendant has not only to show special circumstances which prevented him from appearing but also facts which would entitle him to leave to defend.[14]

Difference between sufficient cause and special circumstances

For setting aside ex parte decree in an ordinary suit, the defendant has to satisfy the court with sufficient cause for his non-appearance. In summary suits, the ex parte decree may be set aside if the defendant shows special circumstances.

The reasons offered by the defendant to explain the special circumstances should be such that he had no possibility of appearing before the Court on a relevant day. For instance, there was a strike and all the buses were withdrawn and there was no other mode of transport. This may constitute “special circumstances”. But if he were to plead that he missed the bus he wanted to board and consequently he could not appear before the Court. It may constitute a ‘sufficient cause’, but not a ‘special circumstance’.

Thus a ‘special circumstance’ would take with it a ’cause’ or ‘reason’, which prevents a person in such a way that it is almost impossible for him to attend the Court or to perform certain acts which he is required to do. Thus the ‘reason’ or ’cause’ found in “special circumstances” is more strict or more stringent than in “sufficient cause”. What would constitute ‘special circumstances’, would depend upon the facts of each case. Special circumstances (for the purpose of setting aside the ex parte decree) may constitute a ‘sufficient cause’, but not vice versa. [15]

How summary suits are different from ordinary suits

The table given below demonstrates the difference between a summary suit and an ordinary suit:-

Summary suits Ordinary suits
Matter Only for suits related to bill of exchange, hundies, promissory notes and contracts, enactments, guarantees of specified nature. For any matter of civil nature.
Applicability of res sub-judice Not applicable if a summary suit can be filed on the matter directly and substantially in issue in a previous ordinary suit. Applicable. One cannot file another suit on the matter directly and substantially in issue in a previous suit.
The right of the defendant to defend The defendant will get a chance to defend only if leave to defend is granted. The defendant has a right to defend the averments made in the suit.
Ease of getting decree In case of non-appearance of the defendant or refusal of leave to defend, the plaintiff is entitled to decree forthwith. Multiple summonses are served to the defendant when ex parte decree is passed.
Setting aside ex parte decree More strict and stringent. Special circumstances for non-appearance has to be shown. Sufficient cause for non-appearance needs to be shown.

Why summary suits

The summary procedure prevents unreasonable obstructions by the defendant who has no defence. It assists expeditious disposal of cases. Unless the defendant is able to demonstrate that he has a substantial defence in his case, the plaintiff is entitled to a judgment forthwith. In the event of ex parte decree in summary suit, the defendant is required to show more strict and stringent causes. This ensures that ex parte decree is not set aside in an ordinary manner.

The summary procedure is generally resorted to in a class of cases where speedy decisions are desirable in the interest of commercial transactions. Summary suits are easier to establish for the plaintiff and tougher for the defendant to defend than ordinary suits. By and large, the summary procedure ensures that the defendant does not prolong the litigation and prevent the plaintiff from obtaining a decree by raising untenable and frivolous defences. [16]

References

[1] https://legal-dictionary.thefreedictionary.com/Summary+Process (Date of visit this site is 02/02/18 and time is 14:33 PM IST)

[2] Rule 1(1), Order XXXVII, Code of Civil Procedure, 1908

[3] Rule 1(2), Order XXXVII, Code of Civil Procedure, 1908

[4] http://www.businessdictionary.com/definition/bill-of-exchange-BOE.html (Date of visit this site is 02/02/18 and time is 15:06 PM IST)

[5] https://www.rbi.org.in/scripts/ms_hundies.aspx (Date of visit this site is 02/02/18 and time is 15:18 PM IST)

[6] https://legal-dictionary.thefreedictionary.com/promissory+note (Date of visit this site is 02/02/18 and time is 15:38 PM IST)

[7]http://www.oxfordreference.com/view/10.1093/oi/authority.20110803100108393 (Date of visit this site is 02/02/18 and time is 15:48 PM IST)

[8] Rule 2(1), Order XXXVII, Code of Civil Procedure, 1908

[9]Rule 3 & Rule 7, Order XXXVII, Code of Civil Procedure, 1908

[10]Manohar Lal Chopra v. Rai Bahadur Rao Raja Seth Hiralal AIR 1962 SC 527

[11]Indian Bank v. Maharashtra State Co-operative, https://indiankanoon.org/doc/106987380/(Date of visit this site is 02/02/18 and time is 18:00 PM IST)

[12]IDBI Trusteeship Services Ltd. Vs. Hubtown Ltd, http://www.livelaw.in/supreme-court-elucidates-principles-governing-grant-leave-defend-summary-suit/

[13]Rule 3(6) & Rule 7, Order XXXVII, Code of Civil Procedure, 1908

[14]Ibid, Indian Bank v. Maharashtra State Co-operative

[15]Karumili Bharathi v. Prichikala Venkatchalam, https://indiankanoon.org/doc/1838515/ (Date of visit this site is 06/02/18 and time is 17:14 PM IST)

[16]http://lexquest.in/understanding-summary-suit/ (Date of visit this site is 02/02/18 and time is 18:10 PM IST)

Option 4 – MSME SAMADHAAN- Delayed Payments to Micro and Small Enterprises under Micro, Small and Medium Enterprise Development (MSMED) Act, 2006

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The MSMED Act, 2006 (Dealing with Delayed Payment) 

Who can apply

Any Micro or small enterprise having valid Udyog Aadhar (UAM) can apply, if your enterprise doesn’t have an Udyog Aadhar (UAM), it can be obtained from here.

Related Provision

The 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)

Nature of assistance

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.

Salient Features

The buyer is liable to pay compound interest with the monthly rests to the supplier on the amount at the three times of the bank rate notified by RBI in case he does not make payment to the supplier for his supplies of goods or services within 45 days of the acceptance of the goods/service rendered. (Section 16)

State Governments to notify (i) Authority for filing Entrepreneur Memorandum (ii) Rules of MSEFC and (iii) Constitution of MSEFC.

All States/UTs have notified Authority for Filing Entrepreneur’s Memorandum, 33 States/UTs (i.e. except Arunachal Pradesh, Assam and Manipur) have Notified rules of MSEFC and all the 36 States/UTs have constituted MSEFCs, as per provisions laid down under MSMED Act 2006.

Every reference made to MSEFC shall be decided within a period of ninety days from the date of making such a reference as per provisions laid in the Act.

If the Appellant (not being the supplier) wants to file an appeal, no application for setting aside any decree or award by the MSEFC shall be entertained by any court unless the appellant (not being supplier) has deposited with it, the 75% of the award amount. (Section 19)

Implementation

The provisions under the Act are implemented by MSEFC chaired by Director of Industries of the State /UT having administrative control of the MSE units. State Government/UTs are requested to ensure that the MSE Facilitation Council hold meetings regularly and delayed payment cases are decided by the Councils within a period of 90 days as stipulated in the MSMED Act, 2006.

MSME Samadhaan Portal – Ease of filing application under MSEFC, an Initiative from Ministry of MSME, Govt. of India

Ministry of MSME has taken an initiative for filing online application by the supplier MSE unit against the buyer of goods/services before the concerned MSEFC of his/her State/UT. These will be viewed by MSEFC Council for their actions. These will be also visible to Concerned Central Ministries, Departments, CPSEs, State Government, etc for pro-active actions.

Will the New Rules on Delayed Payment to MSMEs Have Any Impact?

On 2 November 2018, the Union government issued a notification under the Micro, Small and Medium Enterprises (MSMEs) Development Act, 2006 ostensibly to ensure timely and smooth flow of credit to MSMEs and minimise sickness among them.

The Act strengthens the provisions relating to delayed payments to the MSMEs by specifying the maximum credit period and higher penal interest if delayed beyond that period. If there is a delay in payment, companies will have to mention the reason for such delay in the statement of accounts.
The question is whether such notifications will actually foster the growth of the MSME sector when there are other prevailing laws to curb its growth. Let us understand the current provisions relating to delayed payments in
Liability of Buyer to Make Payment
Section 15 of the Act states that where the supplier supplies goods or renders any services to any buyer, then the buyer shall make payment on or before the date mentioned in the agreement and, if there is no agreement, then before the appointed date. The proviso to this Section states that the period of credit given by the seller shall not exceed 45 days from the day of acceptance or from the date of deemed acceptance. To understand the provision of this section, one must take note of the following definitions:
  • “supplier” means a micro or small enterprise, which has filed a memorandum with the specified authority and has obtained the Unique Identification Number (UIN) for MSMEs.
  • “buyer” means any person who buys any goods or receives any services from the suppliers for a consideration.
  •  “appointed date” means the day following immediately after the expiry of the period of fifteen days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier. 
Explanation—For the purposes of this clause,—
(i) “the day of acceptance” means,— 
(a) the day of the actual delivery of goods or the rendering of services; or 
(b) where any objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, the day on which such objection is removed by the supplier; 
(ii) “the day of deemed acceptance” means, where no objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, the day of the actual delivery of goods or the rendering of services;
Therefore, Section 15 of the Act clearly states that the payment to the suppliers shall be made within the date specified in the agreement, and in case there is no agreement then before the appointed date. However, a maximum period that is allowed under the Act is a period of 45 days from the date of delivery of goods/services.
Further, as per Section 16 of the Act, if a buyer fails to make the payment within the stipulated date, it will be liable to pay compound interest with monthly rests on the outstanding amount additionally. The interest shall be calculated from the appointed date at three times of the bank rate notified by the RBI. However, in case of any dispute regarding the payment of principal/interest between the supplier and the borrower, reference shall have to be made to the Micro and Small Enterprises Facilitation Council (MSEFC), constituted by the respective state governments.
The government has also launched an online delayed payment monitoring system called the MSME Samadhaan the ease of filing an application under the MSEFC. Any MSME, having a valid Udyog Aadhaar Memorandum (UAM) can make an application via this portal. After an application is made by the MSME, the MSEFC shall examine the case and then issue directions to the buyer unit for payment of the due amount along with the interest.
From the date of launch of the MSME Samadhaan portal, i.e., 30 October 2017, MSMEs have filed 2,927 applications related to delayed payments. These cases involve an amount of Rs744.65 crore. This portal has also helped in getting the delayed payments settled mutually between seller and buyer.
About 105 mutual settlements have been made, involving Rs8.87 crore.
Applications are getting converted to cases by MSE-Facilitation Councils in the respective states. Some 264 applications have been converted to cases as on 31 January 2018. This has empowered the MSMEs to file their delayed payment cases directly. This is being monitored by the respective ministries/ central public sector enterprises (CPSEs) and state governments. (All the data have been taken from https://msme.gov.in/sites/default/files/MSME-AR-2017-18-Eng.pdf)
Disclosure Requirements
Section 22 of the Act states that the buyer, who buys goods or avails services from the MSMEs, and is required to get his annual accounts audited, has to mandatorily disclose the following additional information in its annual statement of accounts with respect to the amount due to the MSMEs:
  • The principal amount and the interest due thereon remaining unpaid to the supplier till the appointed date;
  • The amount of interest paid by the buyer on account of delayed payments;
  • The principal amount and interest due beyond the appointed date for the period of delay;
  • The amount of interest accrued and remained unpaid at the end of each year;
  • The amount of further interests remaining due and payable even in succeeding years, until such date when the interest due is actually paid to the MSMEs.
Half-yearly Reporting Requirements
Following the notification mentioned in the beginning, all companies who buy goods or avail services from micro and small enterprises and whose payments to such suppliers have exceeded 45 days shall submit a half yearly return to the ministry of corporate affairs (MCA) stating the outstanding amount and the reasons for delay.
However, it is important to note that the notification has not prescribed any form for filing such a return. It is expected that MCA will come up with a notification in this regard.
The question is: who will have the power to monitor this and in case of non-filing of the return, what shall be the penalty/fine imposed on the debtors of the MSMEs? In order to ensure that this notification does not turn out to be a futile effort, the government should soon come out with some clarification in this regard.
Challenge Faced under IBC
The government of India is taking several steps to foster the growth of MSMEs, but the biggest challenge faced by the MSME sector is the Insolvency and Bankruptcy Code, 2016 (IBC). The government has made it mandatory for all the companies to file a half-yearly return in case a payment to the MSMEs is delayed beyond 45 days. But what if the company goes into liquidation? The MSMEs are operational creditors. The IBC defines operational creditors as:
“operational creditor” means a person to whom an operational debt is owed and includes any person to whom such a debt has been legally assigned or transferred.
Further, under the waterfall structure for distribution of assets, an operational creditor comes at the bottom. They have zero liquidation values and no resolution professional cares for the MSMEs dues, even though the resolution plan has to mandatorily comply with the applicable provisions of the Act. However, the prevailing notion seems to be that a resolution plan has to comply with no law except the IBC and promoters are using this prevailing mindset to the hilt.

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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