India: Insolvency Code: Has Corporate Debtor No Say?

The aim and object of the Insolvency and Bankruptcy Code, 2016 is reorganization and insolvency resolution in a time bound manner for the maximization of value of assets of such persons to promote entrepreneurship and availability of credit. The Code provides a speedy process for deciding the application, presentation of resolution plan and to go for liquidation, if the resolution plan gets rejected. However, under this speedy process, the Code does not envisage situations which can defeat the very aim and object for which it was enacted. The Code does not provide any way for the involvement of corporate debtor, which can sometimes cause adverse effect on the company.

The focus of this article is to analyse the Code from the perspective of corporate debtor. The Code gives immense power and rights to financial creditor in order to get back their loans but the Code does not provide corporate debtor any recourse to address their grievances. This creates a heavy imbalance in favor of creditors against corporate debtor. This article analyzes various provisions of the Code and tries to unveil a picture which clearly shows that in situations where the corporate debtor is genuinely interested in revival and paying back loans, the creditor still has the power to take the company to liquidation.

Public Hearing

Under section 7 of the Code, the financial creditor can file an application for the initiation of Corporate Insolvency Resolution Process (CIRP) to the Adjudicatory Authority in the case of commission of default. Rule 4(4) of the Adjudicatory Authority Rules, mandates the applicants to dispatch forthwith, a copy of the application filed with the Adjudicatory Authority. The purpose for the same being, to give the corporate debtor adequate notice that such an application for initiation of insolvency process has been filed against him. However, the Code does not provide any provision for corporate debtor to make a representation in pursuance of such notice. The Code does not envisage the circumstance under which the financial creditor might have concealed relevant documents which can reject the application.

Although, through judicial ruling in the case of Sree Metaliks Limited v. Union of India1, the Calcutta High Court has said that the Adjudicatory Authority has to adhere to the principle of natural justice while deciding application under section 7. The following paragraph clearly shows the objective of the High Court,

"In an application under Section 7 of the Code of 2016, the financial creditor is the applicant while the corporate debtor is the respondent. A proceeding for declaration of insolvency of a company has drastic consequences for a company. Such proceeding may end up in its liquidation. A person cannot be condemned unheard. Where a statute is silent on the right of hearing and it does not in express terms, oust the principles of natural justice, the same can and should be read into in. When the NCLT receives an application under Section 7 of the Code of 2016, therefore, it must afford a reasonable opportunity of hearing to the corporate debtor as Section 424 of the Companies Act, 2013 mandates it to ascertain the existence of default as claimed by the financial creditor in the application"

The abovementioned rationale was reiterated by National Company Law Appellate Tribunal in the case of ICICI Bank v. Innoventives Industries Ltd2 observing,

"52. The insolvency resolution process under Section 7 or Section 9 of I&B Code, 2016 have serious civil consequences not only on the corporate debtor company but also on its directors and shareholders in view of the fact that once the application under Sections 7 or 9 of the I&B Code, 2016 is admitted it is followed by appointment of an 'interim resolution professional' to manage the affairs of the corporate debtor, instant removal of the board of directors and moratorium for a period of 180 days.

However, the point of focus remains that the Code by itself does not provide any recourse for the corporate debtor to raise the grievance. It is for the Adjudicatory Authority to make ways for the corporate debtor to represent himself. Moreover, there is no written procedure laid down for the hearing given to the corporate debtor.

Ascertainment of Default

Under section 7(4) of the Code, the Adjudicatory Authority has to ascertain the existence of the default for the purpose of admitting or rejecting the application within fourteen days from the day of receipt of the application. It means that the threshold of admitting an application is only to ascertain the existence of the default which is very low.

For instance, if a company failed to pay a creditor by one day, the creditor will have the right to file an application under the Code. Authority will only look into whether there was any default or not, and if there was default, the authority will admit the application which will result in appointment of interim resolution professional who will overtake the management of the company.

Reserve Bank of India, in its Master Circular of 20153, has given overdue4 period of 90 days before declaring any asset as Non-Performing Asset and initiation of any debt recovery proceedings. Whereas the Adjudicatory Authority can within one day of default send the company into resolution process. Moreover, the Code does not recognize the situation where the corporate debtor has defaulted but started paying back the dues. For instance, Essar Steels Ltd, one of the twelve companies which the RBI has directed to be sent to NCLT, has started repaying their dues.

In this case, Essar Steels has submitted a revival plan to the creditors, who were part of the board meeting. The creditor has approved the revival plan which shows the co-operation between both the parties. Moreover, Essar has repaid Rs 3,467 from its day-to-day cash flow during the period from April 2016 to June 20175. However, in such situation if any creditor decides to file an application for initiation of resolution process and replace the management with an IRP, the revival of whole company will fall on the shoulders of one person who is a stranger to the company and will handle the work of whole management team. This might reduce the chances of revival of a company while ascertaining that it is sent to liquidation.

Creditor Committee and Resolution Professional

The Creditors while filing an application for initiation of insolvency resolution process have to nominate an Interim Resolution Professional (IRP) also. Such IRP will form the committee of creditors, containing all financial creditors, on the basis of submission of respective claims6. Once the committee is constituted, the committee will appoint either the IRP as RP or will appoint a new person as RP with a vote of not less than seventy-five percent of voting share7.

These provisions show that the person who will be appointed as RP will work for the interest of creditors only. The revival plan, presented by the resolution professional in front of the committee will be focused on the demand of creditors and will not care about the corporate debtor. Consider a situation, where there is chance of revival but the creditor wants to be paid expeditiously; however viable a revival plan, the resolution professional might present, it may not get the committee of creditors. Even if the resolution professional present a genuine revival plan, the committee can reject it and take the company to liquidation. Such action might be against the object of the Code to maximize the value of assets.

However, the Code provides provision for filing a complaint against insolvency professional or insolvency professional agency or information utility by any person in front of the Board8. The Board will direct any person to investigate and present a report in front of the Board9. Thereafter, the Board will form a disciplinary committee to examine the report10. Such disciplinary committee after satisfaction that sufficient cause exists will impose penalty11.

The above complaint mechanism is too lengthy and tedious. Even if someone makes a complaint, the probability of getting the decision during the resolution process is very less. In essence, this provision is an empty gesture in the Code but of no use.

CONCLUSION

It is evident from the perusal reading of the Code that it is definitely an effective move towards establishing a strong regulatory framework to deal with insolvency and liquidation problems. However, the Code is at its nascent stage, it will take time to cross various practical and logistical hurdles before becoming fully comprehensive and consistent. At present, the Code illustrates a picture detrimental to the interest of debtor companies instead of a balance of interest between corporate debtors and their creditors. However, it can be hoped that such interest will be protected in future.

Footnotes

1. WP 7144(W) of 2017, Calcutta High Court.

2. Company Appeal (AT) (Insolvency) No. 1 & 2 of 2017

3. Master Circular No. DBR.No.BP.BC.2/21.04.048/2015-16 dated July 1, 2015

4. Any amount due to the bank under any credit facility is 'overdue' if it is not paid on the due date fixed by the bank.

5. Available at http://www.livemint.com/Companies/UPgt6Sazgkmx6kAtDOGpEI/Essar-Steel-case-hearing-today-a-litmus-test-for-debt-resol.html

6. Section 21

7. Section 22

8. Section 217

9. Section 218

10. Section 219

11. Section 220

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions