India: Insolvency And Bankruptcy Code, 2016: 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 forthepurposeofadmittingorrejectingtheapplication 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-hearingtoday-a-litmus-test-for-debt-resol.html

6 Section 21

7 Section 22

8 Section 217

9 Section 218

10 Section 219

11Section 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.

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