Since the inception of The Insolvency and Bankruptcy Code, 2016 (“Code”), Corporate Professionals has been actively providing services in the.
The Code has faced several challenges since its inception and the government has effectively managed to tighten the loopholes. The Code is now being considered as an effective tool for making a disciplined financial market. However, the nationwide lockdown due to COVID 19 pandemic created unprecedented uncertainties, stress and disruptions in business. In order to protect the stressed businesses, the government introduced certain amendments in IBC which have directly curtailed the rights of creditors to push the corporates into insolvency resolution process. Nonetheless, the importance of the Code cannot be undermined in the Post-Covid 19 economic scenario and hence discussions are on as to the road ahead for the IBC.
While addressing the issues in our webinars, we have observed some commonly asked queries related to IBC Ordinance 2020, the alternatives remedies available to the creditors and future of the Code. With a view to help our industry participants, we have compiled these questions with answers.
Frequently Asked Questions
Questions relating to Amendment in the Code
1. Is there a complete bar on initiation of insolvency proceedings?
No, there is no complete bar. Suspension concerns only in respect of defaults occurring on or after 25.03.2020. However, it has been clarified that no application shall ever be filed for the defaults which occurred during 6 months (extendable up to 1 year) starting from 25.03.2020.
2. Can a new application be filed before NCLT for defaults occurred before 25.03.2020?
Yes, new application can be filed before NCLT for defaults that have occurred prior to 25.03.2020. However, in the matter of Pankaj Aggarwal v/s Union of India, the Hon’ble Delhi High Court has granted interim stay on NCLT admission order against MSME. Hon’ble High Court in its interim order noted that the purpose of the notification providing for increasing the minimum threshold from Rs. 1 lac to Rs. 1 Crore was to ensure that SMEs and MSMEs are not subjected to Insolvency proceedings during the lockdown or immediately thereafter. Further, the Hon’ble HC was of the view that NCLT has committed an error as the notification dated 24th March 2020 was clearly applicable.
Having said this, it is clear that presently the benches of NCLT are proceeding the applications but the judgement supra has given contradictory view as against the IBC Amendment Ordinance 2020 which clarified that it is applicable to defaults which occurred prior to 25.03.2020.
3. Can a fresh application be filed where the amount of default is more than Rs 1 cr.?
Yes. Fresh application can be filed before NCLT against a default amount of more than Rs. 1 Crore only for the defaults occurred prior to 25.03.2020. You may have to justify that the default was prior to the said date.
4. Does the notification of enhancing the default limit have prospective effect?
Yes, the notification for enhancement of the minimum threshold for triggering the provisions of the Code is prospective in terms of the recent orders passed in the matter of Foseco India Limited v Om Boseco Rail Products Limited in (CP (IB) No 1735/KB/2019by NCLT, Kolkata Bench.
5. What will happen if the default of a corporate debtor is continuous and recurring from past and goes beyond 25.03.2020?
One needs to understand to establish a default, one has to look at the commercial terms between the parties. In a contract, there may be a supply of various goods or services for which payments would have been due when such goods were supplied or rendered. Now such supplies could be of pre-pandemic period and also after 25.03.2020. In our opinion, if you wish to file an application before NCLT, the same is possible only for the default amount for the supplies made prior to 25.03.2020. Main challenge before you would be to establish a debt which was due prior to 25.03.2020 and the corporate debtor has failed or rather defaulted in its obligations of making payment.
6. How to determine the date of default?
A default occurs when the debt become due and payable and is not paid. The date of default is the date on which defaulted debt fell due. The date on which the debt fell due shall be determined in accordance with the facts of each case based on the agreement / terms of transaction between the parties.
7. What will be fate of the applications that are pending before the NCLT?
Newly inserted section 10A (suspending the proceedings for six months) is not applicable for defaults prior to 25.03.2020. NCLT is passing the orders in the matters which were reserved for orders. However, normal functioning is yet to resume, till then only urgent matters are being taken up. The ongoing matters would be proceeded as such.
8. Can a fresh application be filed u/s 9 of the Code where the amount of default is less than Rs. 1 Cr. and demand notice had already been sent prior to 25.03.2020?
There is no bar on taking any action for defaults prior to 25.03.2020. Also, it may be noted that notification which came on 24.03.2020 (increasing the minimum default amount has prospective effect). One may argue that Section 8 demand notice is a mandatory requirement under the Code before filing the application before NCLT. So once the demand notice has been issued prior to the enhancement of the Minimum default limit under the Code, the enhanced limit of Rs. 1 crore would not be applicable in such case. Therefore, one may proceed with filing the application.
9. Does the amendment protect debts that have been incurred during the suspension period? What will happen to such debts that have occurred during the suspension period since Code provides that no application can ever be filed under IBC?
Amendment protect the defaulters for defaults occurred during the 6 month or 1 year period starting from 25.03.2020. No action can ever be taken against such defaults as per the IBC Amendment Ordinance 2020.
10. Is Protection extended to personal guarantors to a corporate debtor?
The insolvency resolution process for personal guarantors to a corporate debtor is contained in Part III of the Code. The IBC Amendment Ordinance 2020 does not protect the personal guarantors to a corporate debtor against which the lenders may choose to take actions under the Code as well as other applicable laws.
Questions relating to Alternate Remedies available to Creditors
- Scheme of Arrangement
- Summary Suit/ Recovery Suit
- Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002
- The Negotiable Instruments Act, 1881
- Real Estate (Regulation and Development) Act, 2016
- Micro, Small and Medium Enterprises Developmental Act, 2006
11. What are the alternative remedies available to creditors?
12. How is scheme of arrangement an alternate to the IBC proceedings?
Going back to the traditional approach of entering into a settlement or an arrangement with the creditors of the company, a scheme of arrangement is a viable alternative to the IBC proceedings where the creditors and shareholders are looking for an alternate arrangement for running/reviving the business and not closure of the business of the entity. Negotiation and discussions here are being seen as a tool which everybody including creditors understand since they are also affected with this unprecedented situation.
13. Is there any benefit in the scheme of restructuring as against the IBC proceedings?
In a scheme of arrangement which is generally proposed by the directors who are in control of the company which is presently under stress, scheme of arrangement provides an opportunity to the existing management to keep the control with themselves unlike in IBC, where the control shifts in the hands of creditors. In the current scenario and taking a practical view, insolvency resolution professionals are certainly ill equipped to take good business decisions.
14. In how much time can a scheme of arrangement be approved?
A scheme of arrangement if filed with the due approval of creditors by way of NoC’s, should not take more than 4 to 6 months’ time.
15. What kind of claims can be made under a recovery suit?
Summary suit can be filed only for two categories: (1) Suit upon Bill of Exchange, Hundies, Promissory Notes; and (2) To recover debt, liquidated demand in money payable by the defendant on written contract, and on guarantee.
16. What is the court fee for filing the summary suit/ recovery suit?
It depends from state to state, in Delhi it approximately comes to 1% of the claimed amount.
17. How long does it take generally for a summary suit to be decided?
Mostly it takes 6 months to obtain a decree. Execution is thereafter.
18. Is there any pecuniary jurisdiction for filing the Summary Suit/ Recovery suit?
Yes. Suits below an amount of Rs. 2 crore would go to the district courts and above that to HC having jurisdiction.
19. What will be the procedure for filing of criminal case against the drawer of the cheque?
Firstly the holder of the cheque/payee has to send a demand notice within 30 days, after receiving the information from its bank regarding the cheque bounce, to the drawer of the cheque either individually or through lawyer asking to make the payment of the cheque amount within 15 days from the receipt of the intimation/demand notice with respect to dishonour of the cheque. Secondly if the drawer fails to make the payment within the said 15 days from the receipt of the intimation/demand notice with respect to dishonour of the cheque, the holder of the cheque/payee can move onto filing a criminal complaint in the court.
20. What action can MSME take if the party is defaulting in its payment?
MSME may approach MSME Council through MSME Samadhaan Portal online or chose to file a physical application. It is recommended to file a physical application which is drafted by a counsel who will then cover the aspects related to the possible foreseen defences of the defaulting party against whom recovery is sought and the eligibility of the complainant MSME.
21. How long does it take to decide an application before MSME council?
Depends how soon application is converted into case. However, the timelines which are provided say that MSMEFC shall decide a case within 90 days.
22. Which category of assets can be proceeded with SARFAESI action?
Any asset, movable or immovable, given as security whether by way of mortgage, hypothecation or creation of a security interest in any other form except those excluded u/s 31 of the Act.
23. Can the guarantors’ personal property be proceeded against under SARFAESI?
Only those property given as security can be proceeded under the provisions of SARFAESI Act.
24. What is the remedy available to the borrower upon possession being taken? Within what time frame?
The borrower or any aggrieved person can make an application u/s 17 of the Act to the Debt Recovery Tribunal to challenge the action within 45 days from the action being taken u/s 13(4) of the Act.
25. What can be claimed before RERA in case if delay by the builder in possession?
One may claim Penalty, compensation and refund in relation to the unit booked with the builder.
26. Can an application/complaint be filed against the promoters delaying in giving the possession during COVID?
The Ministry of Finance has considered the COVID- 19 as a natural calamity and a Force Majeure event and therefore, it has given an extension for the registration and completion date suo-motu by 6 months for all registered real estate projects expiring on March 25, 2020.
Other Developments in the Code
27. What is Pre-package Insolvency?
A pre-package insolvency is a pre-planned arrangement in which financially distressed company and its creditors & investors reach an agreement to resolve the bankruptcy/insolvency and debts of the stressed company. The concept is still being explored in India. Ministry of Corporate Affairs has set up a committee to devise pre-pack arrangements under the current insolvency laws prevailing in India.
28. Will Operational Creditors have any say in the negotiation with the company in pre package process?
No, generally pre-pack schemes are more in the favor of secured creditors and operational creditors do not have much say in the negotiation nor they are given a fair share. However, since the pre package is not ye implemented in India, this might be considered by the government while drafting the provision for pre-package insolvency. However, it would be safe to assert presently that pre-packs would not deviate much from the current regime wherein the control of the affairs of the Company shifts from promoters to the Committee of Creditors which generally constitutes Financial Creditors (Secured and unsecured) both.
29. What is cross border insolvency?
Cross-border insolvency is a situation where the insolvent debtor has assets in more than one jurisdiction or where some of the creditors of the debtor are not from the jurisdiction where the insolvency proceedings have been filed/initiated. Currently, only two enabling section 234 and 235 of the Code having limited scope i.e. “Agreements with foreign countries (Sec 234)” and “Letter of Request to a country outside India in certain cases (Sec.235)”. Though India is yet to establish the concrete framework for dealing with the cross border insolvency matters, however, stakeholders are aware of the Jet Airways case where the foreign creditor was allowed to participate in the meetings of the Committee of Creditors by Hon’ble Appellate Authority.
30. What is insolvency framework for MSME?
Under Insolvency framework for MSME, only MSMEs will be able to initiate insolvency proceedings through this mechanism. The lenders and operational creditors will not be able to initiate insolvency under this framework. Currently section 240A deal with MSME where promoters are exempted from certain clauses of Section 29A. It is expected that the new Insolvency Resolution Framework of MSME will be enforced under section 240A as announced by Finance Minister, Nirmala Sitharaman during the Pandemic Reliefs announcement speech.
31. Can homebuyer welfare association act as resolution applicant under the Code?
A resolution applicant can be any person who is eligible and meets the criteria as laid down for the specific corporate debtor by its resolution professional in light of the applicable provisions of the Code and applicable regulations. There is no embargo upon the homebuyer welfare association to bid for a company under a resolution process. One important test which every person posing as the resolution applicant has to satisfy is to check its eligibility under Section 29A of the Code.
32. If resolution plan does not provide any provision for shareholder then would the plan be considered not considering the interest of all stakeholders?
A resolution plan is approved by the members of committee of creditors having majority of 66% voting rights, which then is confirmed by the Hon’ble NCLT.
In Essar Steel judgement, Hon’ble Supreme Court stated that while the ultimate discretion of what to pay and how much to pay each class or subclass of creditors lies with the CoC, the decision of the CoC must necessarily reflect that it has considered three main parameters: (a) ensuring that the corporate debtor is kept as a going concern during the CIRP process; (b) maximizing the value of the assets of the corporate debtor; and (c) balancing the interests of all of the stakeholders, including operational creditors. The NCLT and the NCLAT cannot interfere on merits with the commercial decisions taken by the CoC but can modify the plan to make it viable.
Having discussed above, it is important to note that provisions of the Code at most provide for the payment of the liquidation value to the dissenting creditors. Drawing reference from this, it can be said that in almost all the cases the value available for the equity shareholders is zero. One can give/submit a plan without providing anything to the shareholders which is also commonly seen in case of companies where all the shares are generally held by the promoters or relatives & friends. For listed entities, under plans, stakeholders have witnessed plans seeking reduction in share capital, swaps, extinguishment etc.
33. If any activity in relation to the CIRP of a company could not be completed due to lockdown, what can be the consequences?
As per notification dated 29.03.2020, Regulation 40C has been inserted in the IBBI (Insolvency Resolution Process for corporate Person) Regulations, 2016 which provides that if any activity could not be completed due to lockdown in relation to the corporate insolvency resolution process, that period of lockdown shall not be counted for the purposes of timeline for any activity that could not be completed. Similar, vide notification dated 17.04.2020, Regulation 47A was inserted in IBBI (Liquidation Process), Regulations, 2016 which provides that if any task could not be completed due to lockdown, that period shall be excluded while computing the timeline for liquidation process.
34. Section 7 provides an option for filing a record of default as an optional document, whereas NCLT circular dated 12.05.2020 has made such filing mandatory. Is it not overriding IBC?
Recently, Hon’ble Calcutta High Court has quashed the aforesaid circular. We do not feel that NCLT can make it mandatory by issuing a circular or has the powers to include such a requirement when the provisions of the Code, as evolved till date, don’t make it mandatory upon the financial creditors to submit the record of default from the Information Utilities. In our understating, Circular dated 12.05.2020 is ultra vires.
35. Is the IBC presently enforceable against a partnership firm covered in Part III?
No, the provisions relating to the initiation of insolvency/bankruptcy proceedings against a partnership firm and proprietor ship concern are not yet enforced.
36. Can the creditors join hands together to cross the revised threshold of Rs. 1 crore?
As per Section 7(1) of the Code, a financial creditor either by itself or jointly can file an application for initiating CIRP against the Company. However, on the other hand Code does not allow operational creditors to join hands while preferring an application for initiation of insolvency proceedings against a corporate Debtor. The limit of Rs. 1 Crores is specified under Section 4 of the Code by an amendment enforced on 24.03.2020. Two or more Financial Creditors may join hands for initiating the insolvency proceedings under Section 7 of the Code. Said understanding is derived from the use of word jointly under Section 7 (1) of the Code.
For any discussion, please feel free to contact:
Mr. Manoj Kumar
Partner & Head – M&A Transactions and Insolvency
Corporate Professionals Capital Private Limited
SEBI Registered (Category-I) Merchant Banker
M: +91 9910688433
Disclaimer: This Note is for general information only and not intended for solicitation. Please do not treat this as legal advice. Readers are encouraged not to rely solely on these contents before making any decision.