Insolvency Code- Tool for Recovery of Dues or Not
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It is a well-known fact that civil recovery matters often take a long time to decide. Due to low recoverability, the trade displays a low credit discipline. This has stirred businesses as it often creates large working capital requirement and hence more emphasis on margins.
There was a choice to begin winding up petitions before High Courts under earlier Companies Act, 1956. The prohibitive cost of litigation often acted as a dampener for the Creditors actions. The fact is that the petition (in the case admitted) would lead to liquidation through the office of Official Liquidator and rest depends upon the Company, the matter used to stretch for two to three years during which the corporate debtor (company) would remain in control of the same management.
There has been a major shift in the Insolvency & Bankruptcy Code 2016 (IBC), and now an operational creditor can initiate action under IBC for recovery of its dues as per a very cost-effective manner.
Operational Creditor
Section 5(20) of the Insolvency and Bankruptcy Act, 2016, defines a person to whom an operational debt is owed as an “Operational Creditor” and it includes such person to whom such debt has been legally assigned or transferred.
It is admissible to note that, a creditor would fall into the category of an operational creditor if an operational debt is owed to him. What exactly will fall under operational debt becomes clear from the case of Vinod Awasthy v A.M.R Infrastructures Limited. In this case, the NCLT has formulated that ‘operational debt’ under the code can be divided into four categories viz. employment, services, goods, and government dues. If the debt owed to the operational creditor does not fall in any of these four heads, the creditor cannot be known as ‘operational creditor’ and therefore he cannot initiate a corporate insolvency resolution process against the corporate debtor.
How to make an application for initiation of the corporate insolvency resolution process (CIRP) against defaulting Corporate Debtor for a debt of more than Rs.100,000/- (Rupees one lakh)
For initiation of CIRP in accordance to Section 9 of the Insolvency and Bankruptcy Code, 2016 and Regulation 7 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 an operational creditor may make an application to the Adjudicating Authority.
Steps to be followed by the Operational Creditor are:
Step 1: An operational creditor may deliver a demand notice upon the corporate debtor demanding payment in respect of the operational debt in respect of which the default has occurred. The demand notice shall be in prescribed Form 3 or a copy of an invoice with a notice in Form 4(under Rule 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016)
Step 2: The Corporate Debtor shall within 10 days of receipt of the demand notice, communicate to the operational creditor the existence of any dispute or payment of the unpaid operational debt. It is important to note that the dispute raised by a corporate debtor has to be pre-existing to the demand notice issuance date.
Step 3: At the expiry of 10 days of delivering the demand notice to the corporate debtor, if the operational creditor does not receive any payment or notice of dispute, the operational creditor may make an application to the Adjudicating authority for initiation of CIRP under Section 9 of the code in Form 5. The operational creditor may propose the name of a resolution professional to act as an Interim Resolution Professional.
Step 4: The applicant (the operational creditor) shall then serve to the corporate debtor at his registered office by speed post or registered post, a copy of the application made to the adjudicating authority (NCLT)
There is only a nominal filing fee of Rs. 2000/- for filing petition in NCLT. CIRP thus gets initiated against a corporate debtor by an operational creditor.
Is the Insolvency Resolution Mechanism more effective than its predecessors?
The standard restoration in the 60 resolved cases under the IBC is around 46 percent as against 25 percent under the earlier board for industrial and BIFR (financial reconstruction).
Another important section, to take the bull by the horns, is the invocation of Section 74 of the IBC that prescribes penal provisions for violation of the moratorium by the officers of the corporate debtor, creditors and bidders, and failure to comply with the resolution plans by the resolution applicants. The purpose fairly acts as a pressure tool for recovery as it protects the code from being taken lightly, and also infuses some pressure in the stakeholders to the transaction.
A Glance at the Recovery through various mechanisms
It is notable that the average recovery by the banks, as per the data available, through the IBC was 41.3% in FY-18 against 13.80% through different modes of recovery. The recovery through SARFAESI stood solely at Rs.26,500 crore as against IBC that stood at Rs.9,92,900 crore. recoveries through the DRTs and the Lok Adalats were even lower which stood at 7200 crores or 5.4% and Rs.1800 crore or 4% respectively.
The periodical report of the IBBI discloses that out of the 12 cases resolved under its regime, the average recovery as a percentage of total claims filed by the financial creditors was quite high i.e. 69.7%. Cases like Kohinoor CTNL Infrastructure owed Rs.2528 crore to the financial creditors and they could recover Rs.2246 crore or 89% of the total claim amount. Cases like forwarding Shoes, Trinity Auto Components, and Propel Valves, recovered full amount to the financial creditors. Two cases sound exceptionally successful. Burn Standard Company and Shree Radha Raman Packaging recovered over the number due.
Instances of Recovery through IBC Mechanism
The threat which the IBC possesses a recovery mechanism in itself. The legal notices or the threatening notices being sent to the debtors are rendering them between the devil and the deep sea, whereby they are leaving no stone unturned in the payment of the dues of the creditors.
If one probe into the Corporate Insolvency Resolution process thoroughly, then each section has an important role to play. The various provisions of the admission of the application in the NCLT have been structured in such a way that the debtors are left with limited options and benefits to state their innocence for the application filed by the financial creditors. The debtors are left with no options other than to repay the debts of the creditors.
Insolvency law, not a Debt Recovery Tool
Insolvency proceedings are not meant to coerce or threaten a debtor to pay. The law has been enacted for reorganization and insolvency resolution of the corporate debtor. Its goal is to maximize the value of assets, promote entrepreneurship and availability of credit, and balance the interests of all the stakeholders. It is meant to prevent the inequitable distribution of available assets to one or a few aggressive creditors to the detriment of the debtor and other creditors. Otherwise, assertive and resourceful creditors will extract their pound of flesh and leave the debtor bleeding to death by eliminating any prospects of its revival. Its use for debt collection by individual creditors is a gross misuse of the legislation.
The proper function of insolvency law is to maximize return to creditors through a collective debt collection mechanism by pooling together of a debtor’s assets for the benefit of all creditors. Creditors make recovery either by the restructuring of debtor’s business or by its quick liquidation where revival is not feasible. Returns or assets are distributed amongst creditors in accordance with insolvency waterfall rules. In fact, insolvency proceedings are meant to avert the problems associated with individual creditors separately rushing to recover their individual debts and the concomitant waste caused by such actions against an already distressed debtor.
NCLT has an important role in preventing the conversion of insolvency law into bad debt recovery proceedings.
The law has been enacted for reorganization and insolvency resolution of the corporate debtor. (Reuters)
Applications filed under the Insolvency and Bankruptcy Code show a disturbing trend of the law being employed by small creditors as a debt collection tool rather than for restructuring of non-performing assets by banks, thereby undermining its import. Out of the 103 applications admitted or disposed of by the National Company Law Tribunal till mid of May, 55 had been initiated by suppliers of goods or services.
Banks had filed only 16. Petitions by ordinary creditors have proved to be an effective threat as in most cases the debtor company has stepped forward to promptly settle with the petitioner who then withdraws the application. Despite the monumental non-performing assets held by banks, they have not stepped forward to use the insolvency law to resolve assets that can be turned around. This is perhaps one of the reasons that prompted the government to promulgate the Banking Regulations Ordinance to empower RBI to direct banks to make use of the insolvency law for the resolution of non-performing assets in fit cases.
Insolvency proceedings are not meant to coerce or threaten a debtor to pay. The law has been enacted for reorganization and insolvency resolution of the corporate debtor. Its goal is to maximize the value of assets, promote entrepreneurship and availability of credit, and balance the interests of all the stakeholders. It is meant to prevent the inequitable distribution of available assets to one or a few aggressive creditors to the detriment of the debtor and other creditors. Otherwise, assertive and resourceful creditors will extract their pound of flesh and leave the debtor bleeding to death by eliminating any prospects of its revival. Its use for debt collection by individual creditors is a gross misuse of the legislation.
The proper function of insolvency law is to maximize return to creditors through a collective debt collection mechanism by pooling together of a debtor’s assets for the benefit of all creditors. Creditors make recovery either by a restructuring of debtor’s business or by its quick liquidation where revival is not feasible. Returns or assets are distributed amongst creditors in accordance with insolvency waterfall rules. In fact, insolvency proceedings are meant to avert the problems associated with individual creditors separately rushing to recover their individual debts and the concomitant waste caused by such actions against an already distressed debtor.
Conclusion
The mechanism of Insolvency resolution has been favorable to quite an extent in preserving the interests of its stakeholders. Though the motive of the mechanism is not recovery, it has successfully acted as a pressure tool of recovery. The number of applications being withdrawn before the pre-admission stage is quite high in number.
The provisions of the resolution mechanism are strictly time bound which are exerting pressure on entire stakeholders to comply with the ideology of the code. There are strict penal provisions as defined in section 74 of the IBC, 2016 for violations on the part of the officers of the corporate debtor, the creditors, and the bidders. The approval of the resolution plans is governed in such a way that failure by the committee of creditors to approve the plan, would lead the company into liquidation.
It’s been two years to IBC, and so far the performance has been more than satisfactory. Needless to say, the code has been demonstrating multifarious interests and things are changing gradually. One can see and analyze the arrows being thrown in all directions by the Insolvency mechanism, leaving debtors between a rock and a hard place.