Insolvency and Bankruptcy Code, 2016 (“IBC”) consolidate and amend the laws relating to reorganisation, corporate insolvency and bankruptcy proceedings in India. This led to multiple litigations before different adjudicatory authorities with conflicting decisions. IBC aims at simplifying the process of insolvency and bankruptcy (proceedings in India, ensuring fair negotiations between debtor and creditor. Under the present regime, a creditor can initiate the corporate insolvency resolution process (“CIRP”) by approaching the National Company Law Tribunal (“NCLT”) and appeal from its orders lie before the National Company Law Appellate Tribunal (“NCLAT”) and final appeal before Supreme Court (“SC”).
IBC came into force w.e.f December 1, 2016 and, during the course of one year, the adjudicatory authorities have dealt with several contentious issues. The focus of this article is to critically examine some of those issues.
2. Withdrawal of application
Rule 8 of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 permits financial or operational creditor or a corporate applicant to withdraw its application for initiation of CIRP before its admission.
In Lokhandwala Kataria case1 NCLT allowed CIRP to be initiated based on the application of the financial creditors. After admission of the application, the parties agreed to settle the matter. However, when they approached NCLT, their request was denied. Subsequently, the debtor filed an appeal before NCLAT seeking permission to withdraw the insolvency application. NCLAT held it was not possible to withdraw a petition once it has been admitted as settlement cannot be a ground to interfere with the order of NCLT. Moreover, they did not have any inherent powers2 to interfere since the relevant rules were not in force. Thereafter, both parties appealed before the SC seeking permission for settlement and withdrawal of insolvency proceedings.
The question before the SC was whether the parties can enter into a settlement after NCLT admits a case. While IBC does not provide for withdrawal of proceedings after admission, the SC exercised its inherent jurisdiction under Article 142 of the Indian Constitution and permitted the parties to settle, holding that NCLAT does not have the power to withdraw a matter after admission.
In exercising its inherent powers, SC touched upon the toes of the legislature. While it may be true that NCLAT does not have inherent powers to address settlement post-admission of a case, the court did not provide reasons for exercise of its own inherent powers. Perhaps, this decision will address situations where the creditors and debtors genuinely reach a settlement which requires discontinuation of CIRP. Rule 8 clearly states that a withdrawal of the application can be permitted by the adjudicating authority prior to admission which leads to the inference that the withdrawal after admission is not permissible. Such a strict interpretation of rule 8 is capable of imposing serious hardship on those debtors who are willing to cure the default on their part. This decision will open the floodgates to litigation wherein cases of similar nature will inevitably be argued before the SC and maybe then the wider consequences of this decision would become clear.
IBC prescribes a time limit of 14 days for admission/rejection of the application of CIPR by NCLT3. Further, it provides the applicant 7 days time to rectify any defects in the application. Once initiated, CIRP to be completed within 180 days from the date of admission and be extended by 90 days.4
In JK Jute Mills Ltd v. Surendra Trading Company5 NCLAT had to address two questions. Firstly, if NCLT does not adhere with 14 days and admit or reject an application, can CIRP be initiated and interim orders passed? Secondly, is 7 days mandatory for rectification of the application? An appellant filed an application for initiating CIRP against debtor. NCLT granted 7 days time to the appellant for rectifying certain procedural defects in the application. However, the appellant sought time for NCLT after 7 days to produce the additional documents supporting the application. Yet, NCLT went ahead and passed interim directions against the sale of the debtor’s assets. The debtor appealed against this interim order before NCLAT and argued that once NCLT fails to pass an order admitting or rejecting an application within 14 days of its submission, it can no longer decide the matter and, therefore, has no power to grant a stay on the sale of assets. In other words, admission or rejection within the statutory timeline is a prerequisite to passing any interim orders.
After analysing the provisions of IBC, NCLAT concluded that the (a) 14 day-period is procedural and a directive to ensure expeditious disposal of cases. It should be computed from the date when the application is presented before the adjudicating authority, (b) 7 days for rectification of defects by the applicant is mandatory and application is fit to be rejected when the rectification is beyond that window. (c) NCLT/NCLAT, as per section 64 has to mandatorily record reasons for not disposing the application within the statutory time limit with assent of president of NCLT/chairperson of NCLAT for extension.
Accordingly, NCLAT allowed the appeal on the ground that the application filed by appellant was incomplete, defective and fit to be rejected. It observed that in the given scenario if NCLT passed any other order apart from dismissal, it would be illegal.
This order of NCLAT was challenged before SC on the sole aspect of whether NCLAT was correct in finding that 7 days cure period was mandatory. The court also concurred with NCLAT’s view and observed 14 day-period was not a mandatory time frame. SC observed that CIPR involves two stage, first- filing the application which is scrutinised by the registry for defects. This stage has no bearing on CIRP as NCLT is not supposed to deal with the application. At second stage which is adjudication, NCLT is to apply its mind and decide as to whether the application should be admitted/rejected. However, this 14 day-period for admission/rejection of application is directory, there is no reason to make it mandatory in respect of the first stage, which is pre-adjudication stage.
The decision of the SC and NCLAT made it clear that time is the essence for IBC and all the stakeholders including the adjudicating authority. Yet, it seems to have the effect of potentially stretching the timeline of CIRP, particularly at the stage of admission. The full impact of this decision is not clear, and it could be used to cause unnecessary delays in the name of procedural fairness.
4. Scope of “Financial Creditor” and “Operational Creditor”
The definition of financial creditor came under scrutiny in Nikhil Mehta & Sons v AMR Infrastructure Limited6. Here the appellant had signed a MoU with the respondent, whereby the appellant purchased properties from the respondent and in return for a substantial portion of the total money paid upfront, the respondent promised to pay monthly assured returns from the time of signing of the MoU till the time the possession was delivered to the appellant. After paying these assured returns for some time, the respondent defaulted on its payments. Following this, the appellant filed an application under section 7 of IBC for initiating CIRP against the respondent. The question to be decided was whether this arrangement was a simple sale transaction and the appellant was mere buyers or a financial creditor.
NCLT while examining these terms, financial creditor and financial debt, concentrated on the expression consideration for time value of money and concluded that the legislature has included financial transactions in the definition of financial debt which are usually for a sum of money received today to be paid for over a period of time in a series of payments in the future. NCLT concluded that the instant transaction was a simple one and payment of assured return was not good enough to bring it under the scanner of section 5(8).
On appeal, NCLAT upheld NCLT’s observation regarding section 5(8) that time value of money is an essential requirement of a financial debt. However, it took a different view with respect to the appellant’s status as financial creditor. NCLAT observed that as per the MoU the appellant was referred to as an investor investing in an assured returns plan and they agreed to pay a monthly return to his investor. Logically, it followed that assured returns would be in the nature of debt under section 3(11) which means any liability in respect of a claim which is due from any person and includes a financial debt and operational debt. Moving on to the debate regarding whether the debt would be a financial debt or not, NCLAT after a perusal of the financial returns of the respondent noticed that the assured returns payable by them were shown under “commitment charges”, at par with “Interest on Loans”. In addition, TDS was deducted from these payments under the head of “Interest, other than securities”. Based on these factors, the NCLAT concluded that the amounts invested by appellant was not a mere sale transaction but would indeed come under the meaning of financial debts under section 5(8) of the IBC.
In Col. Vinod Awasthy v. AMR Infrastructures Ltd7, NCLT examined a similar issue of whether a flat purchaser would fall within the definition of an Operational Creditor defined as a person to whom operational debt is owed, as under Section 5(20) of the IBC. NCLT, while dismissing the application at the admission stage itself, examined the definition of operational debt which is confined only to four categories as specified in section 5(21) namely- any goods, services, employment or dues which were payable under any statute to the Centre/State Government or local bodies. It observed that the framers of IBC had not intended to define an operational debt as a debt other than a financial debt and was limited to debt arising from the categories mentioned in the section. Thus, the refund sought to be recovered by the applicant was associated with the possession of immovable property, which is beyond the scope of operational debt.
The above judgments give rise to the possibilities that there maybe certain creditors who would not fall within the scope of financial or operational creditor and as such any claim for refund of advance/deposit and assured returns promised by the debtor may not qualify either as a financial or an operational debt. Thus, IBC has left out certain kinds of debts from its scope, showcasing the limitation sets out in the definition of financial creditors and operational creditors. However, IBC contains a general definition of ‘debt’, which leads to an interpretation that it cannot be limited in its scope to financial Debt and operational debt. The Insolvency and Bankruptcy Board of India has also released a new form for non-financial and non-operational creditors to make claims under CIRP.
IBC is a new law which is still evolving and the judiciary is expected to aid the process. Since, the judiciary is still grasping the complexities of the new law it may take time for this law to achieve its objectives of promoting fair negotiations between debtor and creditor, promotion of entrepreneurship, availability of credit etc.
1. Civil Appeal No. 9279 of 2017
2. Rule 11 of the National Company Law Appellate Tribunal Rules, 2016
3. See Sections 7(4), 9(5) & 10(4) of IBC
4. See section 12 of IBC
5. Company Appeal (AT) No. 09 of 2017
6. Company Appeal (AT) No. 7 of 2017
7. (C.P. No. (IB)-10(PB)/2017. February 20, 2017).