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How to proceed against the company under IBC?
kartik mago 7 Feb 2019

How to proceed against the company under IBC?

HOW TO PROCEED AGAINST THE COMPANY UNDER IBC

(INSOLVENCY AND BANKRUPTCY CODE)

 

What is IBC?

The Insolvency and Bankruptcy Code, 2016 seeks to consolidate the existing legal framework concerning insolvency and bankruptcy. Considering the current pace of life of any individual in today’s time bankruptcy takes a long time to process. IBC   tends to resolve insolvencies by minimizing the time taken to resolve such cases.

This Code aims to protect the interests of small investors by taking into consideration their basic requirements. Hence, implementation of the Code will minimize the cost (in terms of both time and money) in attaining liquidation.

 

How IBC is helpful for Recovery of Debt by following Creditors:

·       Supplier of Goods/ Services:

 

Under this Act, if any person has supplied Goods or rendered services to any Corporate Debtor; and such corporate debtor makes default as non-payment of debt or any part of a debt, non-payment of installments due, then through NCLT, the creditor can take an action against the corporate debtor by the filing of a petition.

Time Period of Recovery:

If the creditor doesn’t receive payment due within 10 days he can issue a demand notice to the debtor, then it can file an application in NCLT for initiating the recovery (Corporate insolvency resolution) process. Within 14 days of application, NCLT will either accept the application or reject it.

·       Small Businesses:

 

Due to these following reasons the small business did not use to start a proceeding against the debtor:

1.       Due to lack of time-bound guidelines, it took a long time for the admission of the cases by the adjudicating authorities.

  1. Filling a matter in courts in earlier times was not cheap.
  2. Earlier the primary onus to initiate a resolution process lies with the debtor

Under this code within 24 days of issue of demand notice creditor will come to know whether his petition admitted or not. It is less costly then the application in the court as the fees for admission of an application by the operational creditor is Rs. 2,000/-.

·        Employee and workmen dues:

Employees and workmen are also considered as part of an operational creditor under IBC. If a Company fails to make salaries payment of employees or workmen and the value of the payment is more than Rs. 1 lac then employees can file the application against the Company with NCLT for initiation of the process of Recovery.

Cost of the application, process, time by the employees and workmen are same as the filing of an application by a creditor of supply of goods/services.

  • The debtor of Loan:

If any person has taken a Loan from any Corporate Debtor; and such corporate debtor makes default as non-payment of interest, debt or any part of the debt, non-payment of installments due then the creditor can initiate the proceeding against the corporate debtor by the filing of the petition in NCLT.

Time Period of Recovery:

For initiating the recovery process, a financial creditor can file an application. The NCLT, will either accept the application or reject it within 14 days of filling the application.

 

The history

In December 2015, The Insolvency and Bankruptcy Code, 2015 was introduced in the Lok Sabha. The President of India gave his assent to the proposed Bill on 28th May 2016.

 

The procedure for going against the Company

Under IBC, the employees and workmen are considered a part of the operational creditor. An operational creditor is any person to whom

1.     operational debt is owed

2.     Such debt has been legally assigned or transferred.

The IBC defines an operational debt as:

“A claim in respect of the provision of goods or services including employment or debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.”

Thus, the operational debt must fulfill the following pointers

1.     Debt arising out of professional goods; or

2.     Debt arising out of services provided; or

3.     Debt arising out of employment; or

4.     Any dues arising out of any law in force at that time payable to the Central Government, State Government or to any local Authority.

IBC recognizes employees and workmen as part of operational creditors. If a company fails to pay their salaries and the value of such non-payment exceeds Rs. 1 lakh, then the concerned employee or workmen can file an application against the company with the National Company Law Tribunal (NCLT) in order to recover their salary or wages, as the case may be.

Under Section 8 of the Code, the operational creditor has to first give notice to the debtor Company demanding a copy of the invoice or payment of the amount involved in the default. The Company has to furnish the thing demanded by the creditor within a period of 10 days.

If the Company fails to do so, then the operational creditor has an option under Section 9 to approach NCLT (adjudicating authority) and file an application for initiating a corporate insolvency resolution process.

The application shall be accompanied with

1.     a copy of the invoice demanding payment or demand notice delivered by the operational creditor to the corporate debtor;

2.     an affidavit to the effect that there is no notice given by the corporate debtor relating to a dispute of the unpaid operational debt;

3.     a copy of the certificate from the financial institutions maintaining accounts of the operational creditor confirming that there is no payment of unpaid operational debt by the corporate debtor; and

4.     such other information as may be specified

The creditor can also propose a resolution professional to who will act as an interim resolution professional.

NCLT has to, by order, either accept or reject the application made by the creditor within a time period of 14 days from the receipt of such application.

Section 9(5)(i) provides for the grounds on which the application can be accepted. These grounds are as follows:

·        if the application is complete

·        if there is no repayment of unpaid operational debt

·        the invoice or notice for payment to the corporate debtor has been delivered by the operational creditor

·        no notice of dispute has been received by the operational creditor or there is no record of dispute in the information utility

·        there is no disciplinary proceeding pending against any resolution professional proposed

Section 9(5)(ii) provides for the grounds on which the application can be rejected. These grounds are as follows:

·        if the application is incomplete

·        if there is repayment of unpaid operational debt

·        the invoice or notice for payment to the corporate debtor has not been delivered by the operational creditor

·        notice of dispute has been received by the operational creditor or there is no record of dispute in the information utility

·        there is a disciplinary proceeding pending against any resolution professional proposed

When NCLT rejects an application if it is incomplete, then a notice is to be given to the applicant to rectify the defect in his application within seven days of the date of receipt of such notice.

In the case of Punjab National Bank vs Divya Jyoti Sponge Iron Private Limited[1], NCLT, Kolkata Bench approved a resolution plan and took judicial notice of fixation of exaggerated insolvency resolution cost of a dying corporate debtor. The Tribunal has observed that legitimate guidelines and resolutions must be undertaken to guide and ensure the prospects of a revival of a dying corporate debtor not be at the highest cost which cannot be affordable by the corporate debtor.

In M/s Incredible Unique Buildcon Pvt Limited V/s M/s Clutch Auto Limited[2], two petitions were filed, one by the operational creditor under section 9 and the other under section 10.

The Corporate Debtor itself filed the petition for initiation of Corporate Insolvency Resolution Process against it. A list of financial and operation creditors has also been attached. The petitioner has further disclosed the details of property against which the loan of the corporate debtor is fully or partially secured along with details of the date of its creation.

The Hon’ble judge dismissed the operational creditor’s petition stating that  The Operational Creditor may file its claims before the Insolvency Resolution Professional in accordance with the public notice to be issued like all other claimants.

 

The Chennai bench of NCLT admitted the application filed by three employees for the commencement of the corporate insolvency resolution process and has appointed P Sriram as interim insolvency professional (IIP). Employees said that Aruna Hotels failed to pay arrears of salary, gratuity and leave salary of these employees. 

In the case of Aruna Hotels[3], the court referred to the case of an employee D Ramjees, who joined as a junior assistant and rose to the rank of company secretary. He had made a demand of Rs 2.6 crore but the respondent (the company) had denied the liability. What went in favor of the employee was that a day after the petition was filed before the NCLT on April 3, the MD, in a letter, acknowledged the liability of clearing these arrears. The court has directed the insolvency professional to take charge and declared moratorium of any legal action of recovery against the company until the completion of insolvency process. The court has also directed the other two employees N Krishnan and C Ganapathy to approach IIP with their claims. 

 

Since IBC has come into effect early in the year 2017, a variety of cases would set a precedent for future disputes. Earlier, in a case of Ms. Schweitzer Systemtek India versus Phoenix ARC[4],  M/s Schweitzer Systemtek India Pvt. Ltd. (“Schweitzer”) filed for initiation of corporate insolvency proceedings under Section 10 of the Insolvency and Bankruptcy Code. Schweitzer had availed of loans of Rs. 4.5 crores from Dhanlaxmi Bank. The bank, further assigned the debt to M/s. Phoenix ARC Pvt. Ltd. (“Phoenix”). In order to avail of the bank loan, the Promoters of Schweitzer had attached their personal properties. Phoenix attempted to recover these personal properties through other recovery proceedings.

Schweitzer objected to these recovery proceedings by bringing them to the notice of the NCLT. Schweitzer contended that the pendency of insolvency proceedings places a moratorium on initiation of other suits against it and hence the recovery proceedings initiated by Phoenix are unmaintainable. The NCLT in the instant case dismissed the contentions raised by Phoenix and clarified that the moratorium applied only to
properties owned by the Corporate Debtor Company. The NCLT also held that any personal property of the Promoters of the Corporate Debtor Company which have been furnished as security in order to avail loans for the Corporate Debtor Company will not be protected by the moratorium and can proceed against separately for recovery.

 

Recently the Bombay High Court, in Tayal Cotton (P.) Ltd. Vs. State of Maharashtra[5] discussed whether moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (Code) includes criminal proceeding within its ambit. After considering the legislative intent behind introducing the provision for a moratorium in the Code, the Bombay High Court held that Section 14 of the Code, clearly excludes criminal proceedings. The section only prohibits a suit or legal proceedings of like nature including the execution of judgment; decree or order in any court of law, arbitral tribunal or other authority.

 

 

 

 

 

Conclusion

Hence, considering the intention of the Law, one can opine that Insolvency and Bankruptcy Code, 2016 is Game Changer for the corporate debtors. Powers are vested with the creditors also along with corporate debtors to initiate insolvency process against the corporate debtor. The Code promises to bring about far-reaching reforms with a thrust on creditor has driven insolvency resolution. The aim of the code is the early identification of financial failure and maximizing the asset value of insolvent firms.



[1] W.P.9519(W) of 2014

 

[2] [2017] 140 CLA 72 (NCLT)

[3] https://economictimes.indiatimes.com/markets/stocks/news/even-employees-can-approach-nclt-to-recover-dues/articleshow/59732131.cms

[4] https://www.panindialegal.com/schweitzer-systemtek-india-pvt-ltd-vs-phoenix-arc-pvt-ltd-t-c-p-no1059ibpncltmbmah2017/

[5] http://www.mondaq.com/india/x/774728/Insolvency+Bankruptcy/Criminal+Proceedings+Do+Not+Fall+Under+The+Purview+Of+The+Moratorium+Under+The+Insolvency+And+Bankruptcy+Code+2016+Bombay+High+Court?type=popular

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