Insolvency and Bankruptcy Code, 2016 - Operational Creditor- an overview
The Insolvency and Bankruptcy Code, 2016 (“Code”) has been enacted inter alia to consolidate and amend the
laws relating to reorganization and insolvency resolution of corporate persons[1],
partnership firms and individuals in a time bound manner for maximization of
value of assets of such persons. The scheme of the Code is such that the
insolvency resolution and liquidation of corporate persons (Part II- Chapters I
to VII) and that of individuals and partnership firms (Part III) are dealt with
separately. For the purpose of the
matter at hand, this note shall restrict itself to the insolvency resolution
and liquidation of corporate persons. While the entire burden of preparation of
insolvency resolution plan is placed on the shoulder of the insolvency
resolution professional, the National Company Law Tribunal (“NCLT”) acts as the adjudicating
authority under the Code. The National Company Law Appellate Tribunal (“NCLAT”) is the appellate authority
placed above the NCLT in hierarchy. The Insolvency
and Bankruptcy Board of India (IBBI) governs the procedural aspects of
insolvency and bankruptcy proceedings in India (it frames and amends the regulations from time to time in exercise of
the powers bestowed upon it under the Code) including regulating the registration
and appointment of insolvency resolution professionals.
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Applicability
Threshold: The provisions pertaining to insolvency resolution and
liquidation for corporate person (which includes companies) shall apply to
corporate debtors[2]
where the minimum amount of the default is one lakh rupees (INR
1,00,000).
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Who can
initiate corporate insolvency resolution process against a corporate debtor who
commits a default?
ii)
An operational creditor, or
iii)
The corporate debtor
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Meaning
of ‘default’: Non-payment of debt when whole or any part or instalment of
the amount of debt has become due and payable and is not repaid by the
debtor or the corporate debtor, as the case may be (Sec. 3 (12) of the Code)
Ø
Meaning
of ‘debt’: A liability or obligation in respect of a claim
which is due from any person and includes a financial debt and operational
debt (Sec. 3 (11))
Ø
A ‘Operational debt’ means a claim in respect
of the provision of goods or services including employment or a 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 (Sec. 5 (21)). An ‘Operational
Creditor’ is a person to whom an operational debt is owed and includes any
person to whom such debt has been legally assigned or transferred (Sec 5 (20)).
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Clarification
on ‘Operational Creditor’:
i)
The 'Operational Creditor' and 'Operational
Debt' having defined in Section 5(20) and Section 5(21) of the Code, except
those who come within the meaning of Operational Creditor no other creditor, whether secured or unsecured creditor are
entitled to file an application under Section 9 though they are entitled to file claim before the Interim
Resolution Professional, once Insolvency Resolution Process starts against
a 'Corporate Debtor', either under Section 7 or Section 9 or Section 10 of the
'I & B Code'.
Pawan Dubey and Ors. Vs. J.B.K. Developers Pvt. Ltd. (IV (2017) BC 56)
ii)
A perusal of Section 9 of the Code would show
that in order to maintain an application as an ‘Operational Creditor’ the
petitioner has to satisfy the requirements of section 5 (20) and (21) of the
Code. … It is evident from the perusal of the aforesaid definition of
‘Operational Debt’ that is a claim in respect of provision of goods or services
including dues ….However, the framer of the Code has not included in the
expression ‘Operational Debt’ as any debt other than the ‘Financial Debt’. It
is thus confined to aforesaid four categories like goods, services, employment
and government dues.
Col. Vinod Awasthy Vs. AMR Infrastructure Ltd. ((C.P. No.
(IB)-10(PB)/2017. February 20, 2017))
Ø
Corporate
Insolvency Resolution Process- By Operational Creditor
Step 1: Notice:
An Operational Creditor, on the occurrence of a default, shall deliver a demand
notice of unpaid operational debtor copy of an invoice demanding payment of the
amount involved in the default to the corporate debtor (Sec. 8(1)). Notice to be issued in format of Form 3 in terms of Insolvency &
Bankruptcy (Adjudicating Authority) Rules, 2016.
Step 2: Reply
by the corporate debtor: The corporate debtor may within a
period of ten (10) days of the receipt of the demand notice or copy of the
invoice mentioned in sub-section (1) bring to the notice of the operational
creditor—(a) existence of a dispute, if any, and record of the pendency
of the suit or arbitration proceedings filed before the receipt of such notice
or invoice in relation to such dispute; (b) the repayment of unpaid operational
debt with proof thereof (Sec 8 (2)).
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Sec 5 (6) of the Code defines
‘Dispute’ as ‘includes a suit or arbitration relating to – (a) existence of
amount of debt, (b) quality of goods or services; (c) breach of a
representation or warranty’. The Supreme Court of India in Mobilox Innovations Private Limited Vs.
Kirusa Software Private Limited (AIR2017SC4532), has recently held that
while determining “existence of a dispute”, all that the NCLT is to see is
whether there is “a plausible
contention which requires further investigation and that the “dispute” is
not a patently feeble legal argument or an assertion of fact unsupported by
evidence.” While opining that “a spurious defence which is mere
bluster” should be rejected, the
Supreme Court added a word of caution – while determining whether dispute
exists or not, the NCLT is not required to satisfy itself that the defence
is likely to succeed or to examine the merits of the dispute. So long as a
dispute truly exists in fact and is not spurious, hypothetical or illusory,
the application of an operational creditor must be rejected by the NCLT.
The existence of any pending suit or arbitration is not the sole criteria.
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Step 4:
Order
by the NCLT: Within 14 (fourteen) days of receipt of the application
under Step 3, the
NCLT
may either:
a)
Admit the application if it is
complete, there
is no repayment of the unpaid operational debt; the demand
notice has been delivered to the corporate debtor; no notice
of pending dispute is sent by the corporate debtor;
or there are
no disciplinary proceedings against any resolution professional
proposed; OR
b)
Reject the
application in
the event of existence of adverse situations as stated above. In case
of rejection, 7 days’ time shall be provided to the applicant to rectify the
defect.
Step 5: Declaration of moratorium, public announcement and appointment of
interim resolution professional (Sec. 14, 16): The NCLT shall by an order declare
a moratorium till the completion of the resolution process -
(a) on
the institution or continuation of suits, execution of judgments, decree or
order, alienation/ transfer of assets of the corporate debtor, recovery of any
property, recovery or enforcement of any security interest
(b) cause
a public announcement of initiation of corporate insolvency process and call
for submission of claims
(c) appoint
an interim resolution professional [in
case the applicant/ Operational Creditor makes no recommendation of the
insolvency professional or he is found to be under disciplinary proceedings,
NCLT may appoint an insolvency professional as may be recommended by the
Insolvency and Bankruptcy Board of India]
Step 6: Public announcement: Public announcement shall be made by the
insolvency resolution professional (“IRP”)
within 3 (three) days from the date of his/her appointment, in Form A under the Insolvency &
Bankruptcy (Insolvency Resolution) Regulations, 2016. The public announcement inter alia shall contain the details of
the insolvency professional, last date of filing claims, penalty for making
false claims (Sec 15).
Step 7: Claims by Operational Creditors: A
person claiming to be Operational Creditor shall submit proof of claim to the
IRP in Form B in terms of the
Insolvency & Bankruptcy (Insolvency Resolution) Regulation 2016. The
existence of debt may be proved on the basis of –
i)
a contract for the supply of goods and services
with corporate debtor;
ii) an invoice demanding payment for the goods and
services supplied to the corporate debtor;
iii) an
order of a court or tribunal that has adjudicated upon the non-payment of a
debt, if any; or
iv) financial
accounts.
Step 8: Verification of Claim: The IRP or
the resolution professional, as the case may be, shall verify every claim, as
on the insolvency commencement date, within seven (7) days from the last date
of the receipt of the claims, and thereupon maintain a list of creditors
containing names of creditors along with the amount claimed by them, the amount
of their claims admitted and the security interest, if any, in respect of such
claims, and update it which shall also be submitted to NCLT (Regulation 13 and
14 of Insolvency And Bankruptcy Board of India (Insolvency Resolution Process for
Corporate Persons) Regulations, 2016).
Step 8: Role of interim resolution professional (IRP)- committee of creditors
(sec 17, 18, 20, 21): From the date of appointment of the IRP, the
management of the affairs of the corporate debtor, powers of the board shall
vest in the IRP. The IRP shall, inter alia, constitute a committee of creditors
(COC) within 30 days of his appointment after
collation of all claims received against the corporate debtor and determination
of the financial position of the corporate debtor. Financial creditors shall comprise the committee of creditors and in
case there are no financial creditors then CoC shall comprise of 18 largest
operational creditors of the corporate debtor and one nominee each of workmen and employees of the corporate
debtor.
Step 9: Appointment of resolution professional (Sec 22): The COC, within 7
(seven) days of constitution, hold a meeting to appoint the IRP as the
resolution professional (RP) or any other replacement (to be forwarded by NCLT
to the Board for confirmation within 10 (ten) days of receipt of the name from
the NCLT).
Step 10: Information Memorandum (Sec. 29 and Regulation 36 of Insolvency And
Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons)
Regulations, 2016): The RP shall prepare
an IM containing such information as assets and liabilities of the corporate
debtor, latest annual financial statements, list of creditors, details of
guarantees, list of material litigation, liquidation value, liquidation value
due to operational creditors. The purpose of the IM is to provide adequate
information to all potential resolution applicants to submit/ apply with their
resolution plans.
Step 11: The resolution
applicant[5]
may submit a resolution plan to the RP on the basis of the IM, which shall be
examined by the RP with regard to provision for payment of process cost,
payment of debts of operational creditors, management of corporate debtors
after the approval, implementation and supervision of the plan. The COC must
also approve the plan by 75% vote.
In terms of the IBC, any insolvency resolution plan received
by the insolvency resolution professional (to be approved by the committee of
creditors by 75% vote) must satisfy/ confirm the following (section 30 of the
IBC):
(a) provides
for the payment of insolvency resolution process costs in a manner specified by
the Board in priority to the repayment of other debts of the corporate debtor;
(b) provides
for the repayment of the debts of operational creditors in such manner as may
be specified by the Board which shall not be less than the amount to be paid to
the operational creditors in the event of a liquidation of the corporate
debtor;
(c) provides
for the management of the affairs of the Corporate debtor after approval of the
resolution plan;
(d) the
implementation and supervision of the resolution plan;
(e) does
not contravene any of the provisions of the law for the time being in force;
(f) conforms
to such other requirements as may be specified by the Board.
Step 12: Approval of NCLT: Upon submission of the duly approved resolution
plan by the RP, the NCLT may accept (if
it provides for payment of process cost, repayment of debts, management of the
debtor company, implementation and supervision of the resolution plan etc.)
or reject the plan.
Step 13: Liquidation: In event of lack of any valid/ acceptable resolution
plan within the stipulated time period or rejection of such plans, the NCLT shall
pass an order requiring the corporate debtor to be liquidated and require a
public notice to be issued in this regard.
In course of the process of liquidation, the liquidator[6]
shall distribute the proceeds from the sale of the liquidation assets of the
corporate debtor in the following order of priority[7]:
(a) the
insolvency resolution process costs and the liquidation costs paid in full;
(b) the
following debts which shall rank equally between and among the following :—
(i)
workmen's dues for the period of twenty-four months preceding the liquidation commencement date; and
(ii)
debts owed to a secured creditor in the event such secured creditor has
relinquished security;
(c) wages
and any unpaid dues owed to employees other than workmen for the period of
twelve months preceding the liquidation commencement date;
(d) financial
debts owed to unsecured creditors;
(e) the
following dues shall rank equally between and among the following:—
(i)
any amount due to the Central Government and the State Government including the
amount to be received on account of the Consolidated Fund of India and the
Consolidated Fund of a State, if any, in respect of the whole or any part of
the period of two years preceding the liquidation commencement date;
(ii)
debts owed to a secured creditor for any amount unpaid following the enforcement
of security interest;
(f) any
remaining debts and dues;
(g) preference
shareholders, if any; and
[1]
This includes a company registered under the
Companies Act, LLP or any other person incorporated with limited liability
under any law for the time being in force.
[2] ‘Corporate debtor’ means a corporate person who owes a
debt to any person (Sec 3(8) of the Code)
[3] ‘Financial creditor’ means any person to whom a
financial debt is owed and includes a person to whom such debt has been legally
assigned or transferred to (Sec 5 (7)). Financial debt broadly pertains to debt
in relation to money borrowed at interest, acceptance of deposit, lease or hire
purchase, derivative transactions etc.
[4]
The insolvency professional shall complete the
process within 180 days of admission of the application, extendable upto a
period of another 90 days by an order of the NCLT(Sec. 12).
[5] Sec. 29 A of the Code defines specific persons
disqualified to be a resolution applicant – it bars wilful defaulters,
insolvent promoters whose accounts have been classified as non-performing
assets, amongst others.
[6]
The resolution professional appointed for the
corporate insolvency resolution shall act as the liquidator for the purpose of
liquidation (Section 34 of the Code)
