Category Archives: Insolvency and Bankruptcy Code

Corporate Insolvency Resolution Process – Cannot be Equated with Winding Up Proceedings

Section 16-G(1)(c) of the Tea Act, 1953 refers to the proceedings under Section 9 Insolvency and Bankruptcy Code shall not be limited to winding up and/or appointment of receiver only. The winding up/liquidation of the company shall be the last resort and only on an eventuality when the corporate insolvency resolution process fails. As observed by the Hon’ble Apex Court in Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17, the primary focus of the legislation while enacting Insolvency and Bankruptcy Code, 2016 is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate debt by liquidation and such corporate insolvency resolution process is to be completed in a time bound manner. Therefore, the entire corporate insolvency resolution process as such cannot be equated with winding up proceedings. Duncans Industries Ltd. v. A.J. Agrochem, (2019) 9 SCC 725.

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Insolvency and Bankruptcy Code – Limitation

In B.K. Educational Services (P) Ltd. v. Parag Gupta and Associates, (2019) 11 SCC 633 it was held as follows: “It is thus clear that since the Limitation Act is applicable to applications filed under Sections 7 and 9 of the Insolvency and Bankruptcy Code from the inception of the Code, Article 137 of the Limitation Act gets attracted. “The right to sue”, therefore, accrues when a default occurs. If the default has occurred over three years prior to the date of filing of the application, the application would be barred under Article 137 of the Limitation Act, save and except in those cases where, in the facts of the case, Section 5 of the Limitation Act may be applied to condone the delay in filing such application.”  Vashdeo R. Bhojwani v. Abhyudaya Coop. Bank Ltd., (2019) 9 SCC 158.

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Financial Debt – Under Insolvency & Bankruptcy Code

Thus, in order to be a “debt”, there ought to be  a liability or obligation in respect of a “claim” which is due from any person. “Claim” then means either a right to payment or a right to payment arising out of breach of contract, and this claim can be made whether or not such right to payment is reduced to judgment. Then comes “default”, which in turn refers to non-payment of debt when whole or any part of the debt has become due and payable and is not paid by the corporate debtor.

            What is clear, therefore, is that a debt is a liability or obligation in respect of a right to payment, even if it arises out of breach of contract, which is due from any person, notwithstanding that there is no adjudication of the said breach, followed by a judgment or decree or order. The expression “payment” is again an expression which is elastic enough to include “recompense”, and includes repayment.

            The definition of “financial debt” in Section 5(8) then goes on to state that a “debt” must be disbursed against the consideration for time value of money. “Disbursement” is defined in Black’s Law Dictionary (10th Edition) to mean:

  1. The act of paying out money, commonly from a fund or in settlement of a debt or account payable. 2. The money so paid; an amount of money given for a particular purpose.

In short, the “disbursal” must be money and must be against consideration for the “time value of money”, meaning thereby, the fact that such money is now no longer with the lender, but is with the borrower, who then utilizes the money. In the Dictionary of Banking Terms (2nd Edition) by Thomas P. Fitch, “time value for money” is defined thus:

            “present value” today’s value of a payment or a stream of payment amount due and payable at some specified future date, discounted by a compound interest rate of discount rate. Also called the time value of money. Today’s value of a stream of cash flows is worth less than the sum of the cash flows to be received or saved over time. Present value accounting is widely used in discounted cash flow analysis.”

            As per the precise language of Section 5(8)(f) of the Insolvency and Bankruptcy Code, which appears to be a residuary provision, whereas it is “catch all” in nature. This is clear from the words “any amount” and “any other transaction” which means that amounts that are “raised” under “transactions” not covered by any of the other clauses, would amount to a financial debt if they had the commercial effect of a borrowing.

            The expression “any other transaction” would include an arrangement in writing for the transfer of funds to the corporate debtor. Pioneer Urban Land and Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416.

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Factors to be Determined by Adjudicating Authority – When Examining an Application U/s 9 of IBC

The Adjudicating Authority, when examining an application under Section 9 of the Insolvency and Bankruptcy Code, will have to determine:

  • Whether there is an operational debt, as defined, exceeding Rs. 1 lakh? (Section 4 of the IBC).
  • Whether the documentary evidence furnished with the application shows that the aforesaid debt is due and payable and has not yet been paid? And
  • Whether there is existence of a dispute between the parties or the record of the pendency of a suit or arbitration proceeding filed before the receipt of the demand notice of the unpaid operational debt in relation to such dispute?

If any one of the aforesaid conditions is lacking, the application would have to be rejected. Apart from the above, the adjudicating authority must follow the mandate of Section 9 of the IBC, and in particular the mandate of Section 9(5) of the Act, and admit or reject the application, as the case may be, depending upon the factors mentioned in Section 9(5) of the Act. Transmission Corporation of Andhra Pradesh Limited v. Equipment Conductors and Cables Ltd., (2019) 12 SCC 697.

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Insolvency Code – Cannot be Used Prematurely

Operational Creditors cannot use the Insolvency Code either prematurely or for extraneous considerations or as a substitute for debt enforcement procedures. The alarming result of an operational debt contained in an arbitral award for a small amount of say, two lakhs of rupees, cannot possibly jeopardize an otherwise solvent company worth several crores of rupees. Such a company would be well within its rights to state that it is challenging the arbitral award passed against it, and the mere factum of challenge would be sufficient to state that it disputes the award. Such a case would clearly come within para 38 of Mobilox Innovations (P) Ltd. V. Kirusa Software (P) Ltd., (2018) 1 SCC 353 being a case of a pre-existing ongoing dispute between the parties. The Code cannot be used in terrorem to extract this sum of money of Rupees Two Lakhs even though it may not be finally payable as adjudication proceedings in respect thereto are still pending. K. Kishan v. Vijay Nirman Company Private Ltd., (2018) 17 SCC 662.

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Trade Union – Falls within the Definition of Person Under IBC

A trade union is certainly an entity established under a statute – namely, the Trade Unions Act and would therefore fall within the definition of “person” under Section 3(23) of the Insolvency and Bankruptcy Code. That being so, it is clear that an “operational debt”, meaning a claim in respect of employment, could certainly be made by a person duly authorized to make such claim on behalf of a worman. Rule 6, Form 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 also recognizes the fact that claims may be made not only in an individual capacity, but also conjointly. Further, a registered trade union recognized by Section 8 of the Trade Unions Act, makes it clear that it can sue and be sued by a body corporate under Section 13 of that Act. Equally, the general fund of the trade union, which inter alia is from collections from workmen who are its members, can certainly be spent on the conduct of disputes involving a member or members thereof or for the prosecution of a legal proceeding to which the trade union is a party, and which is undertaken for the purpose of protecting the rights arising out of the relation of its members with their employer, which would include wages and other sums due from the employer to workmen. J.K. Jute Mill Mazdoor Morcha v. Juggilal Kamlapat Jute Mills Co. Ltd., 2019 (4) AWC 3160.

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Insolvency Proceedings – Time Period for filing application

As per sub-section (1) of Section 9 of the Insolvency and Bankruptcy Code, application can be filed after the expiry of period of ten days from the delivery of notice or invoice demanding payment, which is in tune with the provisions contained in Section 8 that gives ten days’ time to the corporate debtor to take any of the steps mentioned in sub-section (2) of Section 8. As per sub-section (2) of Section 9, the operational creditor is supposed to file an application in the prescribed form and manner which needs to be accompanied by requisite/prescribed fee as well. Sub-section (3) puts an obligation on the part of the operational creditor to furnish the information stipulated therein. Once such an application is filed and received by the adjudicating authority, fourteen days’ time is granted to the adjudicating authority to ascertain from the records of an information utility or on the basis of other evidence furnished by the operational creditor, whether default on the part of corporate debtor exists or not. This exercise, as per sub-section (5), is to be accomplished by the adjudicating authority within fourteen days. Sub-section (5) provides two alternatives to the adjudicating authority while dealing with such an application. In case it is satisfied that conditions mentioned in clause (i) of Section 9(5) are satisfied, the adjudicating authority may pass an order admitting such an application. On the other hand, if the adjudicating authority finds existence of any eventuality stated in sub-section (2), it may order rejection of such an application.

 One of the conditions, is that application under sub-section (2) has to be complete in all respects. In other words, the adjudicating authority has to satisfy that it is not defective. In case the adjudicating authority, after the scrutiny of the application, finds that there are certain defects therein and it is not complete as per the provisions of sub-section (2), in that eventuality, the proviso to sub-section (5) mandates that before rejecting the application, the adjudicating authority has to give a notice to the applicant to rectify the defect in his application within seven days of receipt of such notice.

 Sub-section (5) of Section 9, thus, stipulates two time periods. Insofar as the adjudicating authority is concerned, it has to take a decision to either admit or reject the application within the period of fourteen days. Insofar as defects in the application are concerned, the adjudicating authority has to give a notice to the applicant to rectify the defects before rejecting the application on that ground and seven days’ period is given to the applicant to remove the defects. Surendra Trading Company v. Juggilal Kamplapat Jute Mills Company Ltd., (2017) 16 SCC 143.

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Application for – Initiation of Corporate Insolvency Process

 

Section 9(1) of the Insolvency and Bankruptcy Code contains the conditions precedent for triggering the Code insofar as an operational creditor is concerned. The requisite elements necessary to trigger the Code are:

 

  • The occurrence of a default;
  • Delivery of a demand notice of an unpaid operational debt or invoice demanding payment of the amount involved; and
  • The fact that the operational creditor has not received payment from the corporate debtor within a period of ten days of receipt of the demand notice or copy of invoice demanding payment, or received a reply from the corporate debtor which does not indicate the existence of a pre-existing dispute or repayment of the unpaid operational debt.

 

It is only when these conditions are met that an application may then be filed under Section 9(2) of the Code in the prescribed manner, accompanied with such fee as has been prescribed. Under Section 9(3), what is clear is that, alongwith the application, certain other information is also to be furnished. Obviously, under Section 9(3)(a), a copy of the invoice demanding payment or demand notice delivered by the operational creditor to the corporate debtor is to be furnished. Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd. (2018) 2 SCC 674.

 

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Existence of Default

From a conjoint reading of Section 7(4), 7(5)(a) with Section 3(11) and 3(12) of the Insolvency and Bankrutpcy Code, it is evident that the Adjudicating Authority before admitting the application under section 7 for initiating a Corporate Insolvency Resolution Process precondition that is required to be satisfied is that there is existence of default and to prove the default, the amount of debt should be due and payable.

The Applicant could not justify the existence of default and when the amount in question became due and payable. There was no evidence to substantiate that the date of repayment was fixed and when the amount will become payable. Thus the Application filed by the promoter director of the Respondent Company u/s 7 of the Insolvency and Bankruptcy Code, for initiation of corporate insolvency process against the Respondent Company was dismissed as not maintainable. Manoj Kumar Agarwal v. Mehndipur Balaji Infra Developers Pvt. Ltd. CP (IB) 88/ALD/2018.

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Existence of Dispute

The expression “existence” has been understood as follows:

“Shorter Oxford English Dictionary gives the following meaning of the word “existence”:

  • Reality, as opp. to appearance.
  • The fact or state of existing; actual possession of being. Continued being as a living creature, life, esp. under adverse conditions.

Something that exists; an entity, a being. All that exists.

Two extremely instructive judgments, one of the Australian High Court, and the other of the Chancery Division in the UK, throw a great deal of light on the expression “existence of a dispute” contained in Section 8(2)(a) of the Insolvency and Bankruptcy Code, 2016. The Australian judgment is reported as Spencer Constructions Pty. Ltd. v. G & M Aldridge Pty Ltd., 1997 FCA 681 (Aust).

The expression “genuine dispute” was held to mean the following:

“Finn, J. was content to adopt the explanation of “genuine dispute” given to McLelland, C.J. Eq in Eyota Pty Ltd.v. Hanave Pty Ltd., (1994) 12 ACSR 785 (Aust)  wherein it was held as under:

‘The expression connotes a plausible contention requiring investigation, and raises much the same sort of considerations as the “serious question to be tried” criterion which arises on an application for an interlocutory injunction or for the extension or removal of a caveat. This does not mean that the court must accept uncritically as giving rise to a genuine dispute, every statement in an affidavit ‘however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently and probable in itself, it may not be having ‘sufficient prima facie plausibility to merit further investigation as to its truth or a patently feeble argument or an assertion of facts unsupported by evidence.”

Reliance was placed on Rohalo Pharmaceutical Pty. Ltd. v. RP Scherer, (1994) 15 ACSR 347 (Aust), wherein it was held as under:

“The provisions of Sections 459-H(1) and (5) of the Corporations Law assume that the dispute and offsetting have an “objective” existence the genuineness of which is capable of being assessed. The word “genuine” is included in “genuine dispute” to sound a note of warning that the propounding of serious disputes and claims is to be expected but must be excluded from consideration.”

A “genuine” dispute requires that:

  • The dispute be bona fide and truly exist in fact;
  • The grounds for alleging the existence of a dispute are real and not spurious, hypothetical, illusory or misconceived.

In Hayes v. Hayes, 2014 EWHC 2694 (Ch) under the UK Insolvency Rules, it was held:

“It is clear that on the one hand, the court does not need to be satisfied that there is a good claim or even that it is a claim which is prima facie likely to succeed. In Bayoil S.A., In re, (1990) 1 WLR 147 (CA) it was held:

“The majority decided in that case that, shadowy as the cross claim was and improbable as the events said to support it seemed to be, there was just enough to make the principle work, namely, that it was right to have the matter tried out before the axe fell.”

On the other hand the court should be alert to detect wholly spurious claims merely being put forward by an unwilling debtor to raise what has been called “a cloud of objections.”

Section 5(6) of the Insolvency Code only deals with suits or arbitration proceedings which must “relate to” one of the three sub-clauses, either directly or indirectly. A dispute is said to exist, so long as there is a real dispute as to payment between the parties that would fall within the inclusive definition contained in Section 5(6). Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd., (2018) 1 SCC 353.

 

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