Is Section 11 of the Insolvency and Bankruptcy Code, 2016 a Roadblock in Ensuring Justice?

By | February 12, 2019
insolvency and bankruptcy code 2016

insolvency and bankruptcy code 2016

Introduction

Within two years of its inception, the Insolvency and Bankruptcy Code, 2016 has captured a place for itself as one of the most innovative and successful implementations of the Narendra Modi Government. The Code has been instrumental in resolving the issues of corporate entities and to find ways for saving or reforming the business rather than go into liquidation.

The Code has been of immense utility to the creditors of the corporate debtors since it has brought about a shift in the scenario from the debtor in possession to the creditor in control. It has helped in providing ways for the creditor to recover the money owed to them in a meticulous manner with more ease. However, being very novel legislation, there still exists some loopholes in the Code which need thorough and elaborate interpretation by the NCLT and the appellate authorities to ensure that the ends of justice are met.

With the recent amendments to the Code having an intense impact on some of the biggest corporate giants of the Country, the National Company Law Tribunal’s work has been more crucial than ever. While the hot topic for discussion at the moment is the law preventing the promoters from initiating a resolution process before repayment of dues, there are other important provisions which are in need of the NCLT’ attention.

One such provision which needs immediate attention of the Courts is Section 11 of the IBC, 2016[1]. The said provision speaks about those persons who are not entitled to make an application to initiate the Corporate Insolvency Resolution Process (CIRP). They are:

(a) A corporate debtor undergoing a corporate insolvency resolution process; or

(b) A corporate debtor having completed corporate insolvency resolution process twelve months preceding the date of the making of the application; or

(c) A corporate debtor or a financial creditor who has violated any of the terms of resolution plan which was approved twelve months before the date of the making of an application

(d) A corporate debtor in respect of whom a liquidation order has been made.

At a glance, it seems like a fair provision since it safeguards the interests of the financial or operational creditors of the debtor. However, this is a partial and one-sided point of view. Looking at the provision from debtors’ point of view, it appears to be unjust and unreasonable.

It is a known fact that one of the main objectives of the Insolvency and Bankruptcy Code, 2016 is to ensure that the insolvency resolution process takes place in a time-bound manner to ensure the maximization of the value of assets of the Corporate Debtor. The Code endeavors to solve the problems of non-performing assets as well. However, looking into the impact Section 11 has on the corporate debtors, it is apparent that the effect is contradictory to the objective of the code. By preventing a corporate debtor from initiating insolvency proceedings against those who are indebted to him, he will be forced to go into liquidation. Thus an opportunity for revival and reorganization of the business is lost and is hence unfair to the corporate applicant. It is clear from the explanation provided in the provision that the restriction imposed is applicable to the Resolution professional as well.

For instance, a situation might arise where a company is undergoing CIRP which is being carried out by a Resolution Professional who is empowered to act on behalf of the corporate debtor as a result of the power granted to him under Section 25 of the Code. It is his duty to preserve and protect the assets and also to represent the company in legal proceedings. It includes his duty to recover the outstanding debts of the Corporate Debtor against whom CIRP has been initiated and to settle the claims of the creditors.

In such a situation, he utilizes the assets of the Company to settle the claims. However, if the available assets are not sufficient to satisfy the claims, then the only logical option available is to attain the money from those who are indebted to the Company. But the problem arises when neither the corporate debtor nor the Resolution Professional being his representative is entitled to initiate CIRP against its debtors by virtue of Section 11 of the Code.

Judicial Interpretation

This point came up for consideration in the case of JAI AMBE ENTERPRISE v S.N. Plumbing Private Limited[2] before the NCLT Mumbai in which the tribunal by an order dated 06.02.2018 allowed the RP of a Corporate Debtor to initiate Insolvency Resolution Process against its debtors. The court emphasized on the point that in such a proceeding, he is acting as the representative of the operational creditor who has the right to recover outstanding dues. In such an instance, they are well within their powers to initiate proceedings under Section 9 of the IBC.

While the Code demands that no two parallel IRP should run against a corporate debtor, I feel the need to clarify that by initiating insolvency proceedings against its debtors, there is no violation of the provisions of IBC. It is because both the proceedings, they are acting in different capacities. In one instance, he is the Corporate Debtor against whom CIRP has already been initiated while in the subsequent proceeding, he takes up the position of either financial or operational creditor.

Subsequent to this, the same point came up for consideration in the case of M/s Mandhana Industries Limited v. M/s Instyle Exports Private Limited[3], wherein the petitioner was an operational creditor against whom CIRP had already been initiated and was being represented by the RP and the respondent was a corporate debtor who owed debts to the petitioner. However, in this case, the NCLT Delhi adopted a contradictory approach to the view taken in the above-mentioned case. The Court held that even though it was clear that debts were owed and default occurred, the applicant is barred from maintaining the application by virtue of the wording of Section 11 of the Code.

Analysis and Conclusion

In my opinion, the approach adopted by the court is totally unfair to the creditor and is a gross violation of justice. It is pertinent in the interest of equity and justice that the financial or operational creditor should be equipped to recover the debts due to them even at the stage of the resolution process. Making him wait until the liquidation blocks the opportunity for reviving the company and puts unnecessary pressure on him. The intention of the legislature while enacting this provision is quite vague. The direct consequence of such a drastic measure is the prohibition of the rightful claims of the corporate applicant through the RP which is quite absurd. There is a need for clarification with regard to the status of a corporate debtor who makes the application under Sections 7 or 9 as either the Financial/Operational Creditor or Corporate debtor.

What the Code contemplates is that no two parallel corporate insolvency process should like against a corporate debtor. It is important to realize that the present situation poses a completely different scenario. Here, when a Corporate Debtor against whom CIRP has already been initiated, proceeds to initiate another CIRP against a third party, it is in his capacity either as an operational creditor or financial creditor. Thus it is not a situation of two parallel proceedings against the same corporate debtor.

However, it is to be noted that there is a drawback in endowing Section 11 with a liberal interpretation while considering the maintainability of applications under Sections 7 and 9. It is because this provision might be misused by a person against whom CIRP has already been initiated to cause unnecessary delay and complications by proceeding against other debtors. This might create a never-ending chain reaction as everyone might have somebody who owes them money.

In such a circumstance, the need for clarification has become very necessary with different NCLTs adopting contrasting views while interpreting this provision. There is a cloud of uncertainty surrounding the matter and even though it was explicitly pointed out by the tribunal in Mandhana Industries case, that the IBBI should consider and remove the anomaly for invigorating the Code suitably to overcome the hurdle forced in the present scenario.

In spite of these intense deliberations on this topic, no significant change has been brought about in its legal position to date.  It is of utmost urgency that either the Supreme Court or the Insolvency and Bankruptcy Board of India take up this  matter with serious consideration and lays down a clear, unambiguous  and settled position with regard to the scope of the maintainability of application under Section 11 by the Resolution Professional to ensure that the ends of justice are met. While arriving at a conclusion it is necessary that there should be a proper balance of interests between the corporate debtor and the creditor.


By – Fathima Mehendi

National University of Advanced Legal Studies


Sources

[1] http://www.mca.gov.in/Ministry/pdf/TheInsolvencyandBankruptcyofIndia.pdf

[2] MA 78/2018 in CP 1268/I &BC/ NCLT/MB/MAH/2017.

[3] Company Petition No. (IB) – 301(ND)/2018.


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