Alternatives To Insolvency And Bankruptcy Code Under New Regime

AUTHOR: – JAIDEEP BHALLA

(Company Secretary (Aspirant), LL.B, B.COM Graduate, An Investment Portfolio analysts, First Runner-up winner Moot Court Competition Organised by ICSI Noida Chapter)
Mobile No. 7838684213

Introduction

The Novel Coronavirus (“Covid-19”) has hit brutally, almost every sector. The pandemic has not only devastated the global business, by halting the international trade, but the virus has also caused major economic disruptions in industries ranging from catering to tourism industries, banking to manufacturing industries. The pandemic has forced governments across the world to impose travel restrictions for work and restrictions on migration. The severity of the situation did require quick and decisive action from the Indian Government to prevent ‘further deepening’ of the crisis. 

Notification by the Finance Minister

Thereby, on 24^th March 2020, the Finance Minister made an announcement regarding changes in Insolvency and Bankruptcy Code, 2016 (IBC). Under this, Proviso to Section 4 of IBC was amended. This section provides, the Government of India, the ability to increase the threshold amount of debt required to file application under IBC, to any higher amount up to Rs 1 crore from earlier Rs.1,00,000.

The Central Government has exercised this power vide its notification dated March 24, 2020 to increase the threshold to 1 crore. Therefore, petitions now under the IBC cannot be filed in respect of payment defaults below Rs 1 crore. Prior to 24^th March 2020 announcement, the threshold limit seemed to be very creditor- friendly as it was  nascent stages of the IBC. The threshold limit of default Rs.1 lakh gave creditors the upper hand, particularly operational creditors. But this amendment, has been touted as saviour to Micro, Small and Medium Enterprises (“MSME”) at the time of lockdown crisis.

With the COVID-19 outbreak and with no visible solution in sight, the Economy will be in doldrums. Demand for Goods and Services might reduce and it will be difficult to raise finances for operations. The MSME will be the most vulnerable and worst affected grouping due to this. In that case, IBC would be the proverbial Sword of Damocles hanging over these MSMEs over the eminent default of dues. To reduce this burden, the government decided to raise the limit under Sec 4 and prevent the MSMEs from going into liquidation. Having said that, suspension of Section 7, 9 and 10 of the IBC in case of prolonged challenges from the Covid-19 lockdown, will do away with initiation of insolvency resolution proceedings against defaulting corporates

However, the step by the Central Government vide above mention-dated lead to various implication, permutation, and combination on the legal sanctity on the above mention notification. Following are some of the options under existing statutes for recovery of dues.

1. Personal Guarantor to a Corporate Debtor

As per Notification dated 15^th November 2019, sections dealing with insolvency and bankruptcy of Individuals and Partnership Firms, in so far as applicable to Personal Guarantor of a Corporate Debtor, has been notified and has come into picture. As per Sec 78 of IBC, insolvency and bankruptcy proceedings can be initiated against personal guarantors, wherein the amount of default is not less than Rs 1000.

However, it is imperative to note that there has been no such update/amendment with regard to the personal guarantors, thereby, meaning that the limit for personal guarantor to  corporate debtor still continues to be erstwhile limits, that is, Rs. 1,000/-.

Hence, Creditors who have the personal guarantee for any Corporate Debtor as security, can invoke this section. This might be applicable to Promoters who have given personal guarantee against a loan. Personal Guarantor can subsequently recover the due from Corporate Debtor u/s 145 of Indian Contract Act, 1872.

• Debt Recovery Tribunal

Application can be made to Debt Recovery Tribunal under Payment of Debt due to Banks and Financial Institutions Act 1993. This was the mechanism adopted by Banks and Financial Institutions prior to the inception of Insolvency and Bankruptcy Code. The debt threshold is 20 lakhs. So this is the option for Banks and Financial Institutions for debt in the range 20 lakhs to 1 crores. However, it is imperative to note that Operational creditors cannot invoke this option for their recovery.

• SARFAESI Act 2003: 

This allows Financial Institutions with dual option. First, it can take over the mortgaged asset and sell it to recover the dues, by-passing the DRT. Also, it allows the Banks to securitise the assets and sell the loan to Asset Reconstruction Company.

However, it is imperative to note at this juncture, a question may arise that, if after three months, the Central Government reduces the default limit from 1 Crores to any lower limit, whether the financial creditor may invoke the parallel proceedings under IBC.

The answer to the aforesaid question was addressed by the Hon’ble NCLAT in the matter ‘Punjab National Bank V. M/s Vindhya Cereals Pvt Ltd’[1], in which it was held by the Hon’ble NCLAT that, parallel proceedings under SARFESI ACT cannot constitute as ‘malicious or fraudulent’ proceeding

• Section 138 of Negotiable Instruments Act:

This is relevant mainly for operational creditors, wherein the receipt of dues was via Cheque. This is applicable when a cheque is dishonoured due to insufficiency of funds in account of the Drawer (Corporate Debtor). Under this section, following conditions needs to be satisfied:

(a) The cheque is presented within 3 months from the date it was drawn

(b) Payee (Creditor) gives a notice to the drawer within 15 days from the date the cheque was returned unpaid

(c) The Drawer fails to make payment to the Payee within 15 days of receipt of Notice.

(d) The cheque was drawn for the discharge of Debt.

The suit needs to be filed within 30 days. It is a compoundable offence .The only thing needs to be proved is existence of a debt and the fact that cheque is dishonoured. This is comparatively faster than a normal civil suit. After Negotiable Instrument (Amendment) Act 2018, the Drawer has to pay interim compensation of 20% to the Payee. This will help the creditor to get immediate financial liquidity.

However, a question which arises is that, whether an application under Section 9 of IBC is maintainable during pendency of proceeding under Section 138 of Negotiable Instruments Act, 1881.

The aforesaid issue was addressed by the Ho’ble NCLAT in the matter ‘Sudhi Sachdev v APPL Industries Ltd’[2] in which it was held that if a case is pending under section 138/141 of the Negotiable Instruments Act, 1881 (NIA), it cannot be held to be a dispute pending before a court of law. The pending case amounts to admission of debt and not the existence of a dispute.

• Summary Procedure under Order XXXVII of Civil Procedure Code:  

Summary Procedure is a unique legal provision wherein the court passes a judgement without hearing the defence, resulting in speedy and expeditious disposal of case(s).it is pertinent to note that Under Sub Rule 2 to Rule 1, recovery of Debt is covered under Order XXXVII. Under this,

• The Plaintiff (Creditor) shall file a Plaint with the Court and serve a copy of it to Defendant.
• The Court might or not allow “leave to defend” to the Defendant. If leave to Defendant is granted, then security needs to be provided to Court. If leave to defend is not granted, then the Court may pass appropriate judgement as it deems fit.

The advantage of Summary Procedure is speedier recovery of debt vis-à-vis normal Civil Suit.

• Alternate Dispute Resolution (Mediation and Lok Adalats)

Lok Adalat have been established under Legal Services Authority Act 1987. Lok Adalat can be approached either when the dispute is pending in court or at pre litigation stage. Parties at Pre Litigation stage may refer the matter to Lok Adalat by filing an application with State/District Legal Service Authority. Alternatively, the creditor can recover the money through Mediation and Arbitration mechanism, if there is a dispute over the ‘amount’ that is due.

• Recovery of Workmen/Employees’ Dues:

Workmen/Employees are classified as Operational Creditors under IBC. The unprecedented hit of novel coronavirus will batter hard, the Workmen/Employees. Firstly, there might be mass lay-off or retrenchment due to sluggish economic issues. Secondly, Employers might not pay these Workmen/Employees, their outstanding dues. Since, the limit under Sec 4 has been increased, it is not possible for these workers to initiate Insolvency Proceedings against their employer. Thereby Workmen/Employees may file the application to Labour court under Sec 33C of Industrial Disputes Act, 1947 or under Sec 16 of Payment of Wages Act 1936 or both.

• Trade Receivable electronic Discount System (TReDS):  It is an institutional system of Factoring/ Reverse Factoring for Micro, Small and Medium Enterprises. This mechanism has been approved by the Reserve Bank of India. It is to facilitate the trade receivable financing of MSMEs.  This is how the system works:

This system will be helpful to MSME in two ways.

1. If any Operational Creditor (MSME) has supplied Goods or Service to any Company and if there is uncertainty over the receipt of consideration, then the MSME can sell its Invoice under TReDS, to a financier and it will create liquidity to the MSME.
2. Also (Corporate Debtor (MSME) would be getting regular supply of Goods and Services from Operational Creditors, enabling them to maintain and run the business.

Conclusion

In the light of the on-going crisis, it is inevitable that the companies are going to go through a financial hardship, and hence, it may be imperative that the revision of threshold will indeed come as a saviour for small and medium sized companies, vulnerable to the wrath of lenders during these tough times. Therefore, in cases that involve large outstanding dues or the cumulative dues of financial creditors is high, they should actually take recourse under IBC.
However, in cases that do not involve large outstanding debt, above mentioned alternatives could be tried for Debt recovery.

No doubt, MSMEs should be protected in such tough times. But it is to be kept in mind that, creditors (mostly operational) would themselves be MSME and would rely of debt recovery as a source of working capital. Thus, future amendments in IBC should ensure that:

Cure is not worse than the problem itself