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IBC Section 10 – A Peculiar and Distinctive Provision

November 29, 2019
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IBC Section 10

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This article is written by Harshita Naidu, pursuing a Certificate Course in Insolvency and Bankruptcy Code from LawSikho.com. Here she discusses “IBC Section 10 – A Peculiar and Distinctive Provision”.

Introduction

The provision is unique and dissimilar from other provisions of the Insolvency and Bankruptcy Code, 2016 as the Corporate Debtor is empowered to move an impugned petition against itself to initiate the Corporate Insolvency Resolution Process and declare itself as Insolvent.

Explanation

Section 10 of the Insolvency and Bankruptcy Code, 2016 (“Code”) grants a locus standi to the Corporate Applicant to initiate a Corporate Insolvency Resolution Process (“CIRP”) against itself. It is a benignant provision and is favorable not only to the creditors [either operational/financial creditors] but also to other concerned stakeholders of the Company. The National Company Law Tribunal pursuant to Section 60(5) of the Code has the jurisdiction to entertain and dispose of an application under Section 10 of the code.

Section 4 of the Code provides a locus standi to the Corporate Applicant to initiate a CIRP against itself. The cause of action arises when a Corporate Applicant defaults in repayment of the debt amounting to INR. 1, 00,000/- (Rupees One Lakh Only.) and above to either it’s Operational, Financial or other Creditors within the prescribed period. 

Interpretation of ‘Corporate Applicant

Section 5(5) of the Code defines Corporate Applicant as follows:

The aforesaid provision is comprehensive, as the meaning of the Corporate Applicant is not restricted to a Corporate Debtor and includes the Authorized Representatives appointed on behalf of the Board of the Debtor to make an application under the respective provider.

Therefore, it shall be assumed that the aforesaid is a clarificatory provision that is construed to give a wider meaning to the term- ‘Corporate Applicant.’

The rationale behind making an application under Section 10 of the Code

The policy of Law favors the Corporate Debtor if its business is severely affected due to bad market conditions and the non-availability of working capital funds. Business does not flourish always and may face financial crunch due to which the Corporate Debtor is unable to discharge its existing obligations. 

The onus lies on the Corporate Debtor to prove the fact that its business is affected in general and it has suffered huge losses in the previous Financial Years. If the same can be proved within the prescribed time frame, then the application shall be admitted by the Hon’ble Tribunal. 

Prerequisites for Initiation of Corporate Insolvency Resolution Process

The procedure for initiation of CIRP is delineated under Section 10 of the code wherein the Corporate Debtor is required to provide information under Form- 6 read with Rule 7 of the Insolvency and Bankruptcy [Application to Adjudicating Authority Rules],2016  (hereinafter referred to as AAA rules). 

It is incumbent on the Corporate Debtor to furnish all relevant and accurate information as asked under Form 6 with relevant information as directed under Section 10(3)of the Code which includes

Pursuant to Section 3(12) of the Code, the term “default”  means non-payment of debt when the whole or any part or installment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be;

The Hon’ble National Company Law Appellate Tribunal observed in Unigreen Global Pvt. Ltd vs. Punjab National Bank1  that if there is a debt and a default has occurred and the Corporate Debtor is not ineligible under Section 11 of the Code, then Adjudicating Authority has no option but to admit the application unless incomplete in which Corporate Debtor is given time to rectify its defects.

As per Section 10(4), if the application is complete and fulfills all the criteria as mentioned above and is devoid of any technical error, it shall be admitted within fourteen days of filing the application by the Adjudicating Authority.

The dichotomy of Section 10 with Section 65 and 66 of the Code and the notion of Financial Fraud

Although Section 10 is an independent provision that is favorable to all concerned stakeholders, it is always read in light with Section 65 [Fraudulent or malicious initiation of proceeding] and Section 66[fraudulent trading or wrongful trading] of the respective Code.

NCLT has time and again reaffirmed the purpose of the code and has made clear that the spirit of Law is to provide resolution to distressed Companies. However, the provisions are misused by the petitioners with the intention to defraud the stakeholders.

The intention of the corporate debtor shall not be incredulous and deceitful.  Section 65 and Section 66 protects the interest of the Stakeholders and stipulates punishment for Financial Irregularities and Fraud. Section 10 read with Section 65 and 66 is co-related with the Vulnerable Transactions i.e. Section 43 to 51 of the Code.

Section 10 and its interplay with Section 65 – There are various instances where Corporate Applicants make an application with fraudulent or malicious intent and frustrate the proceedings of the court.  Section 65 states that if CIRP or liquidation proceedings are initiated by any person with fraudulent or malicious intent for any purpose other than the purpose for resolution of insolvency or liquidation then heavy penalties shall be imposed by the Adjudicating Authority.  

The same shall be elucidated by way of a few illustrations:

NOTE: In the same case, if JKL Ltd. is not a related party of EFG Ltd. and suppose if Mr. B has friendly relations with JKL Ltd. for the past 20 years and EFG Ltd. clears all dues of ‘XYZ’  but has not repaid the outstanding debts taken from JKL Ltd and initiates CIRP u/s 10 of the Code. In both situations, it can be assumed safely that the application is not made in good faith and falls under the purview of Section 65 of the Code. 

It can be inferred from the above situations that, Section 65 of the Code comes into the picture in both the cases, as the Corporate Debtor has a fraudulent and malicious intent.

Section 10 and its Interplay with Section 66 of the Code

As per section 66(1), if during the CIRP or liquidation process, it is found that any business of the corporate debtor was carried out with the intention of defrauding creditors or for any fraudulent purpose then, the resolution professional shall make an application to the adjudicating authority informing the fraudulent transaction. Adjudicating authority upon receiving such an application may pass an order that any person who was knowingly parties to the carrying on of the business in such manner shall be liable to make such contributions to the assets of the corporate debtors as it may deem fit. Section 66(1) extends liability on “any person” who was knowingly a party to such transaction. It can be assumed safely that Company and its directors are under its ambit.

However, as per Section 66(2), liability is extended specifically to the director or partner of the corporate debtor in case of fraudulent or wrongful trading. As per the directions of NCLT, director or partner is liable to make contributions to the assets of the Corporate Debtor  if before the insolvency commencement date, such director or partner knew or ought to have known that there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process in respect of such corporate debtor; and such director or partner did not exercise due diligence in minimizing the potential loss to the creditors of the corporate debtor.

Twilight period is the time when the director knew or ought to have known that there was no reasonable possibility of avoiding the commencement of resolution of the company, till the time the company actually enters into resolution. It is the responsibility of a Director/ Partner to exercise due diligence during the twilight period.   

For the purposes of this section a director or partner of the corporate debtor, as the case may be, shall be deemed to have exercised due diligence if such diligence was reasonably expected of a person carrying out the same functions as are carried out by such director or partner, as the case may be, in relation to the corporate debtor.

If any illegitimate and felonious transaction is executed with an intention to defraud the creditors, then the persons involved in such transaction shall be held liable and shall contribute to the assets of the Corporate Debtor.

The same shall be elucidated by way of few illustrations:

The above situations also attract Section 49, as the corporate debtor/ Director of the Corporate Debtor as the case may be has entered into an undervalued transaction with the intention to keep away the assets beyond the reach of the persons entitled to claim, which will adversely affect the interest in relation to such claim.

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NOTE: In all the aforementioned circumstances, the transactions fell within the lookback period of two years [ one year – if the transaction is executed with a non-related party] prior to the commencement of insolvency proceedings, as prescribed for preferential or undervalued transactions between related parties under the Code.

Case Law Analysis

Section 10 and its misuse are explicated with the help of a Landmark judgment delivered by the Hon’ble Tribunal, in the matter of Munisuvatra Agri International Ltd filed under Section 10 of the Code.

Facts in Issue:

Factual Matrix

Arguments on behalf of Corporate Applicant

Judgement

“Corporate Applicant has filed the Section 10 application with a malafide intention and an ulterior motive and for a purpose other than for resolution so as to frustrate the recovery proceedings pending before courts upon declaring a moratorium”. 

Analysis

Final Thoughts

References


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