CIRP
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In this article, Shilpa Nagral, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses on the question whether two operational creditors can file for CIRP at the same time.

Introduction

What is insolvency?

Insolvency is a situation where an entity does not have enough cash to fulfil its financial obligations or to pay debts as and when they become due for payment. In other words, when liabilities exceed assets, the company is said to be insolvent.

Need for Insolvency and Bankruptcy Code

In India, there were numerous acts like Sick Industrial Companies (Special Provision) Act, 1985 (“SICA”),  Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002 (“SARFAESI Act”), Recovery of Debts due to Banks and Financial Institutions Act, 1993 (“RDDBFI Act“), Companies Act, 2013, to deal with matters related to reorganisation and Insolvency and bankruptcy.  This led to confusion as to which authority to approach in related matters. There were overlapping decisions given by different authorities as different stakeholders approached different authorities. Like in the case of Oswal Foods Private Limited, the corporate debtor approached the BIFR while the creditor approached High Court for winding up of the company. Similarly, in case of Jeevan Diesels and Electricals v HSBC, one creditor approached the Calcutta High Court while the other creditor approached initiated proceeding under the RDDBFI Act, against the same company in the same matter. Hence, to provide for time-bound and easy closure of business and to overcome the various issues and challenges, a strong bankruptcy and Insolvency law was required.

The Insolvency and Bankruptcy Code, 2016 is a uniform law that resolves all insolvency and bankruptcy issues in a time bound and economically viable manner. It replaces all the other acts thereby avoiding confusion and multiplicity of decisions. It provides comprehensive Insolvency legislation encompassing all companies, firms and individuals. The Code strikes balance between interests of all stakeholders involved. Speedy and time-bound disposal of cases increases the availability of credit and also provides the manner for maximisation of the value of assets. This benefits not only the creditors but also the debtor companies and the Indian economy overall.

Ecosystem under IBC

  1. Adjudicating Authority and Appellate Tribunals: Adjudicating authority would be the body who would have exclusive jurisdiction to deal with insolvency cases under the code. The National Company Law Tribunal (“NCLT”) is the adjudicating authority for companies and limited liability partnerships whereas Dispute Resolution Tribunals (“DRT”) is the adjudicating authority for individuals and firms. For appeals against the judgements delivered by the adjudicating authority, appellate tribunal I.e National Company Law Appellate Tribunal is to be approached.
  2. Insolvency and Bankruptcy Board of India: to oversee the Insolvency proceedings and regulate the entities registered under it
  3. Information Utility: specially licensed bodies which would collect, store and disseminate information relations to the indebtedness of a company
  4. Insolvency Professional Agency: These agencies will admit Insolvency Resolution Professionals (IRPs) and develop a code of conduct for them and help them develop best practices for governance.
  5. Insolvency Professionals: licensed professionals who will be recruited by insolvency professional agencies and they will help with the entire insolvency/bankruptcy process by acting as trustees and managing debtor assets during insolvency.

What is Corporate Insolvency Resolution Process (CIRP)?

When a corporate debtor commits a default, Insolvency proceedings can be initiated against it. As per Insolvency and Bankruptcy Code, a corporate defaulter means a corporate person (i.e. company as defined under Companies Act, 2013 or Limited Liability Partnership as defined under Limited Liability Partnership Act, 2008) who is unable to pay the debt when part or whole of the instalment becomes due and payable. To initiate CIRP, the debt exceeding Rs. One Lakh should be due and unpaid by the corporate debtor. Insolvency Resolution and Liquidation for the Corporate person is dealt with under Part II of Insolvency and Bankruptcy Code.

Corporate Insolvency Resolution Process can be initiated by:

  1. Financial creditor;
  2. Operational creditor; and
  3. Corporate debtor who commits default

Who are operational creditors?

As per IBC, operational creditor means “a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.”

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.”

It is pertinent to note that, a creditor would fall into the category of operational creditor only if he owes an operational debt. What exactly will fall under operational debt becomes clear from the case of Vinod Awasthy v A.M.R Infrastructures Limited. In this case, the NCLT laid down that ‘operational debt’ under the code only covers four categories viz. goods, services, employment and government dues. If the debt owed by the creditor does not fall in any of these four categories, the creditor cannot be called ‘operational creditor’ and hence he cannot initiate corporate insolvency resolution process against the corporate debtor.

Procedure for initiation of CIRP by Operational Creditor  

Step 1: Operational creditor can serve a demand notice on the corporate debtor along with the invoice of the amount unpaid.
Step 2: Within 10 days of demand notice, the corporate debtor should either:

  • Make the payment and provide evidence of payment in form of record of electronic transfer or record of encashment of cheque
    Or
  • Intimate the operational creditor of existence of dispute or pending suit or arbitration proceedings
Step 3: When no reply is received from the corporate debtor within 10 days, the Operational creditor can file an application before the adjudicating authority along with the following documents:

  • Copy of invoice;
  • Demand notice served;
  • Certificate from financial creditor confirming that the operational debt has not been paid;
  • Affidavit: No notice stating the existence of any dispute received from the corporate debtor;
  • Name of proposed insolvency resolution professional (optional)
Step 4: Within 14 days of the filing of an application by the operational creditor, Adjudicating authority to ascertain the existence of a dispute and admit or reject the application
Step 5: If application admitted by the adjudicating authority, corporate insolvency resolution process shall commence from the date of admission of application

Can two or more operational creditors file a joint application for initiation of CIRP?

As per Section 8 and Section 9 of Insolvency and Bankruptcy Code, an operational creditor on the occurrence of a default by the corporate debtor should deliver a demand notice along with invoice demanding payment of the amount due. If the corporate debtor fails to make payment or provides records of the existence of a dispute, within 10 days of receipt of demand notice, the operational debtor can initiate insolvency resolution process against him. One of the questions that arise here is, can two or more operational creditors file a joint application for initiation of insolvency resolution process against the corporate debtor. This issue was dealt with in the case of Uttam Galwa Steel Limited v DF Deutsche Forfait Ag. Limited.

Uttam Galwa Steel Limited v DF Deutsche Forfait Ag. Limited.

Facts of the case: In this case, two operational creditors ( DF Deutsche Forfait AG and Misr Bank Europe Gmbh) filed a joint application against the corporate debtor for initiation of corporate insolvency resolution process.

Issue: Can two or more operational creditors file a joint application for initiation of Corporate Insolvency Resolution Process against the corporate debtor?

Analysis: The respondents put forth the argument that as per Rule 10 of the Adjudicating Authority Rules, 2016, Rule 20, 21,22,23,24 and 25 of the NCLT Rules will be applicable to present case. Reliance was also placed on Rule 23A of the NCT rules which expressly states that the bench may permit more than one person to join together and present a single petition if the nature of relief prayed for any cause of action is common to all the parties involved. Hence, basis Rule 23A, both the creditors could file a joint application against the corporate debtor for initiation of corporate insolvency resolution process.

Findings of NCLT Bench:

The NCLT bench stated that, after study of Section 8 and Section 9 of Insolvency and Bankruptcy Code, 2016, it becomes very clear that notice to the corporate debtor against the default has to be served individually by an operational creditor. The presence of the word “an” in section 8 makes it clear that individual operational creditor has to send notice individually. Also, Section 9 makes it clear that if the operational creditor does not receive any reply or proof existence of any dispute from the corporate debtor, he individually can file for initiation of corporate insolvency resolution process.

As the respondents relied on Rule 23A of the NCLT Rules, the bench clarified that the said rule has not been adopted by Section 10 of Insolvency and Bankruptcy Code, 2016 and hence, Rule 23A is not applicable to proceedings under the Section 9 of the Insolvency and Bankruptcy Code, 2016.

It is also pertinent to note that, where the code intended for the creditors to file for joint applications, it made an express provision for the same. In Section 7 the code expressly provides for financial creditors to file for application by itself or jointly. No such provision is made for operational creditors, which makes it clear that the code never intended for operational creditors to file a joint application.

Also, as individual operational creditors will have to send individual demand notices. In each demand notice, the claim and demand will vary, due to which the petition to be filed under Section 9 will have separate individual data. Also, the date of the notice under Section 8 for different operational creditors will be different. Considering all these issues, it is not practical for two or more operational creditors to file for a joint application. Such joint application under Section 9 is not maintainable.

Judgement: Application under Section 9 of Insolvency and Bankruptcy Code, 2016 has to be filed individually by operational creditors. Joint applications under Section 9 is not maintainable.

The way forward

The Insolvency and Bankruptcy Code, 2016 is a one-stop solution for resolving the issues of bankruptcy and insolvency in a time-bound and economically viable manner. The most positive point of this code being, after considering various factors it gives fair chance to the corporate debtor for its revival and not directly rush into liquidation. The code while protecting the interests of small investors will create a process of doing business which is less cumbersome. A strong insolvency framework which was less time and cost consuming was long overdue in India.

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