This article is written by Vishwanath Bahuguna who is pursuing a Certificate course in Insolvency and Bankruptcy Code from Lawsikho.
Table of Contents
The Insolvency and Bankruptcy Code, 2016 (herein after referred to as “Code, 2016) was introduced in the Parliament of India with intent to adjudicate and resolve insolvency within time bound manner for maximisation of value of assets of a debtor under the Code.
The Code, 2016 applies to corporate persons, partnerships and individuals. Need of the Code arises when there is a default in repayment of outstanding dues in terms of the Code. A creditor gains control over debtor’s assets and decisions to resolve insolvency as per provisions of the Code. It would be germane to distinguish two terminology i.e. Insolvency and Bankruptcy under the Code though they may be used interchangeably. Insolvency may be termed as a financial state of an individual, however, bankruptcy is a legal process under which reliefs are extended to debtor’s, who are unable to pay off their debts.
This article deals with remedies available to a corporate applicant to initiate resolution process against the corporate debtor or corporate person under provisions of the Code. Let us see that who is referred to as the Corporate Applicant and its definition under the Code. The corporate Applicant means the Corporate Debtor, itself or a member/partner of the Corporate Debtor who is authorised to make an application for corporate insolvency resolution process under constitutional document of the Corporate Debtor or an individual who is in charge of managing operations and resources of the Corporate Debtor or a person who has the control and supervision over financial affairs of the Corporate Debtor or Corporate Guarantor which means a corporate person who is surety in a contract of guarantee to a Corporate Debtor.
Purpose of Section 10 under the Code
Let us now deal with rational behind introducing Section 10 in the Code. The Parliament introduced this section in the Code with intent to vest rights in the hands of the corporate applicant including a corporate debtor or guarantor with affirmative purpose to initiate corporate resolution process within time bound manner and maximisation of value of its assets. In simpliciter, we may state that Section 10 of the Code is introduced to grant an opportunity to the corporate debtor to restructure its debt and revive itself through resolution process.
This section grants the corporate applicant to initiate resolution process against itself in cases of irretrievable financial distress. It is germane to note that when situation for judging debt or financial liabilities occur, then it can be stated that such debt holder is the best individual for it. Hence, when the Corporate Debtor finds itself in such a situation then it shall immediately opt for initiation of its resolution process through the Corporate Applicant and save its time on futile exercises on debt resolution.
In another, scenario, wherein the corporate debtor opts not to avail resolution process under the Code, then, it is merely decreasing value of its assets instead of its maximisation during the period.
Procedure for initating resolution process
Now, we shall discuss measures adopted under the Code by the corporate applicant to initiate resolution process against the corporate person or corporate debtor i.e. a company in terms of provisions of the Companies Act, 2013 (18 of 2013), a limited liability partnership in terms of provisions of the Limited Liability Partnership Act, 2008 (6 of 2009) or any person incorporated with limited liability under any law for the time being in force but not include any financial service provider.
The corporate applicant as discussed earlier may file an application against the corporate debtor under section 10 of the Code for initiating corporate resolution process before Adjudicating Authority i.e. the National Company Law Tribunal established under the Code with respect to committed default in repayment. The requisites or ingredients for filing application to initiating resolution process can be enumerated as follow:
- Step 1 Filing an application in a form, containing particulars, accompanied by fees as prescribed under the Rules of the Code.
- Step 2 The Corporate Applicant shall along with application furnish:
- the information relating to its books of account and such other documents for such period as may be specified.
- the information relating to the resolution professional proposed to be appointed as an interim resolution professional; and
- the special resolution passed by shareholders of the Corporate Debtor or the resolution passed by at least three-fourth of the total number of partners of the corporate debtor, as the case may be, approving filing of the application.
Post compliance of above two steps, the Adjudicating Authority shall within a period of fourteen days of the receipt of the application by order admit it. In case, there is any deficiency in compliance of above two steps while fining the application, the Adjudicating Authority shall issue notice for rectification of the application within seven days from receipt of the notice from the Adjudicating Authority. Even, if post issuance and due receiving of notice on the application is not adhered to the Adjudicating Authority may reject the same. Other, condition for rejection of the application by the Adjudicating Authority added in the year 2018 by way of amendment is any disciplinary proceeding pending against proposed resolution professional.
Jurisprudence around Section 10
This article further discusses jurisprudence around Section 10 and its interplay with Sections 65, 66 and other provisions of the Code. It would not be incorrect to state that corporate applicant in connivance with the corporate debtor carries out resolution process with intent to defraud its creditors. While, adopting such modus operandi to defraud creditors, the corporate applicant not only violates spirit of resolution process and intention of Parliament with respect to section 10 of the Code, but also causes gross abuse of law and its cannons. An instance, may be cited to show misuse/abuse of the Section 10 of the Code:
- Suppose Mr. Ray director of M/s Coper International Private Limited is related party to M/s KYC International Limited being a director of it and along with his son holds more than two-percent of its share capital. In March, 2019 M/s KYC International Limited entered into a loan agreement with M/s Coper International Private and availed Rs. 20 lacs with a purpose to repay its outstanding dues to its financial creditors. Now, at the time of repayment of loan M/s KYC International Limited refuses to do so and initiated corporate resolution process under section 10 of the code against it. Such action may be termed as result of a malafide intent merely to frustrate recovery proceedings before the court. Since, M/s KYC International Limited is a related party under section 5(24)(e) of the Code to M/s Coper International Private Limited, the said initiation of resolution process may be stated to be with a malafide intent and not due to financial distress.
- In another scenario, wherein M/s KYC International Limited has M/s Zolo limited as one of its financial creditors and it has participation in policy making process of M/s KYC International Limited. Accordingly, it can be stated that M/s Zolo Limited is a related party as defined under section 5(24) (m) of the Code. Now, M/s KYC International Limited after repaying debts to M/s Zolo Limited wilfully initiates corporate resolution process under section 10 of the Code after six months. Hence, it would not be inappropriate to state that M/s Zolo Limited has received preferential treatment under section 43 of the Code as Mr. Ray has some direct or indirect relation with M/s Zolo Limited.
Owing to above instances, it can be safely stated that the Corporate Debtor therein, have a malicious and fraudulent intent and hence, provisions of section 65 of the Code are attracted herein, which reads as follows:
- (1) If, any person initiates the insolvency resolution process or liquidation proceedings fraudulently or with malicious intent for any purpose other than for the resolution of insolvency, or liquidation, as the case may be, the Adjudicating Authority may impose upon such person a penalty which shall not be less than one lakh rupees, but may extend to one crore rupees.
(2) If, any person initiates voluntary liquidation proceedings with the intent to defraud any person, the Adjudicating Authority may impose upon such person a penalty which shall not be less than one lakh rupees but may extend to one crore rupees.
Section 10 and its interplay with Section 66 of the Code
Section 66 of the code states that during the corporate insolvency resolution process or liquidation process, it is found that any business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose, the NCLT may on the application of the resolution professional pass an order that any persons who were 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.
Further section 66(2) of the Code specifically fixes liability of director or partner of the corporate debtor in cases of fraudulent trading or wrongful trading and contribute to the assets of the corporate debtor as deem fit. In simpler words, it can be stated that it the director or partner of the corporate debtor has duty/responsibility of due diligence in relation to trading transactions of the corporate debtor.
An instance, may be cited to show that how wrongful or fraudulent trading are done by the Corporate Debtor and corporate resolution process are initiated to merely use it as a tool to escape/frustrate court proceedings:
- That Mr. Ray, director of M/s Coper International Private Limited using his sole discretions sells an immovable property in name of M/s Coper International Private Limited worth Rs. 20 lacs for a consideration of Rs. 10 lacs to Mr. Jay. Thereafter, two months of the said sale transaction, M/s Coper International Private Limited initiates corporate resolution process under Section 10 of the Code. The resolution professional appointed for said resolution process comes to know that Mr. Ray is a related party then such transaction will fall in category of undervalued transaction. Further, Mr. Jay shall be personally liable under Section 66(2) of the Code. The said instance also attracts provisions of section 49 of the Code which states that where the corporate debtor has entered an undervalued transaction as referred to in sub-section (2) of section 45 and the NCLT is satisfied that such transaction was deliberately entered into by such corporate debtor.
Unigreen Global Private Limited v. Punjab National Bank & Ors.
The Principal bench, New Delhi held that if the corporate debtors does not disclose all the facts including facts in relation to the debts owed by it to its creditors and were trying to misuse the provisions for corporate resolution process under Code for only taking benefit of moratorium on actions against the corporate and its creditors, the application for corporate resolution process would be rejected.
It can be aptly said that Section 10 of the Code vests rights to the corporate applicants including corporate debtors to resolve its insolvency. However, misuse and abuse of process of provisions of the I&B code by the corporate debtor cannot be ignored since, admission of the corporate resolution process leads to moratorium for the benefit of the debtor. It is to be noted that to achieve objective of section 10 in its entirety has to be read along with section 65 and 66 of the I&B Code. That Section 65 and its sub clauses imposes penalty upon the applicant if it initiates corporate resolution process fraudulently or with malicious intent for any purpose other than for that of resolution process. Hence, the NCLT have discretion to reject the debtor’s application where the debtors misuse provisions for corporate resolution process under I&B code.
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