Alternatives to Insolvency and Bankruptcy Code post COVID-19
Introduction
The Novel Coronavirus
(“Covid-19”) has brutally hit, almost every sector. The pandemic has not only devastated
the global supply chain, by halting international trade, but has also caused
major economic disruptions in industries ranging from the service based hospitality
sector to manufacturing and has also engulfed the finance world. The pandemic
has forced governments across the globe 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 24th 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.
The existing limit is Rs 1 lakh.
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 24th
March 2020 announcement, the threshold limit (of Rs. 1 lakh) seemed to be very
creditor- friendly, as IBC was at its nascent stage. The threshold limit of
default (of Rs.1 lakh) gave creditors the upper hand, particularly operational
creditors. But this amendment, has been brought to save primarily the Micro,
Small and Medium Enterprises (“MSME”)
after the lockdown crisis.
In the absence of any silver
lining, the economy will be in doldrums. Demand might reduce drastically in the
wake of thinning disposable incomes. It will be difficult to raise finances,
especially for operations amid crippling markets and weak investor confidence. To
say that the vulnerable MSME sector would be the worst hit is an understatement.
In that case, IBC would be, the proverbial Sword of Damocles hanging over these
MSMEs, over the eminent default of their dues. To reduce this burden, the
government decided to raise the limit under Sec 4 and prevent the MSMEs from being
dragged into insolvency proceedings and in the worst case into liquidation. Having
said that, the Government has also proposed suspension of Section 7, 9 and 10
of the IBC for 6 months, in case the challenges from the Covid-19 continues, which
will do away with initiation of insolvency resolution proceedings against
defaulting corporates.
However, the aforesaid steps
undertaken by the Central Government has not foreseen resolution mechanisms
beyond the IBC route. Other legal options would still be available with the
creditors. Following are some of the options under existing statutes for
recovery of dues.
1) Personal
Guarantor to a Corporate Debtor
As
per Notification dated 15th 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.
2) 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.
3) 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,
a question may arise, in case the banks have invoked SARFESAI, and if after
three months, the Central Government reduces the default limit from 1 Crores to
any lower limit, then whether the financial creditor may invoke the parallel
proceedings under IBC or not?
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. Thus, it conclude that parallel proceeding can be initiated.
4) 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.
5) 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 might 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.
6) 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.
7) 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.
8)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:
Step 1: Supplier supplies the Goods or Services
Step 2: In case of Factoring: Supplier logs in and uploads the Invoice for Receivables. In case of Reverse Factoring: Buyer logs in and uploads the invoice for Receivables.
Step 3: The invoice is converted into “Factoring Units” for bidding. Financiers bid against the Factoring Units.
Step 4: Supplier accepts the most favorable Bid. The TReDS generates settlement instruction debiting the Financier and Crediting the Supplier.
Step 5: On due date of Invoice Payment, the TReDS system generates settlement instructions for debiting the buyer and crediting the financier.
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.But recovery of debt is essential to enable credit availability in the economy.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.
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 on debt recovery
as a source of working capital. Thus, future initiatives by the government
should ensure that:
Cure is
not worse than the problem itself
[1] Punjab
National Bank V. M/s Vindhya Cereals Pvt. Ltd. (Company Appeal (AT)
(Insolvency) No. 854 of 2019)
Disclaimer: This article is reserved for A Biz Chancellor.
AUTHOR: - Rohit Prabhakar (Chartered Accountant, 3rd year Law Student in Law Faculty, Delhi University Mobile no +91-9999311546)
AUTHOR: - JAIDEEP BHALLAPARTNER AT A BIZ CHANCELLOR (ABC)(A FIRM OF CORPORATE EXPERTS )(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. +91-7838684213
No reader should act on the basis of any statement contained herein without seeking professional advice. The results & the interpretation has been done on the basis of my understanding of the Act & Rules, where applicable and with reference to the general articles and analysis. The author explicitly disclaims any financial or other liability of any kind arising on account of any action taken pursuant to the results or interpretation of this document. With respect to information available herein before, the author doesn’t make any warranty, express/implied or assume any liability or responsibility for the accuracy, completeness, or usefulness of such information.
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