Insolvency proceedings against Jaypee Infratech has put issue under scanner; what the issue really involves; find out

Published: August 29, 2017 7:24:11 AM

The National Company Law Tribunal (NCLT) has witnessed several insolvency proceedings against defaulting real estate developers under Insolvency and Bankruptcy Code, 2016.

NCLT,  Jaypee Infratech, AMR Infra, Uttam Galva Steels, National Company Law Appellate Tribunal , Insolvency and Bankruptcy Code, 2016An amendment to regulations for insolvency resolution process seems to reinforce this line of thinking. (Reuters)

The National Company Law Tribunal (NCLT) has witnessed several insolvency proceedings against defaulting real estate developers under Insolvency and Bankruptcy Code, 2016. Many of these were dismissed at the admission stage on the ground that home-buyers are neither ‘financial creditors’ nor ‘operational creditors’. An amendment to regulations for insolvency resolution process seems to reinforce this line of thinking. It goes without saying that the admission of insolvency proceedings against Jaypee Infratech has put the spotlight on this issue.

NCLT, in its decisions under the code against AMR Infrastructure (culminating in Mukesh Kumar vs AMR Infra), held that home-buyers “cannot be treated as ‘operational creditors’ within the meaning of section 9 of the code as the debt incurred by AMR Infra has not arisen out of provision of goods, services or employment. It can also not be considered ‘financial debt’ within the meaning of section 5(8) to mean a debt which is disbursed against the consideration of the time, value or money,” excluding home-buyers from both categories. The National Company Law Appellate Tribunal did not overturn this decision. But NCLT’s view in Uttam Galva Steels is contrary: “There are two types of debts, operational and financial debt … there cannot be a debt other than these two types. There it is a debt against the company, it has to invariably fall either under financial debt or operational debt, and it has to be read as either financial debt or operational debt, it can’t be said that a debt against company for a, b, c reasons can’t be either financial or operational debt.”

On August 16, the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2017, were amended to include a new residual category of creditors (‘other creditors’) under regulation 9A. It provides the process for creditors falling in the residual category to submit proof of their claims in insolvency resolution process. But no other amendments to rules or regulations under the code have been introduced to address the treatment of such ‘other creditors’ under the other provisions of code. So, if a creditor is an ‘other creditor’ by virtue of not qualifying as either a financial creditor or an operational creditor, what then are its rights, privileges, benefits or standing under the code?

The Insolvency and Bankruptcy Board, in response to an article that claims of ‘other creditors’ “would be treated on par with claims of other financial and operational creditors and would not be pushed to the bottom of the list,” noted the amendment is intended to “facilitate the process of collection and collation by the interim resolution professional/resolution professional of all the claims pertaining to corporate debtors” without offering any clarification on the standing of ‘other creditors’.Here are some of the key questions that arise. One, is the ‘other creditors’ category to be construed broadly or narrowly, and to what extent does the introduction of this new category narrow the ambit of the ‘financial creditor’ and ‘operational creditor’ categories? Two, financial creditors and operational creditors enjoy benefits under the code including the right to initiate insolvency proceedings and (potential) creditor committee representation, and these ‘other creditors’ do not enjoy the same right as present, so how is this distinction fair?

Three, any plan approved by the creditors’ committee must assure payment of the liquidation value of debts due to operational creditors, so why is there no similar protection for debts due to ‘other creditors’? Four, under the code, all debts due to unsecured creditors (other than employees and workmen) are treated at par, but since the code itself does not contemplate this third category of ‘other creditors’, are other creditors’ rights in the liquidation waterfall affected in any way or would such creditors be treated the same as financial/operational unsecured creditors? A way of addressing this issue is to clarify that ‘other creditors’ would generally be treated as ‘operational creditors’ for the purposes of the code and as ‘financial creditors’ in specific situations—‘other creditors’ such as ordinary flat buyers could be treated as ‘operational creditors’ under the code, whereas a flat buyer with an assured return could be classified as a ‘financial creditor’. Unless these issues are addressed, this artificial categorisation raises more questions than it answers.

By, Clarence Anthony, Counsel, Trilegal law firm, New Delhi. Views are personal

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