Right of the creditor is paramount; see how India moving from pro-debtor to pro-creditor scenario

Published: September 6, 2017 2:39 AM

The Supreme Court judgment in the Innoventive case arms the NCLT process by upholding the right of the creditor as paramount.

judgement, supreme court, legislationThe judgment of the Supreme Court amplifies the legislative intent behind the Code.

Entrenched managements are no longer allowed to continue in management if they cannot pay their debts”—the most unequivocal and incontrovertible finding of the Supreme Court of India, in its first substantial ruling under the Insolvency and Bankruptcy Code in the case of Innoventive Industries Ltd vs ICICI Bank.

Keeping in mind the history of the Code and the legislative intent, the Court has noted that managements are not allowed to continue if debts are not being paid. The decision takes note of the legislative history, and notes that the the Bankruptcy Law Reforms Committee of November 2015 held that a limited liability company is a contract between equity and debt; if debt obligations are met, equity owners have complete control and creditors have no say in the running of business—when default happens, control is transferred to the creditors.

The Court further notes that time is of critical essence in the scheme of the Code, and the intent of the Code is to see whether corporate debtors can be put back on their feet to stave off liquidation. The Court has made elaborate observations on the scheme of the Code and notes that the management is divested off its powers in case of an initiation of insolvency proceedings; the said management powers are given to a professional agency to continue the business as a going concern and draw up a resolution plan. Once the resolution plan is drawn up, the management is handed over so that the corporate debtor can pay its debts and get back on its feet. Conversely, if the resolution plan is not drawn up within a maximum period of 270 days as permitted under the Code, liquidation would commence. The underlying theme of the Code is to bring defaulter companies back to the commercial fold or get them to face liquidation. To ensure that the defaulter companies can continue their commercial activities, the Code also provides wide powers to the resolution professionals related to raising finances, creating security interests, etc, subject to the approval of the committee of creditors. It is noteworthy that under the Code, the committee of creditors comprises all financial creditors.

The Code provides for two categories of creditors: financial and operational creditor, and the Supreme Court has noted that that there is a difference in the manner the insolvency proceedings are initiated at the instance of a financial creditor and an operational creditor. For financial creditors, in case of a default by a corporate debtor, the role of the adjudicating authority is limited to merely seeing the records of the information utility or other evidence produced by the financial creditor to satisfy itself that a default has occurred. The only defence for a corporate debtor, at this stage, is to point out that the default has not occurred, in the sense that the debt is not due. The Court has further noted that debt may not be due if it is not payable in law or in fact. Thus, the adjudicating authority may therefore only reject an application on the defence taken by the corporate debtor that the debt was not due. The observations of the Supreme Court for initiation of insolvency proceedings for the financial creditor is significant considering the recent efforts taken by RBI to expedite the NPA resolution process.

Conversely, an operational creditor must first send a demand notice of unpaid debt to the corporate debtor. The corporate debtor has time till 10 days from the receipt of the demand notice to bring to the attention of the operational creditor the existence of a dispute or a record of the pendency of a suit or arbitration proceedings which existed at the time of the demand notice. The moment there is existence of a dispute, the operational creditor is out of the scheme of the Code.

The Court has further unequivocally noted that due to the non obstante clause contained in the Code, any rights accruing to the corporate debtor under any law cannot come in the way of the Code. Thus, the Court is clear that the Code is to bring defaulter companies back to the commercial fold or liquidate them, and any other law which unsettles the scheme of the Code will be considered repugnant.

The judgment of the Supreme Court further amplifies the legislative intent behind the Code. The aim of the Code should not be seen from a myopic perspective of recovery of money, but should be thought of as a well-thought-out Code. It lays down that resolution of the corporate debt is paramount, failing which the borrowing company must face liquidation. The judgment is forward-looking, and if properly implemented, will pave the way for effective implementation through strict adherence of timelines.

By Abir Roy, Partner, Lakshmikumaran & Sridharan.

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