Insolvency & Bankruptcy Code- Protection FROM Creditor or Protection FOR Creditor

Background

The Insolvency and Bankruptcy Code, 2016 (“Code”) was notified effective 28 May 2016 with an aim amongst many others, to complete insolvency resolution process in time bound manner, to revive the entity and to ensure/safeguard the value of creditors (specifically unsecured creditors) and to protect the entity itself from coercive action of creditors (with an introduction of moratorium period). This legislation is very much needed, along with the rigour that it propounds.

The Code gives powers to creditors (both operational creditor & financial creditor) to drag the corporate debtor to the National Company Law Tribunal (the Adjudicating Authority) for insolvency resolution process in cases of default of payment. However, in the absence of specific opportunity to the corporate debtor to address the very reason for such default, the intent of the Code appears to below-sided towards creditors.

Should the corporate debtors be given an opportunity to be heard?

Position of Corporate Debtor under the Code

The existing procedure under the Code in case of operational creditor being an applicant involve a notice of dispute being issued against the corporate debtor, following which a time period for response is given to the corporate debtor to prove the existence of a dispute. After the mandated time period of 10 days has been exhausted, the operational creditor files an application. Following the filing of an application, there is a limited period of 14 days, following which the same has to be admitted by the NCLT.In case of financial creditor being an applicant to the insolvency process, an application would be made to Adjudicating Authority and a copy of such application would be sent to the corporate debtor.

Upon application being accepted by the Adjudicating Authority, there is a time period of 30 days within which the insolvency resolution professional is appointed by the creditors to put together all the relevant material in this regard and call for a meeting of various creditors.

The insolvency resolution professional (IRP)  is the individual who is proposed by the resolution applicant (i.e. creditor) and appointed by the Adjudicating Authority. A corporate debtor does not and cannot have any role in such appointment. IRP works to protect the interest of creditors and provides for a revival plan to protect the interest of the creditors.

Upon IRP being appointed, the IRP takes charge of the running of the business. The corporate debtor cannot make any management decisions.The resolution plan is then placed before the committee of creditors, and if more than 75 percent of the creditors approve, then the plan is approved. If not approved, the company goes into liquidation.

It may be noted that once an application is filed by the creditor, the Code rides excessively on the word of the corporate creditor.While there are few judicial precedents in which the Court has ruled that the Adjudicating Authority has to adhere to the principle of natural justice while deciding applications, the point of emphasis remains that the Code by itself does not provide any recourse for the corporate debtor to raise the grievance. It is for the Adjudicatory Authority to make ways for the corporate debtor to represent himself. Moreover, there is no structured procedure laid down for a fair hearing to be given to the corporate debtor.

Possible Remedies for safeguarding the rights of the corporate debtors against the frivolous threats of the creditors.

A corporate debtor who has intimate knowledge of the business, technical and professional experience of running the business should also be heard in appointing an IRP. An IRP who is not experienced in running a particular business or does not have the intimate knowledge required of the industry may cause damage, which perhaps can be evaluated prior to appointing the IRP.

Considering principles of natural justice, a right must be provided to the corporate debtor to be heard and present its side of the facts. It would be essential to have a provision in the Code to provide that opportunity to the debtor. With the rise of frivolous threats from many stakeholders a business has – employees, small value (amount) vendors, it helps in stopping frivolous threats.

Author: Ashwin Bhat

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