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Introduction
Since the advent of Insolvency and Bankruptcy Code, 2016 there has been a churn in legal circles. How much power NCLT can exercise and while exercising these powers what caution it should bear in mind? One such aspect of this matter is National Company Law Tribunal’s power to review any decision taken by State or Union Government. It is well known that when CIRP is initiated any legal proceedings against the Corporate Debtor either comes to a halt or can be taken only in NCLT. Does this mean that even a Governmental action during Insolvency proceedings comes within the jurisdiction of NCLT and NCLT can direct Government to either go back on its decision or take a different decision?
That will be the topic of our discussion in this Article. Firstly we will see meaning of the terms Corporate Debtor, Financial Creditor, Operational Creditor, Interim Resolution Professional, Resolution Professional, CIRP and Committee of Creditors. Then we will see what is an Administrative Action and the Doctrine of Judicial Review. Finally this Article will deal with the power of the NCLT to give direction to Government bodies in the garb of Judicial Review.
So let’s proceed with our discussion.
Brief Facts
A company (let’s say A), which held a mining lease from Karnataka Government, was undergoing insolvency proceedings under Insolvency and Bankruptcy Code, 2016 (in short IBC) before National Company Law Tribunal (in short NCLT). While these insolvency proceedings were underway the Resolution Professional requested to renew a lease of mining which was given to A by the State of Karnataka. But the Karnataka Government rather than renewing the lease, cancelled it due to alleged irregularities by the A. So, Resolution Professional moved before the NCLT for direction to the Karnataka government to renew this lease.
Let’s take a pause here for a while to understand the different terms and processes which we have discussed above.
What is meant by CIRP, Corporate Debtor, Financial Creditor, Corporate Debtor, Resolution Plan etc.
(Firstly let us define the scope of this Article. We are restricting this Article to Corporate Insolvency i.e. insolvency of Companies which is dealt by NCLT and we will not be dwelling upon Personal Insolvency for which one have to file a case in Debt Recovery Tribunal. I will discuss Personal Insolvency in a later Article).
When a company is unable to pay its debt, or in simple terms if the liabilities of a company exceeds its assets, that company is called Insolvent. Assume someone cannot pay the debt he or she owes to you, are there any solutions in sight? Yes. You can straightaway approach the NCLT for declaring that person/company insolvent.
But in what capacity? You can approach NCLT either as an Operational Creditor or Financial Creditor, depending on the purpose for which you have lent money to that Company. So, for instance let’s say X is a Company which manufactures readymade garments and for that purpose you used to supply raw material like raw cloth sheets to it. Definitely X has to pay you for the invoice which you raise on it for such supply. In this case you will be called Operational Creditor defined under Section 5 (20) of Insolvency and Bankruptcy Code, 2016 (in short IBC) and X will be called the Corporate Debtor. Do you know that even when the Government approaches the NCLT for recovering Income Tax dues, it does so as an Operational Creditor.
On the other hand, imagine you are a Bank or NBFC which has given loan to X for development of its business. This loan does not have anything to do with the operations, but rather is for the expansion of the Company and its business. In this case you will be called a Financial Creditor as defined under Section 5 (7) of Insolvency and Bankruptcy Code, 2016.
Now, be as a Financial or Operation Creditor, you can move to NCLT through an Insolvency Petition for declaring that X is incapable of paying its debt to you as it is broke, so kindly declare X an insolvent and sell its assets to pay your money. Now when you go to the NCLT and despite it the Corporate Debtor fails to pay you the money which you legally deserve, the insolvency petition is admitted and Corporate Insolvency Resolution Process (in short CIRP) proceedings are initiated against the X under Section 14 of IBC and an Interim Resolution Professional (in short IRP) is appointed who takes control of company’s assets.
Now the control of the Corporate Debtor Company is not in the hands of its Directors, CEO or Management. The IRP is the head of the management that too utterly and completely. He will look after the affairs of the Company. This IRP also have a duty to constitute a Committee of Creditors (CoC) which includes all the creditors of the Corporate Debtor. This CoC finally appoints a Resolution Professional (in short RP) which replaces IRP. IRP and RP are more or less similar in their powers and liabilities with a minor difference that while the former is temporary, later is permanent and stays with the company till its liquidation.
What is a Resolution Plan
Now RP will receive various suggestions and proposals for rejuvenating the Corporate Debtor Company. For example if Z is a Steel Mining Company and CIRP proceedings are initiated against it, CoC will call for plans to resurrect this dying Steel Mining Company, then maybe another Steel Mining operator, let’s say Y, give a proposal that it is ready to infuse a capital of Rs. 1 Crore into the Corporate Debtor Company and will make it successful in 3 years. This is called Resolution Plan.
Of course there will be some give and take. Let’s say Corporate Debtor i.e. Z, owes in total Rs. 3 Crore to all the members in its Committee of Creditors, then the abovementioned One Crore rupees is not even enough to meet One-third of the CoC’s debt. So the CoC have to shell some expectations in the present of recovering the money, in the hope that maybe later Z will become profitable and will be able to pay its debts. This process is very similar to Restructuring. The advantage of Resolution is that the company is saved from Liquidation (dismantling X and selling it in parts. More about Liquidation have been explained by me in this Article) which is never going to solve the problem as it almost always happens at an undervalued price giving no relief to the Creditors. (If a company’s assets would have been enough to pay its debts why it would go bankrupt!).
(To be continued… )
Parveen Semwal
Advocate, High Court of Delhi and Supreme Court of India