After Sureties, Promotors who have given personal guarantee for the loans are to face heat Now-

After Sureties, Promotors who have given personal guarantee for the loans are to face heat Now-

Insolvency & Bankruptcy board may employ personal assets of guarantors to be enchased and employed for repayment of corporate loans.

MAJOR RECOMMENDATION OF IBBI WORKING PANEL

1	Introduction of a cadre of “Debt Counsellors”
2	Include provision of mediation in case of small cases
3	To make the district courts as adjudicating authority in place of debt recovery panel to ensure easy access.
4	To Educate People against the stigma associated with insolvency
5	Creditors may be restrained from attaching the living accommodation and jewellery of promotors with religious significance.

The Present Status of Recovery Mode

1	353 Companies in India are presently undergoing resolution process as of 30th September 2017
2	12 Companies have already gone into liquidation

The Insolvency and Bankruptcy Board (IBBI) is seriously thinking to allow creditors of the company to encash the personal guarantee given by the promotors of the Company in the process of their debt realisation.

It is to be noted that personal guarantors who have escaped action in the NCLT process will no longer be immune to recovery action by creditors.

A working committee of Insolvency Professionals had submitted recommendations on such changes to IBBI a month ago. The committee is of the view that it will facilitate a quicker aggregation of assets of defaulters and guarantors. 

IS INTEREST OF AN INDEPENDENT DIRECTOR IS AT STAKE DUE TO IBC 2016?

Whether Independent Director of a Company be restrained from transferring his Assets until Insolvency Process is over as held in Jaiprakash Associates case?

IS INTEREST OF AN INDEPENDENT DIRECTOR IS AT STAKE DUE TO IBC 2016?

Recent Supreme Court judgement restraining independent directors of Jaiprakash Associates from transferring any personal assets over a group company’s insolvency issue has sent shock waves through the independent directors’ fraternity, with experts warning that there would be few takers for this role. 

There is a general view It is unfair to place the entire onus on independent directors who are only privy to the information shared with them by the management,” “Instead of penalising independent directors, the management and promoters should be penalised.

It is urged that an independent director said they should be “provided immunity and protection except in cases of wilful fraud or gross neglect.

INDEPENDENT DIRECTORS SHOULD NOT BE HELD LIABLE?

It is argued that Independent Directors used to spend so much time and energy to understand issues although the compensation for the same is not adequate enough,”

Many industry and legal experts said independent directors should not be held liable for operational issues, while others defended the court’s decision saying such directors cannot alienate themselves from affairs of companies. 

WHETHER INDEPENDENT DIRECTOR SHOULD BE GIVEN IMMUNITY?

Independent directors need to be given immunity and protection except in cases of wilful fraud or gross neglect. They should not be held liable for the business losses or business financial failure of the company.

People of calibre are wary of joining boards and the recent order may be a jolt to the office of independent directors as it has given a new dimension to this office.

Experts warned that people will now think long and hard before joining the board of companies.

Some is of the view that however, said independent directors are bound to closely monitor operations of the company on which they are a board member.

“While the Supreme Court judgement may be seen as harsh, independent directors cannot alienate themselves from company issues. 

Courtesy : The Economic Times

VARIOUS FORMS TO BE FILED BY THE STAKEHOLDERS UNDER IBC CODE 2016

“FORM F” TO BE FILED BY OTHER CREDITORS UNDER IBC CODE 2016 TO CLAIM THEIR DUES

VARIOUS FORMS TO BE FILED BY THE STAKEHOLDERS UNDER IBC CODE 2016

Under IBC 2016, only Financial Creditors and Operational Creditors can file for initiation of Insolvency proceedings.   For those investors who have been deceived by flat promoters, there has been no remedy available under IBC Code 2016 as they have to avail other legal remedies available to them under Contract Act, Consumer Act or RERA.

Flat buyers who have initiated an action against failed flat promoters under IBC code were unsuccessful in getting relief under IBC Code 2016 as held in

Col. Vinod Awasthy v. AMR Infrastructure Limited,

Pawan Dubey and another v. J.B.K. Developers Private Limited

Mukesh Kumar v. AMR Infrastructure Limited.

Introduction of New Form F

However , understanding the difficulties encountered by gullible home buyers who were cheated by flat promoters , Jaypee Infra house buyers ” Form F” added by IBBI ,by amending Insolvency and Bankruptcy Board of India (Fast Track Insolvency Resolution Process for Corporate Persons (Amendment) Regulations 2017.

Form F has to be filed by other than operational or financial creditors as proof of claim by those house buyers who have been cheated by home promoters.

FORM F

Persons other than Operational or Financial Creditors

“ FORM F

Under Regulation 9A of the Insolvency and Bankruptcy Board of India (Fast Track Insolvency Resolution Process for Corporate Persons) Regulations, 2017]

FORM 5-IBC

To be filed by Operational Creditors

FORM 5-IBC

Sub-rule (1) of rule 6

FINANCIAL CREDITOR – FORM 1

To be filed by Financial Creditors

FORM 1-IBC

Sub-rule (1) of rule 4) Under section 7 of the Insolvency and Bankruptcy Code, 2016

Corporate Debtor – Form 6

To be filed by Corporate Debtor

FORM 6

Sub-rule(1) of rule 7 Under section 7 of the Insolvency and Bankruptcy Code, 2016

ADMISSION OR REJECTION OF A CASE BY NCLT UNDER IBC 2016

Sections 7, 9 and 10 of the IBC	NCLT to admit or reject an application for initiating insolvency proceedings within 14 days of initiating an action by a creditor or corporate debtor
Section 9 of the IBC	NCLT is required to provide the applicant 7 days to rectify any defects in his application.

WHETHER A FLAT PURCHASER CAN BE REGARDED AS AN OPERATIONAL CREDITOR UNDER IBC 2016,CODE?

WHETHER A FLAT PURCHASER CAN BE REGARDED AS AN OPERATIONAL CREDITOR UNDER IBC 2016,CODE?

WHO IS A FINANCIAL CREDITOR UNDER IBC 2016?

Section 5 (7) of the IBC Code defines who is a “financial creditor” under IBC Code 2016.

Thus, a financial creditor is

"A person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred".

In order to ascertain whether a person is a financial creditor, the debt owed to such a person must fall within the ambit a 'Financial Debt' as under Section 5(8) of the IBC.

WHAT IS A FINANCIAL DEBT UNDER THE IBC 2016?

"A debt along with interest, if any, which is disbursed against the consideration for time value of money and includes-

a	Money borrowed against payment of interest
b	Any amount raised by acceptance under any acceptance credit facility or its de-materialized equivalent;
c	Any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;
d	The amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed;
e	Receivable sold or discounted other than any receivable sold on non-recourse basis;
f	Any amount raised under any other transaction, including, any forward sale or purchase agreement, having the commercial effect of borrowing;
g	Any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution;
h	The amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause"

WHO IS AN OPERATIONAL CREDITOR UNDER IBC CODE?

An operational creditor is defined under Section 5(20) of the IBC to mean

"Any person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred".

In order to ascertain whether a person would fall within the definition of an operational creditor, the debt owed to such a person must fall within the definition of an operational debt as defined under Section 5(21) of the IBC.

An operational debt is defined under section 5(21) of the IBC to mean:

"a claim in respect of the provisions of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority".

Differentiation between Operational Creditor and Financial Creditor

Opeatational Creditor	Financial Creditor
Operational creditors are those whose liabilities from the entity comes from a transaction on operations	Financial creditors are those whose relationship with the entity is a pure financial contract, such as a loan or debt security.

The Code also provides for cases where a creditor has both a solely financial transaction as well as an operational transaction with the entity. In such a case, the creditor can be considered a financial creditor to the extent of the financial debt and an operational creditor to the extent of the operational debt."

In Col. Vinod Awasthy v. AMR Infrastructure Limited, dealt with the question of   whether a flat purchaser would fall within the definition of an 'Operational Creditor' as defined under Section 5(20) of the IBC.

NCLT dealt who is an operational creditor under IBC and explained that

"Operational Creditors are those whose liability from the entity comes from a transaction on operations.

Any supply of goods or services, employment or dues which were payable under any statute to the Centre / State Government or local bodies.

In the above case, NCLT observed that it is sine qua non to prove that the creditor falls within the ambit and scope of the definition of either 'Financial Creditor' under Section 5(7) or 'Operational Creditor' under Section 5(20) of the IBC.

National Company Law Tribunal, Principal Bench, New Delhi observed in the above case held that a flat purchaser cannot be considered as an operational debtor under IBC Code.

Petitioner can avail other remedies available to him such as under the law of the contract, the General Law of the land or Consumer Protection Act and now RERA the Real Estate (Regulation and Development) Act 2016.

It is to be noted that in earlier cases such as Pawan Dubey and another v. J.B.K. Developers Private Limited and Mukesh Kumar v. AMR Infrastructure Limited held the same view that flat purchasers cannot be considered as operational creditor under IBC Code.

WHETHER A DIRECTOR CAN BE ARRESTED UNDER SECTION 138 OF THE NEGOTIABLE INSTRUMENTS ACT, 1881 (NI ACT) WHEN A MORATORIUM ORDER WAS ISSUED UNDER IBC 2016?

WHETHER A DIRECTOR CAN BE ARRESTED UNDER SECTION 138 OF THE NEGOTIABLE INSTRUMENTS ACT, 1881 (NI ACT) WHEN A MORATORIUM ORDER WAS ISSUED UNDER IBC 2016?

CHEQUE BOUNCING CASE

Recently, I received a call from one of the director of the company. He informed me that his creditors have filed an insolvency proceedings under IBC, 2016 and NCLT has approved their plan and initiated an insolvency proceeding and declared a moratorium under section 14 of the Insolvency and Bankruptcy Code, 2016.

He is receiving arrest threat from a police officer as an action under section 138 of the Negotiable Instrument, 1881 which was ordered by a court against him and other directors.

When he informed the police official that already a moratorium has been issued under IBC 2016 and hence, proceedings under section 138 of the Negotiable Instrument, 1881 is to be kept pending till the insolvency proceedings are over.

However, the police official is not accepting the same and he is threatening to initiate action under the Negotiable Instrument, 1881.

Is the Police official is right or does not aware the recent development under IBC 2016. This issue is faced by many directors of the various companies in India who have bounced their cheques and is undergoing the process of Insolvency proceedings.

WHAT IS MORATORIUM ORDER UNDER SECTION 14 OF THE INSOLVENCY AND BANKRUPTCY CODE, 2016?

Moratorium order under section 14 of the Insolvency and Bankruptcy Code, 2016	It refers to a period when no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can be instituted or continued against the corporate debtor or its director

WHO CAN CLAIM AN ACTION UNDER IBC 2016?

If a creditor claim is Rs 100,000 or more and the corporate debtor is unable to pay

A petition for insolvency against a corporate debtor can be triggered by a financial creditor, an operational creditor or by the corporate debtor itself.

WHAT IS MEANT BY CORPORATE INSOLVENCY RESOLUTION PROCESS? (CIRP)

CIRP	It is time bound and the relief of moratorium is available to the corporate debtor

			Insolvency process is to be completed within
CIRP- Normal Process	180 days	Plus maximum 90 days	270 days
CIRP-Fast Track Process	90 days	45 days (one time)	135 days

WHAT SECTION 14 OF IBC CODE SAYS ABOUT MORATORIUM?

14. (1) Subject to provisions of sub-sections (2) and (3), on the insolvency

commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:—

(a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;

When section 14 of IBC code clearly states that no proceeding against any corporate debtor can be taken due to any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority, how an arrest under section 138 of the Negotiable instrument Act can be initiated.  This is the main question still to be clarified.

STRICT CALM PERIOD

The IBC offers that after the initiation of insolvency proceedings for revival of the corporate debtor, there should prevail a stern calm period and complete moratorium in all cases where the primary liability is that of the corporate debtor.

Thus, even proceedings against the guarantors or the directors of the corporate debtor should be stayed until the committee of creditors delivers its verdict on whether revival of the corporate debtor is possible or not.

WHETHER MORATORIUM COVERS DIRECTORS WHO HAVE BEEN FOUND GUILD UNDER SECTION 138 OF THE NI ACT?

In the insolvency proceedings, the major accountability is that of the corporate debtor and when there is a stay of proceedings (moratorium) against the corporate debtor, it will mechanically end in transferring the chief liability to the director of the corporate debtor.

This ultimately will result in the opening of floodgates and will mean that the creditors will chase the directors during what is supposed to be a period of calm. The intent to provide a calm period during which the focus of the creditors is on revival of the corporate debtor will result in a futile exercise.

ULTRATECH ENGINEERING LIMITED CASE

In the above case, NCLT, Mumbai held that an order of Moratorium issued under IBC Code supersedes any other Act in force. That means no action can be initiated against directors of company under insolvency for an offence under section 138 of the NI.

Whether Insolvency and Bankruptcy Code, 2016 (Code) supersedes any State Law ?

Held yes by Mumbai NCLT in ICICI Bank Ltd vs. Innoventive Industries Ltd.

CONCLUSION

It may be concluded that the IBC has not defined what acts will preclude if moratorium order is issued, and whether the proceedings under the ambit of section 14 of the IBC can be enacted against a corporate debtor or its director or not. 

However, the morphological of section 14 is extensive and the purpose of the legislature was to offer a period of complete calm period to a corporate debtor under CIRP. 

Suitable circular or clarification should be issued under IBC 2016 so that the directors who have defaulted payment and has been indicted under section 138 of NI Act are safeguarded until the moratorium period under IBC 2016.