Ease of recovery of debt from A Company against/ goods/services/ loan – Operational / Financial Creditors

SHORT SUMMARY:

In this Flash editorial, the author begins by referring the provisions of Insolvency & Bankruptcy Code, 2016. Further author will discuss how a natural person/ business man/ company can apply for demand of due amount from the Creditors (Companies), what are the terms and conditions for such demand, how much time it will take to recovery of money etc.

The main thrust of the article, however, is upon the “Ease of Recovery of Debt by Creditors (Individual / Proprietor / Partnership Firm / LLP / Company etc.) from the companies to whom Creditor has supplied goods, provide services and given loan etc.)” AND how this code is beneficial to Common Peron, Small Businesses, Real Estate Consumers, Supplier of Goods & Services, Banks, NBFC’, Society etc.

This is article no. 229 of the series of editorials written by the author on corporate laws {including Companies Act, 2013, SEBI, RBI Regulations, IBC, LLP Act, 2008 etc.}

INTRODUCTION:

Recovery Proceeding can be start against Debtor/ Corporate Debtor in the event of default by the debtor. Debtor can be Company Only.

Default means non-payment of debt when whole or any part or installment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be.

The following persons could initiate the Recovery Process; on the admission of a default by the Corporate Person:

• A Financial Creditor (means any person to whom a financial debt (Loan) is owed)
• An Operational Creditor (means a person to whom an operational debt is owed)
  

“Operational Debt” means a claim in respect of the provision of

• Goods or
• Services
• 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;

Provisions under the Code in relation to Recovery of Debt:

Focus of the Code:

This code use when an individual or organization is unable to meet its outstanding financial / operational debt towards its lender as it becomes due. The main focus of this legislation is at providing resurrection and resolution in a time bound manner for maximization of value of debtor’s assets.

Initiation of Process in earlier law v/s IBC Code:

Unlike earlier law, where the primary onus to initiate a resolution process lies with the debtor, and creditor may pursue separate actions for recovery, security enforcement and debt restructuring, here the Code makes a significant departure from the existing resolution regimen by shifting the responsibility on the creditor to initiate the insolvency resolution process against the corporate debtor.

Recovery Process:

If the default is above Rs.1 Lakh, the creditor (Supplier of Goods, Services, Lender of Loan, Employee, Workmen etc.) may initiate insolvency resolution process. The Code proposes two independent stages:

Insolvency Resolution Process – during which financial creditors assess whether the debtor’s business is viable to continue and the options for its rescue and resurrection; and

Liquidation– if the insolvency resolution process fails or financial creditors decide to wind down and distribute the assets of the debtor.

Order of priority of payment of debts:

The code provides the priority list, on the basis of which proceeds can be distributed following the liquidation of the company as below:

i. Insolvency resolution cost and liquidation cost

ii. workmen’s dues (for 24 months before commencement) and debts to secured creditor (who have relinquished their security interest)

iii. Wages and unpaid dues to employees (other than workmen) (for 12 months before commencement)

iv. Financial debts to unsecured creditors and workmen’s dues for earlier period

v. Crown debts and debts to secured creditor following enforcement of security interest

vi. Remaining debts

vii. Preference shareholders

viii. Equity Shareholders or partners

Any surplus amount remaining after payment of debts shall be applied in payment of interest, which is accrued since commencement date.

How this code is helpful for Recovery of Debt by following Creditors:

I. Supplier of Goods/ Services:

Under the Act, any person has supplied Goods or rendered services to any Corporate Debtor; and such corporate debtor make default as non-payment of debt or any part of debt, non-payment of installments due, then creditor can initiate the action against the corporate debtor by filing of petition in NCLT.

Time Period of Recovery:

Creditor will issue demand notice to the debtor, if creditor doesn’t receive payment due within 10 days, then it can file application in NCLT for initiating the recovery (Corporate insolvency resolution) process. The NCLT within 14 days of application either accept the application or reject the application.

Therefore, under this new code, within 24 days from the date of issue of demand notice, petition filled by creditor either accept or reject by NCLT. The unified regime envisages a structured and time-bound process for insolvency.

Benefits:

Under this code there is no need to go to the high court for recovery of the debt by the creditors, due to time bound provision. Or we can say that this is the fastest mode of recovery of debt.

Example:

If Creditor A supply goods of Rs. 1 cr to the corporate debtor and corporate debtor make the payment of Rs. 80 Lac and deny for payment of remaining amount by any reasons then creditor can go to NCLT against such debtor for recovery of 20 lac.

II. Small Businesses:

As per the provisions mentioned above regarding supply of goods / services, creditor have power to initiate process in NCLT for recovery of debt with time bound manner and cost effective.

Earlier small business avoids initiating process against the corporate debtor due to following reasons:

• Earlier its took long time to admission the cases by the adjudicating authorities due to lack of time bound guidelines.
• Earlier, filling a matter courts which was costly affair.
• Earlier the primary onus to initiate a resolution process lies with the debtor

On to above mentioned grounds like Time; Cost etc., small business owners avoid filing application in courts against the creditors to recover the pending payments.

Under this code within 24 days of issue of demand notice creditor will come to know that whether his petition admitted or not. It is less costly then the application in the court as the fees for admission of application by the operational creditor is Rs. 2,000/-.

As a result, one can opine that this act bestow a great opportunity on the small business owners to file applications for recovery of their debts.

III. Employee and workmen dues:

Under the Code, employees and workmen are also considered as part of operational creditor. If a Company fails to make salaries payment of employees or workmen and the value of payment is more than Rs. 1 lac then employees can file the application against the Company with NCLT for initiation of process of Recovery.

Process, time, cost of the application by the employees and workmen are same as filing of application by creditor of supply of goods / services.

As a result, this act gives a great opportunity to employees/ workmen of the Companies to file applications for recovery of their dues.

IV. Debtor of Loan:

Under the Code, if any person has rendered money (Loan) to any Corporate Debtor; and such corporate debtor makes default as non-payment of debt, interest or any part of debt, non-payment of installments due then lender can initiate the action against the corporate debtor by filing of petition in NCLT.

Time Period of Recovery:

Financial Creditor can file application in NCLT for initiating the recovery (Corporate insolvency resolution) process. The NCLT, within 14 days of application either accept the application or reject the application.

Therefore, under this new code within 14 days from the date of filing of petition the NCLT either accept or reject the application. However, this code gives a chance to the financial creditor to recover his debt.

Conclusion:

Hence, considering the intention of the Law, one can opine that Insolvency and Bankruptcy Code, 2016 is Game Changer for the corporate debtors. Powers are vested with the creditors also along with corporate debtors to initiate insolvency process against the corporate debtor. The Code promises to bring about far-reaching reforms with a thrust on creditor driven insolvency resolution. The aims of the code is early identification of financial failure and maximizing the asset value of insolvent firms.

The unified regime envisages a structured and time-bound process for insolvency resolution and liquidation, which should significantly improve debt recovery rates and revitalize the ailing Indian corporate bond markets.

There is no doubt that once the Code is fully implemented, it is going to be one of the best initiatives by the legislatures and a boon to the economy in the broader sense.

(Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at [email protected])

Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information. IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION WITH THE USE OF THE INFORMATION.