IBC, 2016: Analysis of cases settled under section 7,8,9 and 10

Hundreds of cases have been settled under Insolvency and Bankruptcy Code, 2016 (IBC, 2016) or being battled out. Can we learn lessons from the obvious mistakes committed by some of the better lawyers? I have analyzed many cases under section 7, 8, 9, and 10.

Now the analysis starts.

Let us go back to sec (7) of Insolvency and Bankruptcy Code, 2016 (I&B Code 2016). It reads as under:

“7(1) A financial creditor either by himself or jointly with other financial creditors may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred.”

It goes on to narrate the process to be adopted by the financial creditor or any other financial creditor for filing the application along with the necessary fee.

Let us understand the basic function of a financial creditor. Being banker with 4 decades of association with banking and now with insolvency, all the more, after passing the IRP examination conducted by IBBI, I would like to explain the simple process of how a loan proposal is processed, released after taking necessary documentation in case of a bank and also emphasize on other financial creditors to have strong documentary evidence, proper follow up procedure(not simple threatening calls by customer or collection agents) which can be produced before judges when the necessity comes. Yes, a borrower can go to any length to prove he/she never availed the loans what to speak of returning them.

A bank, say “B” decides to release the loan to purchase a motor cycle by a borrower after doing the necessary background check ups including the repaying capacity and other formalities. The borrower indicates the money needed, gives an invoice from the seller of the motor bike and money is sent to the dealer.

But the bank takes, an application, letter of request, financial details and a request from the borrower and after enclosing a detailed credit note explaining the reasons for releasing the loan; the manager sanctions the loans in writing and hands over a sanction letter and also asking the borrower to execute certain documents before release of loans. These documents would prove later on that there was adequate relationship between the bank and the borrower. I read a case where after availing substantial loans from the bank, while being challenged by the bank for repayment, the borrower refused to even acknowledge the loans sanctioned. The case study is later discussed in this article.

The banks, technically, every half year during the closing of books, do take a balance confirmation letter on a particular date from the borrower. Generally, the borrower takes a statement of account also at that time to verify, the bank has not abnormally charged any thing in the customer’s account. Please do not confuse with periodical statement of accounts which can be easily downloaded or analyzed from online operations. This article is more of legal/established banking procedure oriented.

Now let us analyze, the situation where the borrower after availing, let us say, a sum of Rs 100 crores stop returning the loans. The bank would demand the returning of the loans with up to date interest/other charges. It can only proceed under I&B Code, 2016 unless a default has occurred. Yes, it has to meet the standards set for definition of “default”.

How does “default “defined in NCLT judgements?

Let us illustrate from:

“The Hon’ble National Company Law Appellate Tribunal on 17^th January 2017 in Company Appeal (AT)(insolvency) No. 1 and 2 of 2017 in the matter of M/s. Innovative Industries Ltd. Vs. ICICI Bank &Ans, held that in an application filed by the Financial Creditor under Section 7 for initiation of Corporation Insolvency Process, the Adjudicating Authority is required to satisfy-

(a) Whether a default has occurred;

(b) Whether an application is complete;

(c) Whether any disciplinary proceeding is against the proposed Insolvency Resolution Professional? “

(I may define default as nonpayment of banks dues on time)

The recent developments of section (7) cases threw many relevant questions. Borrowers’ lawyers rightfully raised the question whether the officials who are raising the applications under the said code have the required legal powers to do so? Their arguments were based on the premise that the powers wrest only with the Board of Directors. Not many know that after a bank officer is confirmed as such, he/she gets a General Power of Attorney which enables him/her to sign papers, represent the banks or initiate legal action, whenever required.

It is possible that banks having learnt the bitter medicine of ill preparedness for facing the robust borrowers equally supported by the best lawyers, got themselves updated and face them boldly to recapture their rights. Now the banks Boards have started allowing the bank officials to represent in NCLT/NCLAT by passing special resolution.

I&B Code, 2016 section 7. (3) further explains the following steps, equally important for us to understand the basics thoroughly.

“The financial creditor shall, along with the application furnish _

(A) Record of the default recorded with the information utility or such other record or evidence of default as may be specified;

(B) The name of the resolution professional proposed to act as an interim professional

(C) Any other information that may be specified by the Board.”

Further, let us corelate the above with the actual treatment given by any Adjudicating Authority. (AA)

In the following cases, AA allowed the appeal filed by Financial creditors and appointed “Interim Insolvency Resolution Professional” (IIRP) and advised IIRP to cause a public announcement of the initiation of corporate insolvency resolution process. Moratorium under section 14 was also imposed.

Some of the cases where the above action taken were:

• ICICI Bank Ltd Vs. ABG Shipyard Ltd. (C.P(IB) No. 80/7/NCLT/AHM/2017.
• Macro Lea fin Pvt Ltd Vs. Arrow Resource Ltd. (CA No.259(PB)/2017 in CP- 152(PB)/2017.
• State Bank of India Vs. Namdhari Food International Pvt. Ltd (C.P) No. IB. 189/ND/2017.

However, in the following case involving State Bank of India, Hyderabad Vs. Neeta Chemicals(I) Pvt. Ltd, (CP/IB/128/10/HDB (2017)) under section 10 and 7 of I&B Rules, 2016, the facts present an interesting or untenable action on the part of the borrower, which I have never heard during the last 40 years of my association with banking related matters:

• SBI sanctioned a loan of Rs. 65 in 2009 after taking proper documentation followed by further enhancement to loans of Rs 157.50 after taking proper documentation. Like we hear in recent times, the loans were not returned and were classified as Non- Performing Asset on 26/09/2013 after numerous default notices were issued by the bank. The last meeting of the bank without any fruitful results was held with the borrower in July, 2017. A legal notice was issued on 22/11/2016 calling upon the borrower/guarantors to pay the bank’s overdues for Rs 324.6 Crores or face legal action.
• The provision of SARFAESI was invoked on 01/12/2016 by the bank and the borrower was told to pay the overdues within 60 days. Surprisingly, the borrower returned with the reply, a legal one on 04/03/2017 that no loan was taken by the borrower and any legal action would be defended.
• SBI issued action under SARFAESI ACT, 2002 for e-auction of the assets of the borrowers on 18/07/2017. Further to add momentum, the borrower filed an application under section 10 of I&B Code 2016 to start a Corporate Insolvency Process dated 14/08/2017. The Adjudicating Authority gave the following judgement.
• Judgment: “——— These un-tenable and illegal contentions on behalf of the Corporate Debtor is liable be rejected out rightly, since large amount of public money is involved and these contentions are totally reprehensible and not at all tenable on any ground whatever………”

The judgement upheld the steps already taken by the lender, SBI to recover the bank’s overdues and a cost of Rs 10 lacs incurred by SBI were to be reimbursed by the Corporate Debtor.

Our observations

It might have been observed that I intentionally explained the basic functioning of the bank in processing and releasing of the loans by a commercial bank. Though the current practice of releasing loans has colored the vision of internet borrowers, the fundamentals of any good bank overcomes any legal obstacle with their time- tested procedures followed over centuries. It is also a lesson to the unscrupulous borrowers who misuse the banks and their resources and blame them for every- thing. Incidentally, I wish bankers who are custodian of public money do read this type of brilliant judgements for proper understanding of banking procedure itself.

 Conservative lending procedures with strong emphasis on documentation and proof of releasing of loans and also proper review of lending procedures at every evening by experts who do not deal with loans at sanctioning level set the tone for effective governance of lending operations. When I was holding these operations, I was told to verify invariably whether lending was done beyond the powers of the dealing officials. If so, action was to be taken against the erring officials. Recent events in Allahabad Bank/other public or private sector banks could have been avoided if due caution and proper review of the loans sanctioned at every day had been exercised.

Let us also go into analysis of applications which were initiated under section 8 and 9 of I&B Code, 2016.

Section 8, Insolvency resolution by operational creditor:

“An operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor in such form and manner as may be prescribed”.

It explains how after 10 days of non- payment of the debt, if any, by the operational debtor, the operational creditor may file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process. Section 8 and 9 are read together and action initiated under instructions contained therein.

What may be the action of the corporate debtor within 10 days of receipt of notice from the corporate creditor?

• Bring to the notice of the creditor the existence of a dispute if any and record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute. Many have brought in cases dealt under I&B Code, to the notice of the judge, several instances of cases pending in High court or arbitration proceedings. This action of debtors has resulted in differing judgements.
• Repayment of unpaid operational debt by sending an attested copy of the record of electronic transfer of the unpaid amount from the bank account of the corporate debtor or by sending an attested copy of record that operational creditor has encashed a cheque issued by the corporate debtor.

Now let us correlate the above instructions with actual cases handled at NCLT/NCLAT levels.

• Philips India Limited Vs. Goodwill Hospital & Research Centre Ltd (Company appeal (AT)(Ins) No. 14&15 of 2017. (Poor quality of service and various communications among the parties involved were quoted)
• Smart Timing Steel Ltd Vs. National Steel &Agro Industries. Ltd (CP No. 06/I&BP/MAH/2017 Dated 30/01/2017. (The creditor failed to enclose a certificate from the bank indicating that the payments from the debtor were not received in terms of instructions contained section 9(3) C. The case got dismissed.
• In the P. K. Ores Pvt (Corporate Debtor- CD) Ltd Vs. Tractors(I) Pvt Ltd (Corporate Creditor (CoCr) at NCLT, Kolkata, company appeal (AT) (Ins No. 56 of 2017), CD had stated that the application moved by Co Cr was approved by Adjudicating Authority without serving a copy to the CD and thereby offering an opportunity to the CD to explain their position and also that there were some disputes among the CD and Co C. The judge in his judgement disapproved the action of AA Kolkata since it was in violation of rules of natural justice. The action in nominating an IRP to take charge of the CD’s unit was illegal and hence it was set aside by the judge of NCLAT, New Delhi.

Our observations

The actions to be initiated by the operational creditors have been laid down in minutest details both under section 8 and 9. By not admitting the existence of a dispute regarding the poor quality of service as well as passing an order by AA without sending a copy to CD, were felt untenable under the law and the whole gamut of actions under Section 14 like imposition of moratorium, appointment of an IRP and handing over the management to him were reversed causing the Corporate Debtor free of the rigor of the law and the management was handed back to the Board of Directors for further operations.

 Similar judgements were also delivered in cases like Aruna Hotels Ltd Vs. Krishnan (company appeal AT number 59,87, and 88/2017 under NCLAT, New Delhi, Sabari Inn Pvt Ltd Vs. Rameesh Associates Pvt Ltd (company appeal AT/117/2017 of NCLAT, New Delhi) and several other cases. The advocates dealing with similar cases are requested to follow the rules laid down completely under the Code and not necessarily on the basis of Company’s Act, 2013 only.

Similar instances were also noted for cases filed under section 9 without admitting the existence of prior disputes, not following the procedure of informing the CD while dealing with NCLT or NCLAT which denied the availability of natural justice for CDs, and non- filing of forms like 3, 4, and 5 was justified by imagining the work done under section of 434 and 433 would suffice, instead.

Conclusion

I &B Code, 2016 is a unique law well -conceived to avoid industrial stagnation by involving Corporate Debtor under section 10, corporate creditor under section 7 and corporate operational creditor under sections 8 and 9. Detailed judgements are easily available in the internet for easy reference and hot discussions/understanding. This code has unified varied professionals like bankers, chartered accountants, company secretary, cost accountants and other management personnel and has expedited the release of accounts out of sickness to generate income.

I particularly request bankers to take interest in the judgements of various insolvency cases rather than totally depending upon the lawyers to guide them. Yes, they are part of the process and not take the plea of passengers in voyage, particularly when huge NPAs are willing to drown the whole economy. Banks do need to pay special attention to recruit qualified lawyers under special category and post them on merits to take care of legal problems. I have found many cases where the bankers could have paid more attention. Just a Chief Manager or Asst. General Manager is not enough to handle a difficult case without proper legal knowledge.

For quick recapitulation:

• Form 1 under section 7 of I&B Code 2016 read with Rule No. 4 of the same code – application by financial creditor/s to initiate corporate insolvency resolution process under the code- 5 parts and 4 annexures.
• Form 2 under rule 9 of the same code- written communication by proposed interim resolution professional.
• Form 3 under clause”a” of sub rule1 of rule 5- form of demand notice/invoice demanding payment under the above Code (Non- submission of this form has derailed many insolvency cases, though based on solid proof particularly because of non-application of mind by even famous lawyers who ignored I&B Code, 2016)
• Form 4 under clause” b” of sub-rule 1 of rule 5 – Form of notice with which invoice demanding payment is to be attached (Yes, to follow the instructions strictly without questioning the wisdom of the Code which vide section 238 dictates that provisions of the Code supersedes other laws)
• Form 5 – see sub-rule 1 of the rule 6 – application by operational creditor to initiate corporate insolvency resolution process under the code.

The purpose of this article is to enable simple facts which when followed strictly would result in successful operations under I&B Code, 2016.

Bon legal voyage!

Monumental work done by ICAIIIP in its web site

https://elearning.iiipicai.in/learn/

The above website which immensely helped me in reading 33 cases with full judgements under NCLT and again 33 cases under NCLAT courts. Important judgements under Supreme Court and High courts are also given. Reading of these cases widen the vision of understanding I&B Code.

The updated version of Insolvency and Bankruptcy Code by books:

Taxmann’s

 or

 A standard treatise titled “A comprehensive Guide to the Insolvency Professional Examination” by Dr.Rajeev Babel, FCS and an insolvency professional.

Both the books with their latest versions are monumental works for any learner of I&B Code.

 I appreciate them for their enormous hard work. Let their tribes of book writers/publishers grow.

(c) whether any disciplinary proceeding is against the proposed Insolvency Resolution Professional.

The Hon’ble National Company Law Appellant Tribunal, on 17th January, 2017, in Company Appeal (AT) (Insolvency) No. 1 & 2 of 2017, in the matter of M/s. Innovative Industries Ltd. Vs. ICICI Bank & Anr, held that in an application filed by the Financial Creditor under section 7 for initiation corporation Insolvency Resolution Process, the Adjudicating Authority is required to satisfy-

(a) Whether a default has occurred:

(b) Whether an application is complete; and