Decoding the grey areas of Insolvency and Bankruptcy Code

Position of property buyers

The position of the flat buyers vis a vis the Code is still something which needs attention. The issue regarding the flat buyers initiating the application under the Code first arose in the case of Nikhil Mehta & Sons Vs. AMR Infrastructure Limited wherein the National Company Law Tribunal (NCLT) rejected the application where the flat buyer came in the capacity of a Financial Creditor, though the same contention was accepted by the National Company Law Appellate Tribunal (NCLAT) due to the restrictive clause in the contract titled “assured return plan”, though later on various other cases in relation to AMR Infrastructures had come up to the NCLAT and the same were left unanswered.

Recently the Insolvency and Bankruptcy Board of India (IBBI) has introduced a new Form F for those who does not fall under the category of Operational Creditor or Financial Creditor to submit their claim before the Insolvency Resolution Professional (IRP). As the said Form F was introduced just after Japyee’s Insolvency case it was presumed that same is been introduced for Home Buyers.

However, the Board issued a clarification that Form F is not issued specifically for homebuyers. Even the Supreme Court has said that a direction may be issued to the government that flat owners/buyers be declared as secured creditor like banks and financial bodies. However, despite the cognizance taken by apex court, no amendment has been brought in the Code in order to include the flat buyers or those who have been given assured return assurance in the list of creditors.

Further, even Form F discussed above can only be used when the Corporate Insolvency Resolution Process (CIRP) has been initiated and not otherwise, i.e. the other creditors (other than Operational Creditor or Financial Creditor) cannot proceed with making an application for initiation of the CIRP before Adjudicating Authorities.

For instance, someone has taken on lease a commercial space from a corporate debtor and has deposited security for such leasing. When the said lease expires and the space is handed over to the Corporate Debtor, the Corporate Debtor is under an obligation to refund the security deposit. In case the Corporate Debtor fails to refund it, then the said lessee cannot approach Adjudicating Authority even though he is now a creditor of the said Corporate Debtor as the definition of Operational Creditor or Financial Creditor does not accommodate him.

Limitation Act, 1963

Another grey area in the Code is the applicability of Limitation to the proceedings initiated under the Code. The Legislature is yet to come up with amendments or clarifications, though recently NCLAT has interpreted the applicability of Limitation in the case of Speculum Plast Pvt. Ltd. vs. PTC Techno Pvt. Ltd., wherein it was held that the Limitation Act, 1963 is not applicable for initiation of Corporate Insolvency Resolution Process, though the doctrine of Limitation and Prescription is necessary to be looked into for determining the question that whether an application under section 7 or section 9 can be entertained after a long delay.

Further, the NCLAT was of the opinion that if such an application is filed before the Adjudicating Authority after a delay of more than three years, the Adjudicating Authority may give an opportunity to the applicant to explain the delay within a reasonable period and failure to explain the delay the application won't be entertained.  To sum up, the law at present is that for initiation of CIRP, anybody who has a claim even if limitation period of three years is expired, can approach Adjudicating Authority after completing the formalities provided under the Code. The Adjudicating Authorities are flooded with such applications. In some cases, the claim/debt is 13 to 14 years old.

Debt of a Secured Creditor

Moving further, the other grey area is determination of “Debt” in cases where the Financial Creditor has already proceeded with its remedies as available under the SARFAESI Act. Consider the situation where secured creditor has taken possession of the assets of the corporate Debtor under Section 13(4) of the Act and Sale Notice has been issued under Rule 8(6) of SARFEASI Rules.

In that case, the financial creditor can very well sell the property and adjust the proceeds towards the debt and after adjusting the sale proceeds, if any debt still remains unpaid it is the said unpaid debt should ideally be considered as “Debt” for the purpose of filing an application under Section 7 of IBC.

Not only this, in many cases the Financial Creditors before filing an application under the Code, have already proceeded before Debt Recovery Tribunal, in some cases Winding up before Hon’ble High Court, etc. This only shows that the intention of Financial Creditor is to do forum shopping to recover the debts. As otherwise the Financial Creditor have the option to restructure such Corporate Debtor under the Reserve Bank of India guidelines and they don’t need to proceed under IBC for restructuring.

Liability of the Guarantor?

Another issue with regards to the Code which lacks clarity is the situation of guarantor of the corporate debtor. The jurisprudence of the Code holds two divergent views regarding the same. One view is that the liability of the guarantor is co-extensive with the liability of the corporate debtor therefore; once the application of insolvency is admitted under the Code, the moratorium period will be applicable on the guarantor as well. On the other hand, there are instances where the moratorium is not applicable on the guarantor and secured creditor can proceed against the guarantor under other laws such as SARFEASI and RDB Act, which may create a situation where the corporate debtor’s assets are frozen under the moratorium and guarantor’s assets are being auctioned.

The legislature needs to provide the clarity on this issue for better implementation of the Code. The grey areas under the Code cause grave concern to the persons connected with the corporate insolvency resolution process, though the Adjudicating Authority have been interpreting and analyzing the grey areas under the Code, though different Tribunals express different opinions which needs to be settled and answered by the legislature in order to remove such ambiguities.

(The writer is Founding Partner of Singh & Associates, a New Delhi-based law firm)