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In the midst of the COVID-19 pandemic, it has been reported that the government might soon promulgate an Ordinance to suspend Sections 7, 9 and 10 of the Insolvency and Bankruptcy Code, 2016 (IBC) for upto one year.
This comes as a welcome relief for various corporates who have outstanding financial debts either under various financial instruments to banks, NBFCs and other financial institutions, or operational debts to other manufacturers for availing goods and services.
At the same time, it is no secret that many corporates evade payments of admitted sums of money to banks even though they have the capacity to honour such repayment obligations. These firms have been defined as ‘wilful defaulters’ by the Reserve Bank of India.
As of 2018, these willful defaulters owed their respective lenders a sum of Rs. 1.4 lakh crores (being the cases of financial creditors). Similarly, many corporates routinely avoid timely payments of debts to their vendors, which could be small-time business entities whether or not registered under the Micro, Small and Medium Enterprises Development Act, 2006 (being the cases of operational creditors).
The timely payments are avoided by such corporate debtors, being fully aware of long delays in the money recovery litigation process in the Indian courts.
With the suspension of Sections 7 and 9 of IBC 2016 for the next 6 months, which could possibly be extended upto one year, can such creditors be left without an expeditious remedy for such a long period? The answer is a resounding no.
Average time taken in disposal of Commercial Suits vis-à-vis IBC actions
An effective alternate remedy for such creditors could be exercised by filing a summary suit (commercial) under Order 37 of the Code of Civil Procedure (CPC), 1908, or a standard commercial suit as amended by the Commercial Courts Act, 2015.
The remedy of filing civil suits for recovery of money is often seen as a remedy of last resort, since civil suits have traditionally suffered from the vice of long adjudicatory processes and delays. However, after passing of the Commercial Courts Act, 2015, the said position has changed substantially with relatively quicker adjudicatory processes, as will be seen hereinafter.
As per the Economy Survey 2019-20, Volume 2 released by the Ministry of Finance in January 2020, the proceedings under the IBC take on average, about 340 days for resolution, including the time spent on litigation.
It is noteworthy that the same does not appear to take into account the time spent by the parties before the National Company Law Appellate Tribunal (NCLAT) once an appeal is filed by either parties under Section 61 of the IBC, 2016.
Further, the Year End Review – 2019 of the Ministry of Corporate Affairs, as published on the website of the Insolvency and Bankruptcy Board of India (IBBI), states that the "time taken in recovery improved from 4.3 years in 2018 to 1.6 years in 2019". Thus, even as per the data provided by the IBBI, the average time period for recovery under the IBC, 2016 stood at approximately 1.6 years (584 days) in the year 2019.
At the same time, as per the data available on the website of the Delhi High Court on Institution, disposal and pendency of Commercial Cases during the month of Februrary, 2020, the average number of days for disposal of commercial suits stood at 762 days, and an additional time period of 46 days in the appeals preferred against such decrees under Section 13 of the Commercial Courts Act. One must hasten to add here that the average of 762 days is the cumulative average of all commercial suits.
If one closely observes the regime of the summary commercial suits under Order 37 and the scheme for summary judgments for ordinary commercial suits under Order 13A of the CPC, the average time taken for disposal of these shall be even lesser.
Financial/Operational Creditors under IBC as plaintiffs under the Commercial Courts Act
Section 2(1)(c) of the Commercial Courts Act defines a ‘commercial dispute’. A wide range of disputes are sought be covered under the ambit of this provision. A ‘financial debt’ owed to a financial creditor (being a bank or a financial institution) can very well be covered under Section 2(1)(c)(i) inasmuch as disputes arising out of all ordinary transactions of ‘merchants, bankers, financiers and traders such as those relating to mercantile documents’ have been included as 'commercial dispute’.
Operational creditors can invoke any of the provisions under Sections 2(1)(c)(i) to Section 2(1)(c)(xviii) to file suits for recovery in relation to ‘operational debts’.
Other provisions under the Commercial Courts Act and CPC for speedy adjudication of recovery actions by financial creditors
Some of these may be seen as follows-
1. Filing an application for a summary judgement under Order 13A.
2. Filing an application under Order 12, Rule 6 of CPC for a judgment on admissions.
3. Instituting the suit as a summary commercial suit under Order 37 of CPC.
Litigation costs incurred in filing suits under the Commercial Courts vis-à-vis IBC actions
The court fees payable on a commercial recovery suit under the Commercial Courts Act instituted by a financial creditor/operational creditor, shall be governed by the provisions of the Court Fees Act, 1870.
Thus, in terms of Section 7(i) read with the Schedule I (ad valorem fees) of the Court Fees Act, a litigant shall have to pay ‘ad valorem’ court fees on the amount claimed. The said ‘ad valorem’ amount payable is approximately 1% of the total claimed in terms of the Court Fees Act (this may vary slightly according to the respective State Amendments to the Central Court Fees Act).
However, a financial creditor and an operational creditor are only required to pay a sum of Rs. 25,000/- and Rs. 2,000/- respectively to initiate an action under Section 7 of the IBC.
The claims made by financial creditors are usually made on account of default of repayment of loans, corresponding guarantees, and other security documents, which often run into several (hundred) crores. In such cases, payment of ad-valorem court fees might deter a potential litigant from initiating proceedings under the Commercial Courts Act.
However, in this regard, the Centre may consider a provisional amendment to the Court Fees Act (only till such time as Sections 7 and 9 of the IBC, 2016 are suspended) so as to not burden a financial creditor/operational creditor with the rigours of ad-valorem court fees.
The same would go a long way in ensuring that while small businesses/corporate debtors who have been severely affected by the Coronavirus pandemic do not face stringent action under the IBC, the rights of the creditors against wilful defaulters and other firms not releasing genuine dues (despite being in a position to) are not defeated.
Having said that, it is also seen that a lot of insolvency actions under the IBC, 2016 are amicably settled between the parties at an early stage. If such actions are filed under the Commercial Courts Act and the suit is amicably settled, the litigant can always exercise the option of pursuing a refund of court fees under Sections 16 and 16A of the Court Fees Act.
Thus, filing a commercial suit under the Commercial Courts Act appears to be a viable option exercisable at the instance of a financial creditor/operational creditor to achieve a speedy, efficacious and affordable remedy – atleast during the suspension of Sections 7 and 9 of the IBC, 2016.
The author is an advocate practicing before the Delhi High Court and other fora in New Delhi, and can be contacted at ‘firstname.lastname@example.org’. Views expressed are personal.
The author acknowledges inputs received from Advocate Bhargav Thali in drafting this article.