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The piece answers a few questions on the impact of the IBC Amendment Ordinance on Guarantors, both, Corporate and Individual.
A recent article published here dealt with some questions arising in the context of the IBC Amendment Ordinance, 2020. In continuation of the questions considered there, some more questions, arising in the context of the IBC Amendment Ordinance, 2020 and the Notification dated March 24, 2020, regarding the increase in threshold for invoking IBC are considered here.
1. Can fresh IBC cases be filed for defaults which occurred before 24.03.2020, where the amount in default is below Rs. 1 crore?
In two recent judgments, the Hon’ble NCLT, Chennai Bench and the Hon’ble NCLT, Kolkata Bench, in Arrowline Organic Products Pvt Ltd v Rockwell Industries Ltd, IA/341/2020 in IBA/1031/2019 and Foseco India Limited Vs. Om Boseco Rail Products Limited, CP(IB)/1735/KB/2019, respectively, held that the Notification issued by the Central Government on 24.03.2020, increasing threshold for IBC matters from Rs. 1 lakh to Rs. 1 crore as prospective and therefore, not affecting the maintainability of applications in pending matters. The Hon’ble Chennai Bench in Arrowline, while arriving at this decision, discussed the concept of “vested rights”, following the decision of the Hon’ble Supreme Court in Karnail Kaur v. State of Punjab, (2015) 3 SCC 206, which in turn followed Garikapati Veeraya v. N. Subbiah Choudhry, AIR 1957 SC 540, to hold that rights vested upon a party at the moment when an application under section 7, 9 or 10 of the Code is filed. An essential consequence of the same would be that rights vest in parties only upon filing of the application under section 7, 9 or 10 and not any time prior. Even if notice under section 8 has been issued by operational creditors, the right to invoke jurisdiction of the Hon’ble NCLT for IBC proceedings only occurs on the filing of the application. Consequently, it appears that even for defaults which occur prior to 24.03.2020, IBC proceedings cannot be maintained after 24.03.2020, if the amount in default is not above Rs. 1 crore. This does not render the Notification dated 24.03.2020 retrospective, but will remain prospective, although having effect on some antecedent facts, as explained in Ramji Purshottam v. Laxmanbhai D. Kurlawala, (2004) 6 SCC 455.
2. With IBC provisions regarding bankruptcy having been notified for individuals who are guarantors to Corporate Debtors as well, what is the impact of the IBC Amendment Ordinance, 2020 on these applications?
Three categories of cases must be considered here. One, where CIRP is already in vogue for a antecedent default. Two, CIRP is yet to be commenced, but the default sued for is prior to 24.03.2020. Three, cases covered by the IBC Amendment Ordinance, 2020. In cases (1) and (2), there is no bar to proceeding against the guarantors as the Amendment Ordinance is inapplicable to these cases.
Insofar as case (3) is concerned, Section 10A of the IBC Amendment Ordinance, 2020 suspends initiation of CIRP for any default occurring within 6 months from 25.03.2020. It does not suspend invocation of section 94 or 95 of the IBC, which deal with commencing insolvency resolution process against an individual are not suspended. On this ground, it can be argued that proceedings for any default occurring in this period may be taken against the personal guarantors. But at least three anomalies may arise from such an interpretation.
(i) Section 60(2) r/w sections 60(3) of the Code authorize the Hon’ble NCLT to hear matters pertaining to individual insolvency of personal guarantors, where the Corporate Debtor is in default and in CIRP. These debts, under section 10A (proviso), as discussed here, may be considered a deemed exclusion from the very definition of the term “default”. Thus, a question may arise as to whether any debt which is not paid during the exempted period under the IBC Amendment Ordinance, 2020, can even be considered a default for the purpose of individual guarantors.
(ii) Another issue which needs to be considered in this regard is section 132 to 135 of the Indian Contract Act. In this context, although there is no contract to vary the terms of the contract with the principal borrower, by operation of law, a benefit is conferred on the principal borrower, i.e. the Corporate Debtor. Thus, a question may also arise as to whether the personal guarantor, under the Indian Contract Act, 1872, is entitled to the same benefit in law.
(iii) In a case where the creditor has the benefit of both an individual and corporate guarantee, by virtue of section 10A itself, invoking of IBC proceedings against the corporate guarantor is barred, whereas if the argument as stated supra is accepted, the individual guarantor cannot claim relief under section 10A. Whether this is discriminatory and would stand the test of Article 14 of the Constitution of India must be seen.
Thus, one needs to wait for decisions of the Hon’ble Court/ Tribunal, to clarify on this issue.
3. If IBC is suspended for debts falling in default during the period excluded under the IBC Amendment Ordinance, what are the remedies available to creditors?
There are per se no alternatives to IBC proceedings for creditors, as these do not provide relief of commencing insolvency resolution process or any process akin to it. These are mostly debt recovery mechanisms, which proceedings under IBC which are in rem. With these principles in mind, a non-exhaustive list of debt recovery remedies is considered here:
(i) Proceeding under the SARFAESI Act, 2002 and the RDDBFI Act, 1993.
(ii) Summary suits, under Order XXXVII of the Code of Civil Procedure, 1908 in case of admitted debts.
(iii) Commercial Suits under the Commercial Courts Act, 2016 and ordinary suits under the Code of Civil Procedure, 1908.
(iv) In case security cheques are issued, proceedings under section 138 of the Negotiable Instruments Act, 1882 may also be considered if the cheques are dishonoured.
(v) Arbitration proceedings, based on the agreement between the parties.
(vi) Statutory Arbitration under Section 18 of the MSME Act, in case the creditor is registered as an MSME.
(vii) Remedies available under local laws, like the Shops and Establishments Act in the concerned States, by employees for recovery of their dues.
(viii) Remedies available under various other labour laws may be considered for recovery of wages.
(ix) Remedies available to homebuyers under the provisions of the Real Estate (Regulation and Development) Act, 2016 (RERA) and the Consumer Protection Act, 1986.
(x) Government entities can avail powers and options available to them under the concerned statutes.
4. With filing of fresh section 10 applications by the Corporate Debtor also barred for defaults occurring during the 6-month period mentioned in the IBC Amendment Ordinance, 2020, what are the options available to a Corporate Debtor?
At least three options (non-exhaustive) are available to all Corporate Debtors in this regard, depending on the nature of circumstances in which they find themselves.
(i) Section 271 of the Companies Act, 2013: The Company, under section 271 of the Companies Act, 2013, may, by special resolution, resolve that the company be wound up by the Tribunal. If such an option is availed, the procedure contemplated for winding up of a company under the Companies Act, 2013 would follow. It is relevant to note here that in this process, a moratorium, as available under section 14 of the IBC would not be available to a Corporate Debtor. However, the Hon’ble NCLAT, in NUI Pulp and Paper Industries Pvt. Ltd vs M/s. Roxcel Trading GMBH, Company Appeal (AT) (Insolvency) No. 664 of 2019 as confirmed by the Hon’ble Supreme Court of India in NUI Pulp and Paper Industries Pvt. Ltd vs M/s. Roxcel Trading GMBH, Civil Appeal No. 6697/2019, has held that in the context of IBC, pre-admission moratorium, outside of the purview of section 14 of the Code can be granted by the NCLT under Rule 11 of the NCLT Rules. Whether a similar power would be exercised in the context of section 271 of the Companies Act, 2013 is to be seen.
(ii) Section 230 – 232 of the Companies Act, 2013: A scheme of arrangement with creditors, i.e. debt restructuring under the aegis of section 230-232 of the Companies Act, 2013. Whether in exercise of its inherent powers, the Hon’ble NCLT, under Rule 11 of the NCLT Rules, would be inclined to grant moratorium pending schemes as well, needs to be seen.
(iii) Section 59 of the Insolvency and Bankruptcy Code, 2016: Voluntary liquidation under section 59 of the Code may be an option for companies which are not yet in “default” and wish to wind up their affairs. The non-existence of any form of default is a sine qua non for filing of an application under section 59 of the Code.
The author is an Advocate practicing before the High Court of Judicature at Madras & NCLT. The author acknowledges the inputs from Mr. Goutham Shivshankar, Advocate on Record. The views of the author are personal.