Insolvency and Bankruptcy Code Query Resolution WIth Adv. Anish Gupta!

Synopsis

This article explores a live query resolution session conducted by Ms. Dibsha Nanda, a content writer at LAWyersclubindia wherein,Adv. Anish Gupta, a legal practitioner having over 12 years of extensive experience in the field of corporate commercial litigation and domestic arbitration, with expertise in matters relating to insolvency and bankruptcy laws, resolved some interesting queries relating to insolvency posted under the forums tab on the LAWyersclubindia website.

The Query Resolution Session was conducted on June 16th, 2020, live over a Zoom call owing to the global outbreak of the Coronavirus pandemic compelling us to be locked in our homes.

The session kicked off, with Ms. Dibsha greeting the viewers and providing them with an insight into what precisely is LCI. She illuminated that LAWyersclubindia, launched in February 2008, is India's most trusted knowledge-sharing platform for legal professionals, aspiring law students, and the general public where people post their real-life legal queries to be resolved by legal experts and professionals. The website provides its users with a platform to interact with like-minded people and browse through worthy articles and news pieces on various national and international legal issues, published daily.

Thereafter, Mr. Anish Gupta was invited to enlighten our viewers with his journey and his work through his years of practice. The advocate proclaimed that he has been practicing before the Supreme Court of India, various High Courts, and several quasi-judicial forums across India and has handled numerous challenging litigation and arbitration matters. Before establishing himself independently, he has also worked at L&L Partners and Shardul Amarchand Mangaldas & Co., two supremely prestigious law firms in India.

On behalf of a querist, Mr. Showkath, Ms. Dibsha presented the first question to Mr. Anish. The querist wanted to know if his debt could be paid off with a property registered in the name of his wife when he has no property of his own? Also, whether he can file an insolvency petition in this situation?

To this, Mr. Anish pointed out that there is no bar on the recovery of debt through someone else's property under Indian law but regarding this specific scenario, the debtor cannot file for insolvency in the first place because the process of insolvency has been streamlined but not enforced for individuals under the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the "Code"). Moreover, he mentioned that if the notified provision comes into force in the future, the property of the wife still cannot be attached to recover the defaults made by the husband.

The next question asked by Ms. Dibsha belonged to a querist named Mr. Pawan Kumar, who coveted to know about the minimum default amount under the Insolvency and Bankruptcy Code, 2016 to file a case in DRT against a Partnership Firm, where the Operational Creditor is a Company.

Reiterating his answer to the first question, Mr. Anish stated that Chapter III of Part III of Insolvency and Bankruptcy Code, 2016 contains the provisions to streamlined the process for insolvency for individuals and partnership firms but it has not come into force as of now. Thus, insolvency proceedings cannot be initiated against a partnership firm under the current code of 2016.

Further, he conveyed that the threshold limit to trigger insolvency proceedings against a debtor is Rs. 1 Crore by virtue of the recent Amendment by way of Ordinance, dated 24th of March, 2020, with a view to prevent triggering of insolvency proceedings against small and medium enterprises that are currently facing the heat of Coronavirus pandemic.

Before the said Ordinance, the provisions under Part II, insolvency resolution and liquidation for corporate persons under Section 4 of the Code required the minimum default amount of Rs. 1 lakh for invoking insolvency. 

Mr. Anish was then questioned about the retrospective effect of the recent Amendment, in regard to which he asserted that the Supreme Court of India has time and again observed that a statute is prospective in nature unless it is held retrospective expressly or by necessary intendment. 

In Garikapati Veeraya v. N. Subbiah Choudhry, AIR 1957 SC 540, the Apex Court had observed that the Golden Rule of Construction is that, in the absence of anything in the enactment to imply that it is to have retrospective operation, it cannot be so construed as to have the effect of altering the law applicable to a claim in litigation at the time when the statute was passed.

In Govt. of India & Ors. vs. Indian Tobacco Association, (2005) 7 SCC 396, the Court had emphasized the cardinal principle, that the statutes must always be interpreted prospectively unless the language of the statutes makes them retrospective, either expressly or by necessary implications.

Mr. Anish cited an order by NCLT, Kolkata passed on 20.05.20, in the case of M/s Foseco India Limited v. M/s Om Boseco Rail Products Limited, wherein the view of the Supreme Court that it is a well-settled law that a statute is prospective in nature unless it is held retrospective expressly or by necessary intendment, was observed.

Also, in another order passed on 02.06.20 by NCLT, Chennai, in the case of M/s Arrowline Organic Products (P) Ltd. v. M/s Rockwell Industries Limited, it was held that the said ordinance regarding revision of the threshold limit can be viewed only as prospective, given the detailed discussions regarding the issue of its applicability.

After this informative answer by our guest, Ms. Dibsha moved onto the next question which was associated with the revised threshold limit to invoke insolvency.

The doubt was, whether the revised threshold limit applies to individual creditors or a group of creditors? Also, can other creditors be included for initiating insolvency proceedings against an individual financial debtor, if one creditor cannot meet the threshold limit for the default amount?

Mr. Anish affirmed that the revised threshold limit applies to individual creditors and a group of creditors. In regard to the inclusion of other creditors to initiate insolvency against a debtor, Mr. Anish highlighted a few provisions from the Code.

He explained that Section 7(1) of the Code enables the financial creditors to file an application by himself or with other financial creditors for filing CIRP against a corporate debtor. However, he disclosed that there is a bar on a financial creditor if he intends to file CIRP against two corporate debtors in a single insolvency petition provided the transaction with the debtors are not associated to each other, by referring to Rule 6 of the Insolvency and Bankruptcy Application to Adjudicating Authority Rules, 2016.

Thus, the amount being too high for an individual creditor, other creditors can be included to invoke insolvency proceedings against a corporate debtor, provided the revised default amount gets fulfilled by the inclusion of those creditors.

However, for individual financial debtors, it was again accentuated that the Code has not yet streamlined a process for initiating insolvency against an individual or a Partnership Firm, even though the provisions have been notified.

Ms. Dibsha then budged onto another query wherein, the querist had purchased a flat and took possession of the property but had not received a completion certificate from the builder and the property was not mutated in his name. He had also paid for the construction of common amenities like the swimming pool, gym, etc. to the builder but they were not constructed as on the date of possession. The querist received a notice from an Interim Resolution Professional that insolvency proceedings have been initiated against the builder.

The querist herein, required the procedure to claim his money paid towards the construction of common amenities from the builder along with the procedure to retrieve the completion certificate of the flat. Also, he wanted to know the effect of insolvency on his title in the property and his legal remedy in regard to this.

Mr. Anish responded with an elaborate answer for the easeof our viewers. He clarified that a notice from the Interim Resolution Professional to the querist,implies that the insolvency process has begun against the corporate debtor, herein the builder and followed by a Moratorium under Section 14 of the Code in favor of the corporate debtor. Hence, no civil action can arise against a corporate debtor when the CIRP process is pending against him. He submitted that in order to initiate claims against the corporate debtor, Form CA under the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 is required to be filled and submitted to the Interim Resolution Professional who shall then, verify the claim within a period of seven days from the last date of the receipt of claims and thereupon,maintain a list of creditors containing names of creditors along with the amount claimed by them and the amount of their claims admitted.

Further, if a resolution applicant continues with the work of the debtor and takes control of the management of the building after passing of a resolution plan, then the creditor, herein the querist can surely acquire possession and ownership of his flat along with other buyers who have been allotted flats in the building.

Ms. Dibsha progressed forward with the session and presented another query concerning the remedy available to a creditor if he/she has not been included in the list of creditors by the Interim Resolution Professional.

In respect to this, Mr. Anish said that a suitable application may be filed under Section 60(5)(c) under the Code which empowers the Adjudicating Authority to direct the Interim Resolution Professional to incorporate the applicant in the list of creditors.

In SBI v. S. Muthuraja & Ors (CA (AT) (Insolvency) No. 105 of 2017) pending before Hon'ble NCLAT, the SBI has filed an application for not being made a party to the committee of the creditors by Interim Resolution Professional.

Thereafter, Ms. Dibsha on behalf of another querist, asked Mr. Anish about the legal obligation of an heir towards the recovery of the debt owed by a partnership firm, where the deceased father of the heir was a partner?

Restating his response to the initial questions, Mr. Anish averredthat there cannot be any initiation of insolvency proceedings against an individual or a Partnership Firm. However, any debts owed by an individual or a Partnership Firm can be recovered through a Civil Court or any other dispute resolution body agreed between the parties but not through an Adjudicating Authority under the Code.

The conversation then reached the ultimate query, wherein the right of an ex-employee to institute a civil suit against his ex-employer, which is a Company under serious financial debt, for recovery of his salary and allowance dues, was in question.

Pertaining to this query, Mr. Anish remarked that an employee is fully empowered to institute a civil suit against his employer for recovery of his salary dues as there is a breach of the contract executed between the employer and the employee. Nonetheless, in an event where the insolvency process has commenced against a company and a Moratorium has followed, a civil suit cannot be instituted. Hence, Form E has to be submitted to the Interim Resolution Professional concerning the claims of the employee and he shall be included in the list of creditors after due verification of such claim by the Interim Resolution Professional.

The Advocate also pointed out that, the Code provides for certain debts to be prioritized and disposed of, before others. These are insolvency resolution process costs and liquidation cost, debts to secured creditors, debts to workmen, unpaid dues of employees, etc.

While winding up the session,  Mr. Anish shared his balanced view on the recent Amendment in the Insolvency and Bankruptcy Code, which has been referred to as "A Pandemic of Bad Drafting", with our audience.He scrutinized that the measure of increasing the threshold limit for triggering insolvency from 1 Lakh to 1 Crore shall prove to be an advantage to the ailing corporate debtors, since it will boost their confidence and provide additional time and space owing to the current financial crisis that the country has been facing due to the ongoing global pandemic.

Conversely, he asserted that it will also cause a serious threat to the GDP of the country ultimately leading to recession as the banks and other financial institutions have no sources to earn their profits as they cannot avail any remedy against their borrowers by virtue of the revised threshold limit in the Amendment. He also suggested that the Government should provide some financial relief to the banks in order to intensify their profits and control the recession.

The Live Query Resolution Session ended with Mr. Anish imparting valuable tips to law students who are aspiring to specialize in the field of Insolvency And Bankruptcy Laws. He recommended that the Insolvency Law being relatively new in India, there are a variety of aspects to explore and work in. One must stick to the basics of the law to develop technical excellence and shall focus on analytical skills to anticipate the behaviors of other parties in the deal. With the aim of succeeding as an insolvency and bankruptcy lawyer, a student must work at a prestigious law office or chambers after completing law school, to gain maximum exposure in this field.

Ms. Dibsha signed off the interactive Zoom call, by acknowledging the querists for posting their queries on the LCI forums and expressing thanks to our esteemed guest, Mr. Anish Gupta for his time, patience and efforts, he contributed to connect with our viewers and facilitate them with insightful answers to their queries.