Does the Creditor have joint claim for CIRP against the corporate debtors for the same debts? 

Abstract

When the Corporate Debtor defaults in making payments to its creditors, the process of Corporate Insolvency Resolution Process (CIRP) can be initiated against it by its creditors. The Insolvency and Bankruptcy Code, 2016 (hereafter “the Code”) provides the process for Insolvency Resolution Process (IRP). For this purpose, the government also enacted the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 and Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (hereafter “the Rules”). The Central government on March 24, 2020 notified that the minimum threshold under section 4 of the Code to initiate any proceeding of insolvency against a Corporate Debtor shall be not less than one crore rupees.[1]

Key words.: CIRP, Creditors, Financial Creditors, Debt, Financial Debt.

Introduction

  • What are Creditors?

According to Insolvency and Bankruptcy code 2016, creditor means any person to whom a debt is owed and includes financial Creditors, operation creditors, secured creditors, unsecured creditors and decree holder[2].

  • Financial Creditor

Financial creditor means any person to whom financial debt is owed and includes a person to whom such debts has been legally or transferred to[3].

  • What is Financial debt?

Financial debt means debt along with interest if any, which is disbursed against the consideration for the time value of money and includes; money borrowed against the payment of interest, any amount received by acceptance under any acceptance credit facility or it is de- materialized equivalent, or any amount raised pursuant to any note purchased facility of the issued bonds[4].

  • Debtors

Corporate person means a company as defined in clause 20 of section 2 of the Company Act 2013[5] while a corporate debtor means a corporate person who owes a debt to any person.

Purpose for Taking Loans by corporate persons

There are many reasons why a corporate individual in India may take loans. These reasons incorporate; want to extend the current organization by opening up new branches, needing to improve or redesign the current business, addressing working capital issues particularly compensations, lease and different bills, intending to settle different credits which are expected, for purchasing new hardware and gear, receipt financing and overseeing income issues.

Requirements for Obtained corporate loans

Before an enterprise is conceded credit office, fair treatment is constantly followed prior to giving the advance asset. These necessities incorporate; a duplicate of credit report from the significant credit agencies like Equifax, Experian and Transunion, now you acknowledge value as an organization is profoundly verified. These enterprises will go through your records and give you a FICO rating. Likewise, the organization needs to give reviewed pay explanations, balance sheets and bank articulation that are inspected by guaranteed sanctioned bookkeeper. Business plan is another significant prerequisite as it assists with recognizing any issue. Arrangements of advance proposition by organization is likewise an indispensable prerequisite that hasten advance endorsements, in the proposition one should archive, Company name, corporate design, the administration, measure of cash required, the utilization of cash being mentioned and chiefs’ subtleties.

Dispute arising in the event of loan default

The presentation of Insolvency and Bankruptcy Code 2016 (IBC) in India has been a major murmur of help for organizations and monetary foundations offering advances and other credit offices, which would guarantee that obligation, are recuperated quick. This Insolvency liquidation code (IBC) Law was ordered with the goal to guarantee that there is ease with which organizations work together in India. In spite of the fact that this code the bank can get back the assets through the Corporate Insolvency Resolution Process (CIRP).

The Insolvency and Bankruptcy code currently can only be triggered if there is a minimum default of one lakh rupees[6]. This process can be started by way of filing an application before the National Company Law Tribunal (NCLT).

Another vital viewpoint that must be found as to the Insolvency and Bankruptcy Code (IBC) is that as of now just organizations and Limited Liability Partnerships (LLP) can be considered as defaulting corporate account holders.

The next step after (NCLT) admits the application against defaulting debtor

When the matter is conceded by the NCLT, the NCLT continues with the arrangement of an Interim Resolution Professional (IRP) who assumes responsibility over the administration of the defaulting indebted person resources. The Resolution Professional may then be continuing or eliminated dependent on the desires of the Committee of Creditors (COC). All endeavors will be made to guarantee that acknowledgment of obligations can occur because of the Corporate Insolvency Resolution Process (CIRP) measure.

Corporate Insolvency Resolution Process (CIRP)

The extraordinary obligations, balances or figures might be settled via someone else presenting a Resolution intended to assume control over the Company and pay off the excess obligations. In the event that a goal isn’t affirmed by board of trustees of loan bosses or not presented, the CIRP cycle is considered to have fizzled. All things considered the liquidation procedures would then begin subject to the request for the court.

Time period for Resolution Plan

In order to conduct the whole process, a time period of 330 days is specified.

The cost of Resolution process

Another significant question that emerges is which gathering is liable for causing the costs of the Resolution Process while the CIRP is in actuality? It is the candidate lender who might bring about the expense of the Resolution. Such a candidate would be repaid their assets at a later stage at the hour of endorsement of Resolution Plan or at the hour of Liquidation.

The scuffle amongst the Legal Precedents


It is appropriate to take note of that The National Company Law Appellate Tribunal (NCLAT) through its choice on account of Vishnu Kumar Agarwal v. Piramal Enterprises Ltd., [7](Piramal Enterprises Case) with respect to inception of CIRP held that there is no bar on recording two concurrent applications against the ‘Principal Borrower’ just as the same time with the ‘Corporate Guarantor(s)’ under Section 7 of the IBC. Outstandingly, this choice of the NCLAT has prompted a few problems especially because of a deficiency of arrangements under the IBC which can verify the said choice.

Moreover, the NCLAT in Piramal Enterprises set out that, once for similar arrangement of cases, an application is conceded against one of the corporate debt holders (i.e., either head borrower or corporate underwriter), a second application by similar leaser for similar arrangement of cases and default can’t be conceded against the other corporate indebted person (for example either the key borrower or corporate underwriter). It is quite obvious that NCLAT, on one hand, has permitted documenting concurrent applications for the beginning of CIRPs against the foremost borrower and the underwriter however on the other, it has banished conjuring of CIRP against any of them if CIRP against any of them has effectively been started.

Outstandingly, Section 14 of the IBC lists that the ban will not be relevant to the underwriter proposing that the bank can continue against the corporate underwriter during the CIRP of the Principal Borrower. The choice given by the NCLAT in Piramal Enterprises, whenever effectuated will nullify the point of Section 14 of the IBC.

Also, the Supreme Court, in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta, (Essar Steel) [8]explained the issue of the law of underwriters, the Supreme Court has followed its past choice in State Bank of India v. Ramakrishna [9]wherein it presented to the lender an option to summon agreements of assurances during bankruptcy procedures subsequently permitting a loan boss the most extreme plan of action conceivable. Thus, para 66 of the choice in Essar Steel proposes that the CIRP against an underwriter can begin in any event, when CIRP against the vital borrower exists which is in opposition to the choice of the NCLAT in Piramal Enterprises. Presently, with the choice in Piramal Enterprises being managed by the Supreme Court under an allure, it gets indistinct concerning what methodology should be followed when a leaser moves against the underwriter for the fulfillment of the extraordinary obligation after the fractional installment of the obligation by the goal plan.

Conclusion

In conclusion therefore, a financial Creditor either by itself or jointly with other financial creditors may file an application for claim by initiating corporate insolvency resolution process (CIRP) against a corporate debtor[10].The NCLAT in Piramal Enterprises has set up that a there is no bar in documenting synchronous applications for CIRP against the principal borrower and the guarantor, yet the IBC is quiet on the facilitating methodology if CIRP has been started against both the Principal Borrower just as the Corporate Debtor. Neither the IBC determines any arrangement for the administration of such debates nor any point of reference decisions end up handling something very similar.

In addition, the Apex Court, in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta, (Essar Steel) explained the issue of the law of guarantors, the Apex Court has followed its past choice in State Bank of India v. Ramakrishna wherein it presented to the lender an option to conjure agreements of certifications during indebtedness procedures accordingly permitting a bank the greatest plan of action conceivable.Additionally, it is appropriate to take note of that quite possibly the main qualities of an assurance contract are the co-broad risk of the essential indebted person and the underwriter regarding Section 128 of the Contract Act. This suggests that the responsibility of a guarantor is first and isn’t conceded until the creditor depletes its remedies against the principal debtor.

In any case, considering every one of these logical inconsistencies, it is just sensible that it be certified that there is no bar on initiation of CIRP against the principal borrower or the guarantor regardless of whether an earlier CIRP against any of them subsists.


[1] Ministry of Corporate Affairs, India, S.0. 1205(E).

[2]Insolvency and Bankruptcy code, 2016 s. 3(8)

[3]Insolvency and Bankruptcy code, 2016, s. 3(7)

[4] Insolvency and bankruptcy code, 2016, s. 3(8)

[5] Indian Company Act, 2013, s. 2(20)

[6] Insolvency and Bankruptcy code, 2016, s. 3(8)

[7]Dr. Vishnu Kumar Agarwal vs M/S. Piramal Enterprises Ltd on 8 January, 2019, Company Appeal (AT) (Insolvency) No. 346 of 2018

[8]  Committee of Creditors of Essar … vs Satish Kumar Gupta on 15 November,2019, Civil Appeal No. 8766-67 of 2019

[9] State Bank of India vs V. Ramakrishnan on 14 August, 2018, CIVIL APPEAL NO. 3595 OF 2018

[10] Insolvency and bankruptcy code ,2016, s. 7(1)

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s