Recovery of Debts by Operational Creditors

The Insolvency and the Bankruptcy Code was drafted and enacted to consolidate and amend the laws in relation to reorganization and insolvency resolution of Corporate Persons, Individuals, and Partnership Firms. It is evident to highlight that in the preliminary phase only the provisions related to corporate persons were notified. The provisions relating to individuals and partnership firms are yet to be notified. The main emphasis of the code was on creating and aligning in place time-bound processes thereby leading to maximization of value of assets of the aforementioned, promotion of entrepreneurship, availability of credit along balancing the interest of all the stakeholders.

The Insolvency and Bankruptcy Code in its early stage repealed the already existing legislation which had become outdated with the passage of time. The Code is not easy legislation as the drafters of the legislation burned the midnight oil to create masterpiece legislation that would cater to the solve the issues of the society. The Code is detailed and elongated covering numerous time-bound processes designed for the persons covered under the applicability of the code.

A remarkable fact to highlight is that the Insolvency and Bankruptcy Code in a very lucrative and lucid manner bifurcated the term debt into financial and operational debt. Another outstanding and praiseworthy fact incorporated under the Code was that the code introduced a new class of creditors by classifying the creditors on the basis of debt into financial and operational creditors. This was the first time that the creditors had officially been classified on the basis of debt apart from the classification on the basis of security into secured and unsecured creditors.

Operational debt means a claim in relation to provision or supply of goods or services thereby covering within its scope employment dues and statutory dues that are payable to the Central or State Government or any local authority under any law for the time being in force. Thereafter keeping the definition of operational debt into purview the operation creditors were defined to be persons to whom financial debt was owed and also included within its ambit persons to whom such debt had been legally assigned or transferred.

In this article, we will mainly direct our focus towards the recovery of debts by operational creditors.

Operational creditors as already discussed are persons to whom an operational debt is owed. Also the term operational creditor covers within its purview persons to whom such debt has been legally transferred or aligned. Therefore all persons who have provided any kind of goods or services are covered within the scope and ambit of operational creditors. 

After having discussed and interpreted who operational creditors are, we will now head toward discussing the recovery modes and mechanism available with these operational creditors. 

The operational creditors occupy a significant position and ranking under the code. They have a say on major matters that are covered and elaborated under the code. They have been bestowed with voting rights and equivalent stakes during the course of the constitution of the committee of creditors. Also, the operational creditors enjoy the privilege of being repaid on a priority basis once the proceeds are realized after the insolvency order is passed by NCLT.  

The data as Published by the IBBI states that out of 1858 cases that have been filed to date around 920 cases have been filed by the operational creditors. Out of the 920 cases filed 168 were filed during the quarter ended 31 march 2019. The names of a few cases that were filed by the operational creditors are as follows:

1. Merchem  Ltd.,
2. Naachair Paper Boards Pvt. Ltd.
3. Swadisht Oil Pvt.  Pvt. Ltd.
4. Bafna Pharmaceuticals Pvt. Ltd.
5. Darjeeling Rolling Mills Pvt. Ltd. 
6. Subburaj Spinning Mills Pvt. Ltd. 

Prerequisites for debt recovery via IBC 

1. The minimum amount of default to be recovered should be at least one lakh rupees. 
2. The debt to be recovered should a debt that was due for recovery after December 2016.
3. There should be evidence of written communications made in relation to the debt due to be recovered.
4. There should be a proper copy of agreements and deeds that were entered as evidence in support to highlight the pending debt.
5. There must be proper invoices for the goods supplied.

The operation cannot directly file an application for initiating the corporate insolvency resolution process. Firstly in order to recover the pending debt the operational creditors need to serve demand notice to the defaulting corporate debtor highlighting the amount to be recovered from him. If after serving the demand notice the operational creditor does not receive his pending dues nor do the operational creditors receive any favorable reply from the defaulting corporate debtor then in such a scenario the operational creditors may go ahead with initiating the corporate insolvency resolution process. at the time of filing an application for initiating the corporate insolvency resolution process, the operation creditor is required to furnish forth the copy of the demand notice as initially served to the defaulting corporate debtor.

A remarkable fact in relation to debt recovery by operational creditors is that in the majority of the cases the debts get recovered once demand notice is served and there arises no requirement for initiating the corporate insolvency resolution process. The demand notice as crafted under the Code is a powerful tool in the hands of the operational creditors for recovering their debts. To prevent the running business and unnecessary hindrances the defaulting corporate debtors often pay off their debts after receipt of a demand notice from operational creditors. 

In light of the above, the operational creditors may in order to recover their debts initiate the below-mentioned process via which they can recover their pending debts. The processes with the aid of which the operational creditors can recover their debts are as follows: 

1. By serving demand notice to the defaulting corporate debtor
2. By initiating the Corporate Insolvency Irresolution Process (CIRP)
3. By taking shelter of Liquidation Process
4. By taking recourse of Fast Track Corporate Insolvency Resolution Process (FTCIRP)

Demand Notice 

The first step in the direction of debt recovery by the operation creditors is to serve the demand notice to the concerned defaulting corporate debtor. In light of this on the occurrence of default by the corporate debtor, the operational creditor shall serve a demand notice/copy of the invoice thereby demanding the unpaid dues for the supplied goods or services to the corporate debtor. The demand notice to be served to the defaulting corporate debtor shall be in the format as prescribed in the code in Form 3. While serving demand notice to the corporate debtor in Form 3 it is important to attach the relevant invoices that highlight the balance payment due from the corporate debtors end.

After serving the demand notice a time of ten days shall be granted to the corporate debtor to highlight:

1. any ongoing dispute in relation to the aforesaid supplied goods or services ;
2. details of payment made (if any) after receipt of demand notice 

If after the end of ten days the operational creditor still does not receive the pending payment or any notice highlighting the existence of dispute then in such a scenario the operational creditor can without any further delay file an application for initiating the corporate insolvency resolution process.

Corporate Insolvency Resolution Process (CIRP)

Even after serving the demand notice if there are no favorable outcomes then the operational creditors can either individually or jointly with other operational creditors file an application to commence the insolvency proceedings against the defaulting corporate debtor.  

The operational creditors have the privilege of approaching the NCLT for filing the application in relation to the initiation of the corporate insolvency resolution process. They are required to prove their debts forth the NCLT prior to submission of application for the insolvency resolution process. They are granted the authority to knock on the doors of the NCLT for recovery of their debts from the defaulting corporate debtors.

On this note, the operational creditors are required to make an application in Form 5 along with a fee of Rs. 2,000. The operational creditors while filling the application for initiating the corporate insolvency resolution process as per section 9 of the code shall annex the following documents along the application that is to be submitted: 

1. The copy of demand notice as originally served to the defaulting corporate debtor;
2. The evidence of default as highlighted from the records is maintained by the information utility.
3. The proposed name of the insolvency professional would act as the interim resolution professional.
4. Any other documents or evidence as highlighted by the IBBI.

Once the application is submitted by the operational creditors the same is reviewed by NCLT. The NCLT during the course of reviewing the submitted application ascertains on its own level the existence and nature of default that is highlighted by the operational creditor in the submitted application. It is significant to highlight that the NCLT reviews the submitted application within a time span of fourteen days from the receipt of the application. After reviewing the received application the NCLT has the option of accepting or rejecting the received application. In the scenario where the NCLT opts to reject the received application then in such a situation, it shall issue a notice to the operational creditor thereby giving an opportunity to rectify the highlighted defects.

Once the application is admitted by the NCLT then the corporate insolvency resolution process is deemed to have commenced from the very date on which the application for corporate insolvency resolution process was accepted by the NCLT.

After having arrived at the decision of accepting or rejecting the received application the NCLT shall convey its decision via an order to the operational creditor and corporate debtor if it accepts the received application and to the operational creditor only if it rejects the submitted application.

A crucial fact to be kept in purview is that the Code has prescribed the timeline of one hundred and eighty days within which the entire process of corporate insolvency resolution process needs to be completed. The appointed resolution professional shall make his best endeavors to complete the entire process within the prescribed timeline of one hundred and eighty days. Even after making the best efforts to complete the process within due time if the process remains uncompleted in such a state the resolution professional may approach the NCLT for seeking an extension in a time frame to complete the ongoing process. The maximum extension that may be granted by the NCLT for completing the ongoing process is ninety days. It is important to note that the extension in the time frame shall be granted only once by the NCLT.

Thus the major step in the direction of debt recovery by the operational creditors is to initiate the corporate insolvency resolution process against the defaulting corporate debtor. If due to any reasons the process of corporate insolvency resolution process does not yield the desired results then the operational creditors may take the next recourse of initiating the liquidation process against the defaulting corporate debtor.

Liquidation Process

In the scenarios where the NCLT does not receive a proper resolution plan or it rejects the received resolution plan on account of non-compliance with the specified requirements then in such cases, the NCLT concerned may pass orders for liquidation of the concerned corporate debtor along with issuing a public announcement for the same and forwarding the copy of aforesaid order to the concerned ROC with which the corporate debtor is registered.

The resolution professional as appointed during the course of the corporate insolvency resolution process may with the approval of the committee of creditors request the NCLT to liquidate the defaulting corporate debtor. On receipt of the aforesaid request from the resolution professional, the NCLT shall after requisite review passes the order for liquidation of the defaulting corporate debtor.

It is important to note that once the liquidation order has been passed by the NCLT then in such a scenario no fresh suit or legal proceeding shall be initiated or filed by or against the concerned defaulting corporate debtor. If required the appointed resolution professional may initiate any suit or legal proceeding with the express approval of the NCLT.

Once the liquidation order is passed by the NCLT against the defaulting corporate debtor the order passed will act as a discharge notice after which the officers, employees, and workmen of the corporate debtor will have to relinquish their job. The officers, employees, and workmen of the corporate debtor shall continue to work in the scenario where the business of the defaulting corporate debtor is kept running and in operation by the liquidator during the course of the ongoing liquidation process.

It is evident to note that the resolution professional as initially appointed at the time of the corporate insolvency resolution process shall act as liquidator to carry forward the liquidation process. After the appointment of the liquidator the board of directors, key managerial persons, and partners of the defaulting corporate debtor shall have no role in the business and their respective powers shall move towards the liquidator. Therefore the liquidator will be the main controller of the business of the defaulting corporate debtor during the course of the liquidation process.

The liquidator apart from managing and looking after the business of the defaulting corporate debtor shall form a liquidation estate comprising of the assets of the corporate debtor. The liquidator during the course of forming the liquidation estate shall stand in the position of fiduciary in relation to the liquidation estate thereby keeping the interest of the creditors in safe and secure.

Fast Track Corporate Insolvency Resolution Process

An application for initiating the fast track corporate insolvency resolution process may be made by the operational creditors against the defaulting corporate debtor. The application for fast track corporate insolvency resolution process may be made by the operational creditors against the following: 

1. Small company- As defined under the Companies Act 2013
2. Startups – As defined in the Government of India notification dated 23rd May 2017 as issued by the Ministry of Commerce & Industry.
3. Unlisted Company – Companies having total assets not exceeding one crore as reported in the financial statements of the immediately preceding financial year.

The Code has prescribed a time span of ninety days within which the entire process of fast track corporate insolvency resolution process needs to be completed. Even if after the best endeavors the process of fast track corporate insolvency resolution process remains incomplete then in such a scenario the appointed resolution professional may file an application to NCLT for extension of the timeline to complete the ongoing process. On receiving the application for extension of timeline for completing the ongoing fast track corporate insolvency resolution process if the NCLT is satisfied that the ongoing fast track corporate insolvency resolution process is such that it cannot be completed in the prescribed timeline then in such case the NCLT may extend the prescribed timeline by a further duration not exceeding forty-five days. E aforesaid extension in time frame shall be granted only once by the NCLT.

The operational creditors for initiating the fast track corporate insolvency resolution process shall file an application to the NCLT thereby attaching the required documents along with the application. The set of documents that need to be attached with the application are as follows: 

1. Records as maintained by the information utility highlighting the default committed by the corporate debtor 
2. Any other document as required by the IBBI to suffice that the defaulting corporate debtor against whom the application is filed is eligible for a fast track corporate insolvency resolution process.

The fast-track corporate insolvency resolution process is a shorter version of the corporate insolvency resolution process. The process flow is the same but the difference is in the timelines as in the case of fast-track corporate insolvency the prescribed timeline is just half as compared to the corporate insolvency resolution process.

Therefore the debt recovery under the Insolvency and Bankruptcy may be time-consuming but the processes are result oriented in terms of providing the desired outcome. The operational creditors need to be patient and trust the process flow via which they would be successful in recovering their debts. The code is on the track of getting the pending debts recovered, it’s just that the right recourse needs to be adopted to do the needful. The operational creditors have been quite active ever since the inception of the code to recover their debts. The number of cases as filed by the operational creditors itself highlights the sound awareness of the provisions among the operational creditors.

Hope this article was informative in providing the debt recovery alternatives available with the operational creditors.

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