“The defaulter‘s paradise is lost. In its place, the economy‘s rightful position has been regained” – Justice RF Nariman
With changing facet of in-house counsel to an effective business partner, we have been always exploring opportunities to support business in smarter ways. Managing cash flow in the midst of piling up accounts receivables, has been always a challenge for any enterprise in a country like India, where defaults in contractual payments have been prevalent at all the times. As early as starting of 2017, while we were already on the top of the remedies for an ‘operational creditor’ under the Insolvency and Bankruptcy Code (“the Code”), our inboxes also started witnessing mails from our business leaders requiring us to explore remedies under the Code for recovering overdue amounts from the defaulting/nonresponsive customers. To be honest, it is this situation that tugged us more in to the provisions of the Code, though the Code primarily focus to ensure revival of the ‘corporate debtor’ and is not a mere recovery legislation for creditors. In this write-up, we are striving mainly to portray the practical aspects faced by Corporates who resort to the recovery remedies as an ‘operational creditor’ under the Code.
The Code is one of the most effective reforms which is aiming at timely resolution of insolvency and bankruptcy that would support development of credit markets and encourage entrepreneurship. With a strict 180+90 days ‘resolve-or liquidate’ mandate, the Code has received acclamation, even from the World Bank & IMF and has substantially contributed to India’s 30 place jump in 2018’s ‘Ease of Doing Business’ ranking. After rolling out of the Code, the flow of financial resource to the commercial sector in India has increased exponentially as a result of financial debts being repaid.
One of the major issue faced by creditors was non-responsiveness of debtors to any many demand notices that are issued. The prescribed demand notice under the Code made a big difference here! Due to the 10 days’ mandate period for the ‘corporate debtor’ to respond, most of such non-responsive debtors are coming forward for reconciliation after receipt of the demand notice. It is impossible to rule out at least some of the debtors raising pending issues related to the due payments as claimed in the demand notice. However, the creditor organizations are still benefitted, as it will help them to clean their books of accounts and bifurcate the receivables that are not really collectable or due. The uncertainties and contingencies will be getting out of the financials which will strengthen the credibility of the organization in a long run.
As the efforts under the Code started yielding results in the form of positive cash flows, there has been a phenomenal increase in the organizations’ faith and loyalty towards the legal framework of the country when it comes to remedies for recovery of debts, which was not so evident in earlier days. Undoubtedly, this will upsurge the complied way of doing business in all sectors.
Largely, the debtors were taking shelter under the interpretation of ‘dispute in existence’ under the Code. It’s more agonizing to note that even after the Hon’ble Supreme Court has finally settled the issue in Mobilox Innovations v. Kirusa Software2, ‘corporate debtors’ are still advised to initiate or raise ‘disputes’ which were never raised before the demand notice, just for the sake of dragging the remedy available for the ‘operational creditor’ under the Code.
Lack of clarity towards the documentation required from the operational creditor’s bankers3, which needs to accompany the petition filed under the Code, is another hurdle. Banks are perplexed and they are not in a position to take a consistent position when it comes to the document towards Annex III as prescribed under the relevant Rules. Most of the times, the applicant ends up in filing lengthy bank account statements which runs for so many years altogether.
Apparently, the remedy for the operational creditor under the Code was calculated to be cost-effective, which is actually true for the early stages. You are fortunate if the recovery happens either at the demand notice stage or at the initial stages of the petition. Thereafter, the costs of interim resolution professional (IRP) and the process afterwards are not much lesser than that for a civil action for recovery.
We need more number of NCLT judges to cope with the increased work load and more NCLT benches along with training of judges – it’s the need of the day. The remedies that are designed as time-bound under such a statute can’t suffer delays, as we experience now, for ‘justice delayed is justice denied’.
We are mindful of the well-established principle that the insolvency process under the Code is not a suit for recovery. However, it’s worthwhile to analyze the remedies available for an operational creditor that are direct derivatives of the Code’s objective, which was our modest endeavor in this article. There is no second thought that the Code has brought a paradigm shift in law and our economic policy. Any statute will face executive and administrative issues when it comes to implementation, but we are hopeful that tweaking any such wrinkles on a progressive manner will take this legislation to a successful regime. The future of the insolvency law of India has been never ever promising as it is now!
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