Scenario of recovery prior to IBC:-
Before the enactment of IBC, creditors had the following legal remedies for recovery of debts from the Corporates:
i) Summary Suit :
The creditors used to pursue the option of filing Summary Suit under O.XXXVII under Code of Civil Procedure. The average time taken by a Civil Court is usually three- four years. The same Suit, if filed before a High Court takes more than five to six years (in many cases it is more than that). Apart from the time taken, the creditors also have to incur the Court Fees depending on the amount of the claim.
ii) Companies Act :
Many of the times, creditors used to file winding up proceedings under section 434 of the Companies Act,1956 before the High Court. Though filing proceedings under Companies Act for winding up incurred very less Court Fees, but this remedy had its own set of disadvantages mainly endless delay in deciding the winding up application. The strategy was that the fear of winding up would bring the defaulting debtor to the table for settlement. The long delay in deciding the cases made all the efforts futile.
iii) Sick Industrial Companies Act, 1987 :
This Act popularly known as “SICA”, was enacted to address the ailing industries. However, instead of meeting the purpose of the Act, the Act itself became sick and a hideaway for defaulting promoters of the sick industries.
iv) SARFAESI Act , 2002 :
This Act was enacted to enable all kind of financial institutions to auction the properties of the creditors for the purpose of loan recovery. However, this Act again had its own set of constraints including incessant delays in reaching finality.
Problem of recovery of bad debts and endless delays :
As can be seen above, the remedies available under the Law for recovery of bad debts prior to IBC were prolonged and seemingly never ending. The entire legal process of recovery of dues from the defaulting Corporates was fragmented and was fraught with perpetual delays. This resulted in very poor recovery of debts by the creditors and instilled confidence among the defaulting Corporates that they were protected from any imminent danger of their business being shut or taken over by the creditors. Needless to say the number of defaulting Corporates, who though could make timely payment of the debt, choose to purposefully default due to lack of any stringent legislation.
Then came the magic pill- Insolvency and Bankruptcy Code, 2016 :-
The intention of the IBC was always to ensure speedy resolutions of the Corporate Debtor and in case the resolution doesn’t happen, then the next obvious step of liquidation.Though the NCLAT in catena of judgments has held that the proceedings under IBC are not meant for recovery, however the route of IBC as is known is used by majority of creditors for the recovery of the debts.
What made IBC a runaway success ?
i) Strict Time Line : The IBC provides for a strict time line of 330 days of “Resolve or Liquidate”.
ii) Immediate Control by Resolution Professional : Once the application under the IBC is admitted by NCLT, the creditor is required to immediately hand over the control of the company to the Resolution Professional. This provision instilled a fear among the purposeful defaulters, who though had money to pay to the creditors, but purposely delayed because of the lack of fear in the law. With this provision, whenever a creditor would file a Section 7 or 9 Application against the purposeful defaulter, the defaulter would come running to the Court,insisting for settlement of the dispute. All this would happen within a matter of few months or days after filing of the Petition. Something like this was totally not heard of prior to IBC.
iii) Infrastructure & Reforms : The set up of the Forums under the Code has been quick and the Forums i.e.NCLT, NCLAT and Supreme Court have been remarkably active in adjudicating upon the matters and have provided clarity on interpretation of key concepts under IBC. The IBBI and the Government of India have been receptive in making timely amendments to safeguard and secure the purpose of the Code.
Suspension of Section 7, 9 & 10 :
It is reported in the media that the cabinet has approved the introduction of “Section 10A” to IBC, which would suspend the applicability of Section 7,9 & 10 for a period of one year.
The reason this has been done is because of the Covid-19 pandemic and the prolonged lockdown will lead to defaults by large number of Corporates specially small and medium Enterprises.
In my opinion, this legislation might have two contrasting effects and might kill the very purpose of the Code. At one end, the intent of Section 10A might be correct that it will save large numbers of Corporations who have defaulted to go under Insolvency. At the same time, it will have a very adverse effect on the entities who have to recover money from the defaulting Corporates. The number of entities which might suffer due to closure of the doors of NCLT for filing Section 7 & 9 Petitions will be much more compared to the entities which Section 10A intends to protect.
What alternate remedies does the Creditors have now ?
The Creditors shall continue to have the remedies for recovery which were available prior to the enactment of IBC, those which are already discussed earlier in this blog. In addition, the Parliament has also enacted the Commercial Courts Act, 2015.
The highlights of the Commercial Courts Act :
i) Purpose :- India needed to further improve its ranking in the World Bank “Doing Business Report”, which inter alia, considers the Dispute Resolution mechanism in the country as one of the parameter for doing business. And therefore this Act came to be passed for speedy settlement of Commercial disputes and thereby facilitate ease of doing business.
ii) Separate Courts : The Acts provides for Constitution of separate Commercial Courts at all levels by the State Government.
iii) Strict time lines for pleadings : The Act provides for strict time lines to be followed by both the parties for submission of the pleadings.
iv) Compulsory Mediation : The Act provides for compulsory mediation before institution of a Suit, where no urgent interim relief is contemplated.
Can Commercial Courts be an alternative to IBC for recovery ?
The Commercial Courts Act looks very promising on paper, but is it anywhere near to IBC in matching the speed of disposal of the cases filed for recovery ?
The major impediment in speedy disposal of the Suits under the Commercial Courts Act is the provision of compulsory mediation before the institution of Suits. Practically, the process of mediation in Civil Courts takes anywhere between three to four months and only after four months when the mediation failure report is obtained, does the Commercial Suit begins its journey. This in comparison to IBC is dead slow since in the period of four months the Application under section 7 or 9 usually comes up for final hearing. The Commercial Suit usually takes at least two to three years to dispose off and this time line starts four months after the mediation failure report is obtained.
In my opinion, the long wait for obtaining mediation failure report for Commercial Suits takes out the entire zest in pursuing the Suits under Commercial Courts Act.
Present Dilemma : IBC Vs Commercial Courts Act
Since the Section 7 & 9 of the IBC are suspended for at least one year and once the suspension is lifted, there will be flooding of applications under section 7 & 9 for recovery by the creditors. It cannot be ascertained whether the infrastructure of NCLT would be in a position to bear the large flooding of applications and for the same reason, it is likely that the disposal of applications under section 7 & 9 might get delayed for longer than usual.
In such a scenario the creditors have to determine whether it is practicable to file a Suit under Commercial Courts Act immediately after the Courts resume or to wait for the suspension on section 7 & 9 to be lifted next year or so.
About the Author: Adv Amit A. Tungare
Amit is a practising Advocate and Counsel at Bombay High Court. He also appears various Tribunals and Forums across India. His major areas of practice include Civil Laws, Arbitration, Company Matters, Insolvency Law, Real Estate, Consumer, White Collared Criminal Cases and Corporate Litigation. Amit regularly advises Multi National Companies, MSMEs, Nationalized Banks, Senior Executives and individuals. He is empalled as Legal Advisor with leading Corporates and Banks.
He can be reached at firstname.lastname@example.org
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