Amendment Creates a Third Class of Creditor Under the Insolvency and Bankruptcy Code, 2016

[Guest post by Aayush Mitruka, a lawyer based in Delhi]

The Insolvency and Bankruptcy Board of India (“IBBI”) on 16 August, 2017 amended the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, and the Insolvency and Bankruptcy Board of India (Fast Track Insolvency Resolution Process for Corporate Persons) Regulations, 2017 and introduced a form (Form F) for submission of claims by creditors other than financial and operational creditors to the interim resolution professional (“IRP”). The respective amendments are available here and here.

The newly inserted Regulation 9A under the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 carves out a detailed provision for filing and proving claims by other creditors. This amendment will significantly impact the interpretation of the Insolvency and Bankruptcy Code, 2016 (“The Code”) by courts and tribunals.

Notably, the Code entitles only two types of creditors, viz. operational and financial, besides the corporate debtor, to file for insolvency process against the corporate debtor. Until now, there has been some confusion as to whether, if at all, there could a class of creditors who are neither financial nor operational. The benches of the National Company Law Tribunal (“NCLT”) have taken divergent views on this fine question.

In the case of Mukesh Kumar v AMR Infrastructure,[1] where certain flat purchasers prayed for initiating insolvency resolution against the corporate debtor, the NCLT (Principal Bench), New Delhi refused to interfere citing that the applicants are neither operational creditors nor financial creditors and therefore they do not have locus standi. Accordingly the petition was dismissed since the petitioner was not owed any financial debt or operational debt. In other words the NCLT was of the view that there could be certain class of creditors who are neither financial nor operational, and consequently will not have the power to trigger the Code.

The NCLT, Mumbai Bench when faced with the similar question in the case of DF Deutshe Fortait AG and Anr. v. Uttam Galva Steel Ltd.[2] adopted a different view. While deciding the question of whether interest could also be claimed as a part of operational debt by the operational creditor, the NCLT remarked, which deserves to be mentioned in full below:

  1. If we go through the definition of “financial debt,” it means that a debt along with interest is disbursed against the consideration for the time value of money and with an inclusive list specifying as to what category of debts will become financial debt. When it comes to operational debt, it is a claim made against the goods supplied and services rendered. There are two types of debts; one operational debt another financial debt, there cannot be a debt other than these two types. If it is a debt against the company, it has to invariably fall either under financial debt or operational debt and it has to read as either financial debt or operational debt, it can’t be said that a debt against the company for a, b, c reasons can’t be either financial debt or operational debt. The bottom line in respect to obligation is, a man should repay the value, either in cash or kind, to what he has taken, for this; we have to apply law in such a way that the claimant is provided a remedy. The premise for claim is whether “A” has taken something from “B” with a promise to pay back the value or not, if it is prima facie evident that claim has to be paid, then to see what law is applicable to ensure that it is repaid, but not to dismiss the claim on the ground it is not in accordance with law. Legal proposition is to be searched and applied to promote the cause not to negate the cause. We need not say that procedural justice is always subservient to substantial justice.

(Emphasis supplied)

 Pertinently, an appeal was preferred before the National Company Law Appellate Tribunal (“Appellate Tribunal”) in the case of Nikhil Mehta & Sons (HUF) & Ors. v AMR Infrastructure[3] against the decision of NCLT wherein the Tribunal held that a flat purchaser with assured return agreement could not be termed as a financial creditor. The Appellate Tribunal set aside the decision of the NCLT and treated them as financial creditor and settled the question of whether a flat purchaser with assured return could be called as a financial creditor. The Appellate Tribunal accordingly remitted the case back to the Adjudicating Authority. Interestingly, the situation could be different in, perhaps more common, cases of flat purchasers without any agreement of assured return.

In another case titled Rubina Chaddha & Anr. v AMR Infrastructure[4] where this question cropped up before the Appellate Tribunal, the appellants argued that they ought to be considered as operational creditors. The Appellate Tribunal shied away from deciding this question:

“The appellants herein, whether they are ‘Financial Creditor’ or ‘Operational Creditor’ or ‘Secured Creditor’ or ‘Unsecured Creditor’, as claim to be creditors are now entitled to file their respective claims before the ‘Interim Resolution Profession as may be appointed and the advertisement as may be published in the newspaper calling of such application(s) with regard to resolution of ‘Corporate Debtor’ – AMR Infrastructure Ltd. In such case, their claim should be considered by the Interim Professional (IRP) and the Committee of Creditors, in accordance with the provisions of the ‘I&B Code.’”

This, therefore, leaves the larger question still unanswered.

There was lack of clarity on this aspect as the NCLT benches differed in their opinions. The larger question as to whether the legislature deliberately intended to exclude certain class of creditors who do not meet the strict requirement of being a financial or operational creditor from availing the remedy under the Code seems to now come to rest, for perhaps a short while. In other words it would not be necessary that all the creditors would have to fall in either the category of financial creditor or operational creditor. It seems that the Code envisages a class of creditors to whom neither a financial nor an operational debt is owed. With this amendment, it can be anticipated that the courts and tribunals would now easily exclude certain creditors, perhaps the flat purchasers and the likes, from invoking the Code and may not get into the exercise of expanding the definition of financial debt and operational debt in order to accommodate and provide remedy to all types of creditors. This will create a rather peculiar situation wherein certain creditors will have the only remedy of filing the claims before the Insolvency Resolution Professional under the Code. It remains to be seen as to how this will be used in practice.

– Aayush Mitruka

[1] C.P. NO. (IB)-30(PB)/2017. Also see; Sanjive Kanwar v AMR Infrastructure (C.P. No. 06/2017) and Col. Vinod Awasthy v. AMR Infrastructure (C.P. No.(IB)10(PB)/2017).

[2] C.P. NO. 45/I&BP/NCLT/MAH/2017

[3] Company Appeal (AT) (Insolvency) No. 07 of 2017

[4] Company Appeal (AT) (Insolvency) No.8, 12 and 50 of 2017

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