[Aayush Mitruka is a lawyer based in Delhi]
The working of the Insolvency and Bankruptcy Code, 2016 (Code) has given rise to several challenges which need to be adequately addressed. The Code enables an operational creditor to initiate a corporate insolvency resolution process (CIRP) under section 9 provided it has complied with the requirement of sending a demand notice to the corporate debtor as prescribed under section 8. Notably in this regard, the Code does not envisage a distinction between a foreign and a domestic creditor and they can both likewise initiate and participate in a resolution process. It is worthwhile to bear in mind that the erstwhile winding up regime under the Companies Act also did not contemplate any such distinction.
An application to trigger a CIRP filed under section 9 must be accompanied by some documentation which inter alia includes “a copy of the certificate from the financial institutions maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor.”
Further the term financial institution has been defined to mean:
3. Definition: In this Code, unless the context otherwise requires,— ….
(14) “financial institution” means—
(a) a scheduled bank;
(b) financial institution as defined in section 45-I of the Reserve Bank of India Act,1934;
(c) public financial institution as defined in clause (72) of section 2 of the Companies Act, 2013; and
(d) such other institution as the Central Government may by notification specify as a financial institution;”
The requirement of obtaining a certificate from Indian banks is causing great hardship to creditors with overseas bank accounts. The National Company Law Appellate Tribunal (NCLAT) has consistently found that such a certificate is indispensable for admitting an application under section 9, and that a failure to furnish the document will lead to rejection of the application. The emphasis on specific requirement of “a certificate from a financial institution” leads to an anomaly when it comes to creditors who have an account maintained with a bank outside India. Note that these creditors well could be Indians with overseas operations and holding a foreign bank account.
Unfortunately, the NCLAT embraced a very narrow view, which has caused considerable apprehensions amongst various stakeholders. The present post is aimed at analyzing whether such a reading of law is correct and desirable. Before embarking upon a close scrutiny of the aforementioned question and offering my comments, it may be proper to examine the legislative intent behind such a provision. The notes on clauses suggest that the present requirement was inserted to necessitate a proof of non-payment of debt. It was thought necessary so that frivolous applications can be done away with.
Whilst the NCLAT has held the requirement laid down in section 9(3) of the Code to be mandatory in nature, it appears that the NCLAT did not take into consideration the practical aspects, and adopted an extremely technical approach. It failed to take note that the instructions related to filing of an application under Rule 6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules 2016 provides that, along with Form 5, the operational creditor shall annex a copy of the relevant accounts from the banks / financial institutions maintaining accounts of the operational creditor confirming that there is no payment of the relevant unpaid operational debt by the debtor, if available. The words “if available” in the instructions to rules assumes great significance as the operational creditor is required to comply with the conditions only if copy of the relevant accounts from bank / financial institutions are available to the operational creditor. Naturally, in cases where the creditor does not have an account in India, there is no question of furnishing a certificate.
Secondly, the reading adopted by the NCLAT would result in defeating the objective of the Code and rendering the provision otiose. The debtor may escape the clutches of insolvency by merely setting up a defense of lack of a certificate. Indeed, such a plea will succeed even though the debtor has defaulted in payment and has in fact not even claimed any repayment. Further, this will result in compelling foreign entities to open a bank account in India which could be quite cumbersome given that they have to comply with relevant foreign exchange laws. Surely, the legislature never intended this.
Thirdly, one cannot conceive of a cogent reason as to why the legislature would intend to bar creditors with overseas bank account from invoking the Code. Effectively, the NCLAT creates an embargo on the rights of the creditors (based in India and otherwise) with foreign bank accounts with respect to triggering CIRP, though they are free to file their claims before the Insolvency Resolution Professional. It may be fair to argue that since all banks in India are controlled by the Reserve Bank of India, there is some sanctity attached to the certificates issued by the Indian banks unlike the certificates issued by banks established elsewhere. However this argument does not go very far because of two reasons. Firstly, the fate of an application is not solely dependent on this certificate and, secondly, in any case, the debtor is provided with an opportunity of being heard.
Finally, one may also very well contend that the use of the phrase “unless the context requires otherwise” in section 3 is not without a purpose. In light of such a qualification, a word or a phrase may have a different meaning, if the context so requires, than the meaning attached to it in the definition clause. It gives the courts enough scope to bring home an interpretation which will further the legislative intent and not curtail it. It will not be entirely without merit to argue that when it comes to a foreign creditor, a certificate by an overseas bank ought to be accepted.
The view taken by the NCLAT is wholly unwarranted and proceeds on a misconception of the scheme of the Code. This issue is currently pending before the Supreme Court and it can only be hoped that the Court will mitigate the hardship of the creditors by ruling in their favour. This is but one example of issues that need to be addressed in the implementation of the existing corporate insolvency regime.
– Aayush Mitruka