Public Depositors as Creditors under the Bankruptcy Code: A Matter Left Unsettled

[Shashank Chaddha and Deeksha Malik are fourth and fifth year students, respectively, at National Law Institute University, Bhopal. They can be reached at [email protected] or at [email protected].]

Over the past few months, the orders of the adjudicating authorities under the Insolvency and Bankruptcy Code, 2016 (“Code”) have provided much needed jurisprudence on the new insolvency regime. There have, however, been a few situations where the said authorities have refrained from delving into pertinent questions of law, thereby creating an environment of uncertainty. Of particular relevance is the order of the National Company Law Appellate Tribunal (“NCLAT”) in the case of Hind Motors v. Adjudicating Authority,[1] wherein it deliberately left open the issue whether public depositors are financial creditors within the purview of the Code. A similar approach was adopted by the National Company Law Tribunal (“NCLT”) in Prabodh Kumar Gupta & Ors. v. Jaypee Infratech Ltd.,[2] wherein the adjudicating authority termed the public depositors as “other stakeholders”, giving the decision-making power to the resolution professional to take appropriate action towards the depositors “as the IRP/RP may deem fit.” Since the Code essentially entitles only two types of creditors, viz. financial creditors and operational creditors, to initiate corporate insolvency resolution process,[3] it becomes imperative to determine whether public depositors are financial creditors. It must be noted here that, by virtue of an amendment introduced in the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, the depositors may submit their claims to the interim resolution professional or the resolution professional, as the case may be, as “other creditors”. However, it is the submission of the authors that such depositors should be recognized as financial creditors. Such recognition will have two direct implications – firstly, the public depositors will be able to initiate corporate insolvency resolution process under section 6 of the Code; secondly, they will be entitled to be part of the committee of creditors as provided under section 21(2) of the Code. These entitlements are not available to “other creditors”.

Financial creditors, defined in section 5(7) of the Code, refer to persons to whom a financial debt is owed. The term “financial debt” is widely defined in section 5(8) to mean a debt, including interest, which is disbursed against consideration for the time value of money. In this regard, the following observation of the NCLT in the case of Nikhil Mehta & Ors. v. AMR Infrastructure Ltd.,[4] approved by NCLAT in the appeal preferred against the order, holds significance:

In other words, the legislature has included such financial transactions in the definition of ‘financial debt’ which are usually for a sum of money received today to be paid for over a period of time in a single or series of payments in future. It may also be a sum of money invested today to be repaid over a period of time in a single or series of installments to be paid in future…In both the cases, the inflows and outflows are distanced by time and there is a compensation for time value of money.

Having thus examined the scope of financial debt under the Code, reference must be made to the provisions of the Companies Act, 2013 (“Act”). The term “deposits” is defined under section 2(31) of the Act to include any receipt of money by a company, whether by way of loan or otherwise, except for certain receipts exempted in consultation with the Reserve Bank of India. Further, the Act requires the company accepting deposits to repay the same along with interest in accordance with the terms and conditions of the agreement entered into in this behalf.[5] Such company is mandated to deposit a sum of at least 15% of the amount of the deposits maturing in a financial year and the following year in a separate bank account to be termed as deposit repayment reserve account.[6] The Companies (Acceptance of Deposits) Rules, 2014 imposes certain other obligations such as creation of security,[7] appointment of trustees,[8] and maintenance of liquid assets.[9] On a bare reading of these provisions, one may infer that public deposits necessarily involve disbursement of debt, wherein the time value of money is adequately compensated by repayment of the principal amount with interest. The proposition of the authors is further substantiated by the observation of NCLT in the case of DF Deutsche Forfait AG v. Uttam Galva Steel Ltd.[10] that:

the premise for the 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.

Reference must also be made to the order of the NCLT in Hind Motors Ltd.,[11] where the claims of the public depositors were ordered to be taken into account under the category of financial creditors to further the purpose of the Code, which is to balance the interest of all stakeholders, and to safeguard the assets of the corporate debtor which may otherwise be affected where an independent legal recourse is taken by public depositors in respect of their claims.

Therefore, while it is true that public depositors cannot be regarded as operational creditors, for such creditors have claims in relation to provision of goods and services,[12] their claims must be taken into account on the ground of their fulfilling the requirements of a “financial creditor”.

In light of the above, it is submitted that the NCLAT in Hind Motors should not have left the issue of nature of public deposits unsettled. It goes without saying that the order has resulted in unpredictability, leaving depositors apprehensive as regards their position in the insolvency resolution process. Moneys due to public depositors are to be repaid not only as a matter of contractual obligation, but also as a mandate of the law laid down under the Act. The Code should be interpreted in such manner as to provide suitable redress to the general public advancing money to companies in the form of public deposits.

– Shashank Chaddha and Deeksha Malik

[1] CA (AT) (Insolvency) No. 11/2017 (10 April 2017).

[2] CP No. (IB) 68/Ald/2017 (28.08.2017, NCLT- Allahabad).

[3] The Code, section 6.

[4] [2017] 137 CLA 163.

[5] The Act, section 73(3).

[6] Ibid, section 73(2)(c).

[7] The Companies (Acceptance of Deposits) Rules, 2014, rule 6.

[8] Ibid, rule 7.

[9] Ibid, rule 13.

[10] [2017] 141 SCL 392 (10 April 2017, NCLT – Mumbai).

[11] [2017] 138 CLA 249 (14 February 2017, NCLT – Chandigarh).

[12] See the Code, sections 5(20) and 5(21).

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