Can a Resolution Professional Initiate Insolvency Resolution on behalf of a Corporate Debtor?

[Ajay Sharma is a 4th Year B.A.LL.B (Hons.) student at the National University of Advanced Legal Studies, Kochi]

Introduction

The Insolvency and Bankruptcy Code, 2016 has been undergoing a crucial jurisprudential evolution. From the very inception of the Code, it is appreciable that the Government and the adjudicating authorities have been seeking to resolve all the issues through amendments or judgments. Last year an interesting issue arose before the National Company Law Tribunal, New Delhi Bench (NCLT) in Mandhana Industries Limited v. Instyle Exports Private Limited where the resolution professional of Mandhana Industries Ltd (a corporate debtor in an undergoing corporate insolvency resolution process (CIRP) under section 9 of the Code) filed an application with a prayer for initiation of CIRP against Instyle Exports Pvt. Ltd., the corporate debtor. In the order dated 30 August 2018, the NCLT held that the application filed by the resolution professional under section 9 was debarred by the application of section 11 of the Code.

That was not the first case where a resolution professional filed an application on behalf of a corporate debtor. A similar issue had arisen in of S.N. Plumbing Pvt. Ltd. v. IL&FS Engineering & Construction Co. Ltd in which the Hyderabad Bench of the NCLT on 24 April 2018 held that the application is not maintainable. The issue reached the National Company law Appellate Tribunal (NCLAT) in Mandhana Industries Ltd. v. Instyle Exports Pvt. Ltd, in which the resolution professionals of both the corporate debtors appealed against the NCLT, New Delhi bench order dated 30 August 2018 and the NCLT, Hyderabad bench order dated 24 April 2018. Unfortunately, the NCLAT did not take any decision and disposed the matter by citing different reasons. This post therefore contemplates the possibilities that may arise through different jurisprudential perspectives.

Issue                                                       

Whether the resolution professional can file an application under section 7 or section 9 of the Code on behalf of a corporate debtor for initiation of corporate insolvency resolution process against its own debtor for the loan or service provided by the former corporate debtor to the latter?

Analysis

According to the Code, if the corporate debtor commits a default the financial creditor, operational creditor or corporate debtor itself can initiate CIRP. However, in the abovementioned situation, the resolution professional had initiated the CIRP on behalf of the corporate debtor to recover the debt. Therefore, the sequence again depends on whether the corporate debtor undergoing CIRP can proceed against its own debtor and that too by the resolution professional of former corporate debtor.

The main argument was put forth by the NCLT benches at Hyderabad and New Delhi while rejecting the applications filled by the resolution professional on behalf of undergoing corporate debtor was that section 11(a) of the Code disqualifies the resolution professional from filing the application as the applicant on behalf of the corporate debtor. The resolution professional performs a very crucial role in the CIRP from the date of his appointment until the final decision over the resolution plan that he submits to the NCLT. According to section 25 of the Code, the resolution professional has duty to preserve and protect the assets of the corporate debtor and to keep the company as a going concern during the CIRP. For this purpose, the resolution professional shall undertake certain measures which are provided for by the Code. To represent and act on the behalf of the corporate debtor with third parties in the interest of corporate debtor is one of them.

In certain situations, the recovery of debt might be essential for the survival and revival of the company, since it is the last hope of keeping the company as a going concern. In such circumstances, the resolution professional undertakes all such acts to protect the interest of the corporate debtor. The filling of such application by the resolution professional as a last resort is supported by section 25(2)(b) of the Code. In Jai Ambe Enterprise v. S.N. Plumbing Private Limited, the Mumbai bench of the NCLT allowed the resolution professional to initiate the CIRP against the debtor of the corporate debtor by holding that it is one of the duties of the resolution professional to recover the outstanding debts of a corporate debtor against whom the CIRP is already in progress. The bench also held that the action of the resolution professional is a right course of action for managing the affairs of the financially stressed company.

Section 11(a) of the Code bars the corporate debtor from initiating the CIRP. The provision includes explanation which says that the ‘corporate debtor includes a corporate applicant in respect of such corporate debtor’. There have been many matters in which the NCLT had rejected the application based on the literal interpretation of the section 11 of the Code, which can be seen in Mandhana Industries Limited v. Instyle Exports Pvt. Ltd. and other cases.

The literal interpretation of section 11 has created confusion corporate debtors and resolution professionals. When the resolution professional files the application for initiating CIRP on behalf of the corporate debtor, the tribunal cannot consider him as a corporate applicant because resolution professional only performs his duty by filling such application as specified in the section 25 of the Code. From the plain reading of the provision, it can be implied that the intention behind restricting a corporate debtor in a normal scenario is that the corporate debtor does not initiate the CIRP against itself because it would affect the ongoing CIRP. However, when the resolution professional files the application on the behalf of the corporate debtor, the capacity of the corporate debtor changes from debtor to creditor. Hence, there is no question that the same leads to multifarious litigation and overburdening of the corporate debtor.

One of the main objects of the Code is maximization of value of assets of the corporate debtor. Section 18 does not include ‘debtor due money’ because the debtor has no ownership right over it. The object of the Code can only be achieved when resolution professional is permitted to initiate CIRP on the behalf of the debtor. Such an application would not only benefit the corporate debtor to recover its due, but it also benefits the corporate debtor’s creditors because, if the resolution professional successfully recovers the due amount before the completion  of the ongoing CIRP, then the recovered amount would be distributed among the creditors. Section 11 also bars the corporate debtor from initiating CIRP twelve months preceding the date of making of the application. Such limitation is only for the corporate debtor not against those who can initiate CIRP under section 6 of the Code.

The Code is not equipped with any special provision which gives powers to the resolution professional to initiate any CIRP, or to institute or defend any case on behalf of the corporate debtor, but Section 35(k) of the Code allows the liquidator to institute or defend any suit, prosecution or other legal proceedings, civil or criminal, on behalf of the corporate debtor. Even section 14 of the Code does not disqualify the corporate debtor or resolution professional from initiating the CIRP or filing any suit against the debtor of the corporate debtor. From the provisions and procedure enumerated under the Code, one can imply that the objective of the Code is to protect and preserve the assets of the corporate debtor for the benefit of creditors, but the current stance taken by the adjudicating authorities tend to ignore it. Due to such disability in the Code, many debtors of the undergoing corporate debtor may likely take undue advantage of the situation.

The Code neither contains any specific provision which prohibits the resolution professional from initiating the CIRP against the debtor of undergoing corporate debtor, nor does it bar the resolution professional from initiating the CIRP against the debtor on the behalf of the corporate debtor. This is a grey area that the judiciary and the legislature have to cater to because the corporate debtor should be allowed to recover a debt due from its debtor during the CIRP process.

Suggestion

Before initiating the CIRP on behalf of the corporate debtor, the duly appointed resolution professional must take the written consent of the committee of creditor (CoC), which shall be approved by the NCLT before which the CIRP is pending. If the NCLT approves the application, on the basis of the approval of CoC and the facts of the case, the resolution professional shall allow the initiation of CIRP on the behalf of corporate debtor against its own debtors.

Conclusion

In Mandhana Industries Ltd. v. Instyle Exports Pvt. Ltd (order dated 7 December 2018), the NCLAT has failed to decide on the above-mentioned issue. On a perusal of the arguments mentioned above, it can be said that there is a need for clarification as to whether the resolution professional can initiate CIRP on behalf of the corporate debtor against its own debtor. If the court or legislation allows such a petition, then it would set a precedent for the pending and future cases. In this issue, the court has to interpret the duty and power of the resolution professional in detail as there exists considerable ambiguity surrounding this issue. After examining the issue from this perspective, one may assert that there is no harm in allowing the resolution professional to initiate CIRP on the behalf of the corporate debtor against its own debtor because it not only helps the corporate debtor from saving its business or to emerge from the undergoing CIRP, but it also helps the creditors to recover their debt swiftly.

Ajay Sharma

About the author

1 comment

  • I understand that your concern here is legitimate and sound, and I agree that in accordance with the object and purpose of IBC, an RP should have the power to initiate CIRP against a subsequent debtor of the original corporate debtor, for maximizing the value of its asset.
    But wouldn’t the initiation of CIRP against a debtor of a corporate debtor obstruct the timeline of the original CIRP against the original corporate debtor on the first place? The subsequent initiation of a CIRP would again take 180 to 270 days, which would in essence disturb the entire timeline of events for the original CIRP

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