[Naman Katyal is a II year B.A., LL.B. (Hons) student at Gujarat National Law University]
The conundrum regarding the competence of an operational creditor not incorporated under the laws of India to file a plea for initiation of Corporate Insolvency Resolution Process (‘CIRP’) under section 9 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) has come to the fore again with the decision of the National Company Law Tribunal’s Mumbai Bench (‘NCLT’) in Forever Glory Trading Limited v. Global Powersource (India) Limited (3 July 2020).
While dismissing the corporate debtor’s submission that a foreign entity i.e., a foreign-based creditor company, was inherently incompetent to file a petition for initiating CIRP under section 9 of the IBC, the NCLT held that a foreign entity is within its rights to initiate CIRP against a corporate debtor incorporated under the laws of India given sections 3(23)(g) and 3(25) of the IBC.
Factual Matrix
Forever Glory Trading Ltd., the operational creditor, a company incorporated under the laws of Anguilla entered into an agreement with Global Powersource (India) Ltd., the corporate debtor, a company incorporated under the laws of India in September 2015 whereby it was agreed that the operational creditor would supply batteries to the corporate debtor. A separate agreement pertaining to warranty claims was subsequently entered into in October 2015, according to the terms of which warranty claims were to be raised every month by the corporate debtor in the form of a debit note.
Complications related to payment arose due to the corporate debtor’s consistent defaults in making payments, and consequently, in June 2017, a payment agreement was signed between the parties, which required the corporate debtor to clear all outstanding dues by September 2017. Another payment agreement was entered into by the parties on account of the corporate debtor’s failure to honor the earlier payment agreement. However, even the new payment agreement suffered a similar fate.
Finally, in 2018, the operational creditor moved a petition for the initiation of CIRP against the corporate debtor under section 9 of the IBC before the NCLT.
NCLT’S Decision
At the outset, the NCLT affirmed that two separate contracts were entered into by the parties (the first pertaining to the sale and purchase of batteries and the second pertaining to the payment of warranty claims by the petitioner company) and thus the claim of violation of the warranty agreement by the operational creditor could not be raised in a pre-existing dispute which is instituted on a different ground.
This finding was a direct result of the corporate debtor’s allegation that the operational creditor discontinued acknowledging the warranty claims and failed to issue credit notes against the same since March 2017. According to the corporate debtor, this constituted a dispute with respect to a breach of warranty claims by the operational creditor.
Besides, the Bench also referred to section 12(3) of the Sales of Goods Act, 1930 (“SOGA”) (the judgment incorrectly mentions the section as section 13(3)) to arrive at this conclusion. Section 12(3) of SOGA defines the term warranty to be a stipulation collateral to the main contract, the breach of which does not give a right to repudiate the primary contract.
Thereafter, the NCLT established admission of liability on the part of the corporate debtor by underlining the existence of the two payment agreements, e-mails in which the corporate debtor admitted its liability and the conduct of the corporate debtor making part payment.
On the question of the operational creditor’s incompetence to file a petition for initiation of CIRP under section 9 of the IBC by virtue of it being a foreign entity, the Bench held that such a contention is untenable in law. The Bench relied on sections 3(23)(g) and 3(25) of the IBC to reach its decision. Section 3(23)(g) of the IBC states that the definition of the word “person” for the purpose of the Code includes “any other entity established under a statute, and includes a person resident outside India.” Further, section 3(25) of the IBC defines a “person resident outside India” as a “person other than a person resident in India.”
A Comment on the Decision
In deciding that a foreign entity is competent to initiate CIRP proceedings under section 9 of the IBC, the NCLT has, rightly so, taken a creditor-friendly approach and followed Supreme Court’s lead in Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd., wherein the Supreme Court held that a foreign creditor could not be barred from the purview of the IBC by virtue of its innate inability to abide by procedural requirements in the Code. This decision also follows the rationale laid out inStanbic Bank Ghana Ltd. v. Rajkumar Impex (P) Ltd. by the NCLT’s Chennai Bench in which a foreign bank was allowed to initiate CIRP against a company registered under the Companies Act, 2013.
On a separate note, one would notice that while both the aforementioned decisions are delivered in favor of the creditors after meticulously analyzing the issues at hand in light of relevant precedents and provisions, the decision of the NCLT Mumbai Bench in Forever Glory Trading Limited seems to lack perspicuity, in the sense that the Bench fails to satisfactorily justify its finding on whether foreign entities are competent to initiate CIRP under section 9 of the IBC.
This is evidently visible in the Bench’s perusal of this issue in paragraph number 22 of the judgment, which states:
“The objection that the Petitioner is a foreign entity and cannot file the present petition is not tenable in view of Sec 3(23(g) and 25) of I & B code, wherein, the definition of person includes person resident outside India.”
As can be seen, the Bench supports its finding on the issue with a two-line statement, relying on two of the most fundamental provisions of the Code and without proceeding towards addressing the issue on substantial legal grounds. If only sections 3(23)(g) and 3(25) of IBC would have been enough to establish the competence of foreign creditors to initiate CIRP, then, probably, there would have been no need for the Supreme Court to intervene and clarify the legal position.
Although the decisions of the Supreme Court and the Chennai Bench of the NCLT have dealt with this issue formerly, the instant judgement does not refer to them. Further, the NCLT Mumbai bench did not provide an original analysis of the viewpoint it took. The pronouncement of a reasoned decision has become an indispensable component of the principles of natural justice.[i] Section 424 of the Companies Act mandates the NCLT to conduct its proceedings in adherence to the principles of natural justice. Therefore, any deviation from such an integral aspect of the principles of natural justice tends to hinder academic discussion and certainly, a potential challenge.
Notwithstanding the limited deficiencies in the judgement, the embracement of such a stand that promotes the non-discriminatory nature of the Code is a welcome step. Providing a level playing field for all creditors regardless of their foreign-origin will assist India in climbing up the ease of doing business rankings which are based on the assessment of ten criteria, one of which is “resolving insolvency.” It must also be noted that improving ease of doing business ranking is a stated objective of the IBC as specified in the statement of objects and reasons of the Code.
After providing relief to foreign-based creditors from procedural hindrances in the IBC, the logical next step must involve improving the cross-border insolvency regime in India. India is yet to adopt the UNCITRAL Model Law on Cross Border Insolvency and sections 234 and 235 of the IBC which currently govern the cross-border insolvency matters in India are simply insufficient to deal with this aspect of insolvency laws. Any such move would go a long way in realizing the true intentions of the IBC.Naman Katyal
[i] MP Jain & S.N Jain, Principles of Administrative Law, (7th Edn. 2017, LexisNexis).
