All posts by Ridhima Chachra

Requirement of Bank Certificate for making application by Operational Creditor

Section 9(3)(c) of the Code requires the Operational Creditor to submit, if available, a copy of certificate from the financial institution maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor.

This requirement though important is not mandatory for triggering application by operational creditor.

The Supreme Court vide its order in the matter of Macquarie Bank Vs Shilpi Cable Technologies enabled foreign operational creditors to move an application under the Code as the foreign creditors may not be holding a bank account in the country. The term ‘confirming’ used in the statute makes it clear that the certificate from financial institution is an important piece of evidence but not mandatory and non-payment of unpaid operational debt may be established through other documents as well.

Hence, IBC has widened its scope for recovery by not limiting operational creditors to residents of India and those happening to bank with financial institution mention in section 3(14) of the Code, rather enabling foreign residents as well to take recourse under the Code even in the absence of certificate from the financial institution.The requirement of Bank Certificate under this section is only directive rather than compulsory in relation to an operational debt.

Can Joint/ Collective application be made by Operational Creditors for CIRP?

In Uttam Galwa Steel Limited v DF Deutsche Forfait Ag. Limited., two operational creditors (DF Deutsche Forfait AG and Misr Bank Europe Gmbh) filed a joint application against the Corporate Debtor for initiation of CIRP.

The NCLT Bench held that Section 8 and Section 9 of Insolvency and Bankruptcy Code, 2016, state that notice to the corporate debtor against the default has to be served individually by an operational creditor. The presence of the word “an” in section 8 makes it clear that individual operational creditor has to send notice individually. Also, Section 9 makes it clear that if the operational creditor does not receive any reply or proof of existence of any dispute from the corporate debtor, he individually can file for initiation of corporate insolvency resolution process.

Our view is that it is not practical for two or more operational creditors to file for a joint application. Such joint application under Section 9 is not maintainable.

In Ishwar Kandelwal v. Amrapali Infrastucture Private Limited(C.P. no (I.B.)21/PB/2017, Order dated 22/03/2017), the applicant claimed debts from 11 different Companies under the same group as mentioned in the petition, however the application was made against just one Company. The application was dismissed by the Bench as the amount of debt claimed by the applicant should correspond to the debt owed by the Corporate Debtor named in the application and not otherwise. The fact that debt is owed by Companies belonging to the same group doesn’t justify the application made against just one of the Companies.

(However, as per Section 7 of the IBC Code, the financial creditors may either himself or jointly with other financial creditors make an application before the Adjudicating authority for initiation of CIRP. But in the case of the Operational Creditor due to the process of issue of demand notice u/s 8 and other above mentioned reasons joint application can’t be filed by the operational creditors.)

Withdrawal of IBC Petition by Operational Creditors

An Operational Creditor can make application before NCLT for initiation of corporate insolvency resolution process (CIRP) against defaulting Corporate Debtor.
You can read more about this in our blog IBC – A TOOL FOR RECOVERY BY OPERATIONAL CREDITORS

The Operational Creditor and Corporate Debtor may agree on a settlement prior to admittance of petition for CIRP and NCLT Benches have allowed matters to be withdrawn. Even in instances of undisputed and admitted liability and the matter, after being heard is listed for pronouncement, the NCLT Benches have supported and have allowed Corporate Debtor to settle if the corporate debtor shows intent to do so.

Post admittance of petition by the Adjudicating Authority (jurisdictional NCLT) and upon commencement of CIRP, the withdrawal can still be done but to be done in the following manner:

Withdrawal of application admitted under Section 9 of the IBC, 2016

To facilitate the withdrawal of application made under Section 9 (by operational creditor), a new Section 12A was inserted in IBC. The Board vide its notification dated 3rd July, 2018, enabled the applicants to withdraw their application under Section 12A read with Regulation 30A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 in cases where the applicant and the corporate debtor have entered into terms of settlement after admission of the matter before the Adjudicating Authority but before issue of expression of interest under Regulation 36A.

How to make an application for withdrawal?

The Applicant may make an application for withdrawal of petition under Form FA of the Schedule to the IRP/RP accompanied by a bank guarantee towards estimated cost incurred till the date of application. It must be ensured that application for withdrawal of petition is made before the issue for expression of interest under Regulation 36A.

The committee of creditors (COC) shall consider the application made within seven days of its constitution or seven days of receipt of the application, whichever is later. Where the application is approved by the committee with ninety percent voting share, the resolution professional shall submit the application to the Adjudicating Authority (NCLT) on behalf of the applicant, within three days of such approval. The Adjudicating Authority may, by order, approve the application submitted.

Recently, the NCLAT has adjudicated upon the new Section 12A in the matter of Vijender Kumar Singla v. Oriental Bank of Commerce & Anr (Company Appeal (AT) (Insolvency) No. 143 of 2018), wherein, the withdrawal of application was allowed after the acceptance of the application filed by the financial creditor as the settlement was agreed between the corporate debtor and the financial creditor and withdrawal of such application was approved by 100% of the voting shares of the CoC fulfilling the mandatory requirement mentioned under Section 12A of IBC.

What if there are no Committee of Creditors?

In the matter of HGS India Ltd vs. Geo Api Solutions Pvt. Ltd. petition was admitted at NCLT, Mumbai wherein application under Section 9 of the Code was filed by HGS India Ltd. (Operational Creditor) against Geo Api Solutions Pvt Ltd. (Corporate Debtor). During the period of corporate insolvency resolution process (CIRP), no claims were received from the any creditors till the last date of submission of claims. Hence, the Committee of Creditors could not be formed. Meanwhile, during that period, the Operational Creditor arrived at a settlement with the Corporate Debtor. Since no COC was formed, the requirement for 90% approval could not be fulfilled. The Bench held that the petition for insolvency can be disposed off as settled, when no Committee of Creditors could get formed and the Corporate Debtor is willing to settle with the Operational Creditor.

Our view:

The insertion of Section 12A is a welcome move on the part of the Government. Now, the Government has settled the position regarding the withdrawal of an application post its acceptance by the NCLT. However, the threshold of 90% (Ninety Percent) of voting share of CoC as mandatorily required for withdrawal of an application post its acceptance seems to be a stringent condition, which is not easy to be complied with since each lender may have its own view with respect to revival or restructuring of the corporate debtor. However, though stringent, the newly inserted section has opened a window for termination of CIRP proceedings upon settlement. IBC is thus a very good tool for maximization of recoveries for all stakeholders including financial and operational creditors.

Format-

Form FA- Application for withdrawal of CIRP

Submission of claims by the Operational Creditors during Liquidation

In case no resolution plan comes during CIRP or the resolution plan, if submitted, is not approved, the Corporate Debtor will go under Liquidation. The Liquidator on appointment will invite claims through Public Announcement. The Operational Creditors will then need to file fresh claim before Liquidator complete in all respects as otherwise the same can be rejected by the Liquidator and in such case the Operational Creditors would fail to get any amount from Liquidation proceeds realized out of liquidation of the Corporate Debtor.

If the Company moves into liquidation vide order of the Adjudicating Authority, the operational creditor shall submit his proof of claim in person, by post or by electronic means in Form C of Schedule II under Regulation 17 of the IBBI (Liquidation Process) Regulations, 2016

For individual Workman or Employee – the claim needs to be submitted under Form E of Schedule II of IBBI (Liquidation Process) Regulations, 2016 and for a Group of Workmen or Employees through an authorized representative under Form F of Schedule II of IBBI (Liquidation Process) Regulations, 2016

However, it is recommended that hard copy of notarised affidavit document also (if submitted by electronic means) be submitted to the Liquidator at his address mentioned in Public Announcement made by him along with supporting documents.

It is advised that the claim should be filed complete in all respects and within the timelines as per Public Announcement of the Liquidator so that whenever proceeds are to be distributed by Liquidator in accordance with Section 53 of the Code, the claim of the Operational Creditor is paid accordingly.

Which date to be considered to calculate the claim amount?

The claim submitted by the Operational Creditor shall be as on the liquidation commencement date.

What if the debt claimed is in foreign currency?

The claims of creditors which are denomination in foreign currency shall be valued in Indian currency at the official exchange rate which is the reference rate published by the Reserve Bank of India or derived from such reference rate, as on the date of the commencement of liquidation.

What documents to enclose as proof of operational debt

• Authorised contract/purchase order for supply of goods and/or services
• Proof of delivery/work completion certificate
• Invoices
• Ledger statement of Corporate Debtor in the books of the Operational creditor indicating outstanding receivables.
• Any other document as may be required

The Liquidator may call for such evidence or clarifications from the creditors as he deems fit in order to verify the claim amount.

Formats

The formats of respective forms to be submitted by the Operational Creditors are provided in the following links:

Form C-Submission of Claims by Operational Creditor

Form E- Submission of claims by Workmen or Employee

Form F-Submission of claim submitted by authorised representative of Workmen & Employees

Submission of claims by the Operational Creditors under CIRP

It is very important that the claim submitted by Operational Creditor before Interim Resolution Professional (IRP) under CIRP is complete in all respects otherwise the same can be rejected by the IRP and in such case the Resolution Plan may fail to cover the amounts due to such Operational Creditors

Who can submit?

Any person claiming to be an operational creditor shall submit his claim along with proof.

To be submitted to whom?

The Operational Creditor shall submit his claim along with proof to the IRP

How to submit Claim in Case of CIRP

The operational Creditor shall submit his proof of claim  in person, by post or by electronic means in Form B of the Schedule under Regulation 7 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 wherein he submit all the details regarding the unpaid operational debt along with proof of non-payment of such debts.

For individual Workman or Employee – the claim needs to be submitted under Form D of the Schedule under Regulation 7 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 and for a Group of Workmen or Employees through an authorized representative under Form E of the Schedule under Regulation 7 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

However, it is recommended that hard copy of notarised affidavit document also (if submitted by electronic means) be submitted to the IRP at his address mentioned in Public Announcement made by him along with supporting documents.

Which date to be considered to calculate the claim amount?

The claim submitted by the Operational Creditor shall be as on the insolvency commencement date.

What if the debt claimed is in foreign currency?

The claims of creditors which are denomination in foreign currency shall be valued in Indian currency at the official exchange rate which is the reference rate published by the Reserve Bank of India or derived from such reference rate, as on the date of the commencement of the CIRP.

What documents to enclose as proof of operational debt

  • Authorised contract/purchase order for supply of goods and/or services
  • Proof of delivery/work completion certificate
  • Invoices
  • Ledger statement of Corporate Debtor in the books of the Operational creditor indicating outstanding receivables.
  • Any other document as may be required

The IRP may call for such evidence or clarifications from the creditors as he deems fit in order to verify the claim amount.

Formats

The formats of respective forms to be submitted by the Operational Creditors are provided in the following links:

Form B-Submission of Claims by Operational Creditor

Form D- Submission of Claims by a Workmen or an Employee

Form E- Submission of claim submitted by authorised representative of Workmen & Employees

IBC – A TOOL FOR RECOVERY BY OPERATIONAL CREDITORS

It is well established fact that civil recovery matters take long time to decide. Because of low recoverability, there is a low credit discipline in trade. This has affected businesses as it often leads to large working capital requirement and thus more stress on margins.

There was an option to initiate winding up petitions before High Courts under earlier Companies Act, 1956.The prohibitive cost of litigation often acted as dampener for actions by Creditors. The fact that the petition if admitted would lead to liquidation through the office of Official Liquidator and depending upon the Company, the matter used to stretch for two to three years during which the corporate debtor (company) would remain in control of the same management.

There has been a major shift with Insolvency & Bankruptcy Code (IBC), and now an operational creditor can initiate action under IBC for recovery of its dues under very cost effective manner.

Who is an Operational Creditor?

Section 5(20) of the Insolvency and Bankruptcy Code, 2016, defines “Operational Creditor” as a person to whom operational debt[1] is owed and includes such person to whom such debt has been legally assigned or transferred.

It is pertinent to note that, a creditor would fall into the category of operational creditor only if an operational debt is owed to him. What exactly will fall under operational debt becomes clear from the case of Vinod Awasthy v A.M.R Infrastructures Limited. In this case, the NCLT has laid down that ‘operational debt’ under the code only covers four categories viz. goods, services, employment and government dues. If the debt owed to the operational creditor does not fall in any of these four categories, the creditor cannot be called ‘operational creditor’ and hence he cannot initiate corporate insolvency resolution process against the corporate debtor.

How to make an application for initiation of corporate insolvency resolution process (CIRP) against defaulting Corporate Debtor for a debt of more than Rs.100,000/- (Rupees one lakh)

An operational creditor may make an application to the Adjudicating Authority for initiation of CIRP in accordance to Section 9 of the Insolvency and Bankruptcy Code, 2016 and Regulation 7 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

Steps to be followed by the Operational Creditor have been enumerated below:

Step 1: An operational creditor may deliver a demand notice upon the corporate debtor demanding payment in respect of the operational debt in respect of which the default has occurred. The demand notice shall bein prescribed Form 3 or a copy of an invoice with a notice in Form 4(under Rule 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016)

Step 2: The Corporate Debtor shall within 10 days of receipt of the demand notice, communicate to the operational creditor the existence of any dispute or payment of the unpaid operational debt. It is important to note that the dispute raised by corporate debtor has to be pre-existing to the demand notice issuance date.

Step 3: At the expiry of 10 days of delivering the demand notice to the corporate debtor, if the operational creditor does not receive any payment or notice of dispute, the operational creditor may make an application to the Adjudicating authority for initiation of CIRP under Section 9 of the code in Form 5 along with the documents evidencing the amount of debt claimed along with a copy of certificate from the financial institution maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor.

The operational creditor may propose the name of a resolution professional to act as an Interim Resolution Professional.

Step 4: The applicant (operational creditor) shall then serve to the corporate debtor at his   registered office by speed post or registered post, a copy of the application made to the adjudicating authority (NCLT)

There is only a nominal filing fee of Rs. 2000/- for filing petition in NCLT. CIRP thus gets initiated against a corporate debtor by an operational creditor.

Admission of matter by Adjudicating Authority (NCLT)

The Adjudicating Authority shall within fourteen days of receipt of application admit and communicate such decision to the operational creditor, if all the documents submitted along with the application are found in order and are complete in all respects.

Conclusion

The CIRP shall commence from the date of admission of application by the Adjudicating Authority. On admittance, the control of the Corporate Debtor shall shift from Debtor’s control to IRP’s control, which is not a very comfortable position for promoters/ directors of the company. Therefore, urgency is often shown in most of the cases by the corporate debtor/ promoters to settle with such operational creditor who has initiated Section 9 petition under IBC.As per recent trends, NCLTs have facilitated such settlements effectively meaning that IBC will go a long way in bringing credit discipline in trades in India. Thus, IBC has significantly brought down effective litigation cost for recoveries by Trade/ Operational Creditors.

Formats

The formats of respective forms to be submitted by the Operational Creditors are provided in the following links:

Form3-DemandNotice

Form 5- Application to Adjudicating Authority to initiate CIRP  

[1] ‘Operational debt’ refers to claim in respect of provision of goods and services including employment or debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.