June 20, 2017

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Interpretational issues in IBC

Pooja Mahajan

T he Insolvency and Bankruptcy Code, 2016 (“IBC”) brings a tectonic shift in jurisprudence relating to corporate insolvency. Given this sudden shift, both lenders and debtors are struggling to understand the implication of IBC for them. Unlike the erstwhile law, IBC provides for a two-stage process to deal with corporate insolvency. In stage I, the corporate undergoes a corporate insolvency resolution process (“CIRP”) during which, the committee of the corporate’s financial creditors (“CoC”) attempts to resolve insolvency of the corporate. If the CIRP fails, the corporate enters stage II for its mandatory liquidation. Stage I must precede stage II.

Stage I can be initiated by a financial creditor, an operational creditor, or the corporate itself, on occurrence of a ‘payment default’ by the corporate, by filing an application before the relevant National Company Law Tribunal (“NCLT”). Since December 2016 (when the IBC provisions relating to corporate insolvency were notified), multiple applications have been filed under the IBC for initiation of CIRP and many interesting questions of interpretation have come up in these applications. This article discusses some such key interpretational issues.

Definition of financial creditor and operational creditor

To trigger CIRP, a creditor must either be an operational or financial creditor of the corporate. Terms ‘financial creditor’ and ‘operational creditor’ have been defined in the IBC and are being currently debated before the National Company Law Appellate Tribunal (“NCLAT”) in several appeal cases.

In one appeal case, the issue is whether the applicants, who had booked flats with AMR Infrastructures Ltd. (“AMR”), and who were promised monthly ‘assured returns’ by AMR (until possession) are financial creditors of AMR. ‘Financial creditor’ is a person to whom a financial debt is owed and the term ‘financial debt’ has been defined in the IBC to mean “a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes...”. The NCLT, Delhi (where the CIRP application was filed) discussed the meaning of financial debt, especially the term ‘time value of money’ in detail and held that the amount paid by applicants was for purchase of property (and not as consideration for the time value of money) and therefore, ‘assured returns’ do not fall within the definition of financial debt1.

Interestingly, in other appeal cases (three of which are also against AMR), the issue was whether the applicants, who were claiming refund of advances given for booking units, on account of delay in giving possession are operational creditors of the real estate companies. In a series of cases2, NCLT, Delhi held that ‘operational debt’ (as defined in the IBC) does not include debt other than a financial debt and is confined to only four categories, viz. goods, services, employment and government dues. NCLT held that since the advances were sought to be recovered on account of delay in possession (and the debt did not arise on account of these four categories), the applicants are not operational creditors of the companies.

As per the aforesaid cases, claim for refund of advance/deposit and assured returns promised by the builder may not qualify either as a financial or an operational debt. It would be interesting to see if the NCLTs take the same interpretation where refunds are demanded for other kinds of advances or for security deposits (subject of course to refund conditions being met). Admittedly, in certain cases, claims for such refund will qualify as a debt. It is unlikely that the Legislature intentionally left out certain kinds of debts from the IBC. Therefore, these cases demonstrate the inherent limitation in the way financial and operational debt is defined in the IBC. While straightforward cases of financial debt (such as a loan) would pose no problem, the answer is not clear where complex financial instruments and transactions are involved, for example, debt instruments with equity linked returns. Similarly, if operational debt is limited to only four categories of claims, certain kinds of debts may not fall in any specific bucket. It may now be up to the judiciary to fill the lacunae in definitions of financial and operational debt and extend the same to all kinds of debt.

The disputed interpretation of dispute

While straightforward cases of Financial Debt (such as a loan) would pose no problem, the answer is not clear, where complex financial instruments and transactions are involved

While a financial creditor can trigger CIRP by filing a CIRP application on occurrence of a payment default, an operational creditor has to jump through more hoops to initiate CIRP. In case of payment default, an operational creditor must first send a demand notice to the corporate and if the corporate issues a ‘notice of dispute’, NCLT has to reject the operational creditor’s application. If neither a notice of dispute is issued nor is there any record of dispute with an information utility, then, subject to the application of the operational creditor being complete, the NCLT has to mandatorily admit the CIRP application of the financial creditor.

One of the most interesting issues that has come up before NCLTs is the meaning of ‘dispute’ in the notice of dispute. The reason – inelegant drafting of Section 8 (2) (dealing with issuance of notice of dispute) and the term ‘dispute’ – which seems to suggest that a dispute is valid only if a suit or an arbitration proceeding is pending before receipt of demand notice by the corporate. Now, the moot question is whether it is really the legislative intention that in the absence of such suit or arbitration proceedings, non-payment of operational debt is enough to start CIRP of a corporate, even if the debt is otherwise disputed?

Different NCLTs are taking different views, some holding that a dispute means a dispute pending in a suit or an arbitration before receipt of the demand notice and some other opining that a dispute means any dispute raised in a notice of dispute. Some of these cases went up in appeal to NCLAT and NCLAT came up with an order recently3, giving its view on the issue, and raising even more interpretational questions. While on the one hand, NCLAT held that the definition of ‘dispute’ is inclusive and the term ‘dispute’ cannot be limited to a pending suit or arbitration, on the other hand, NCLAT also held that the corporate debtor must have taken some action on the dispute under any Act or law before receipt of the demand notice. The NCLAT has thus shifted the onus on the corporate debtors to proactively take some action on the dispute before receipt of the demand notice under the Code (rather than the creditor taking an action for recovering its dues). There are unanswered questions – such as what happens if the corporate debtor had no occasion to dispute the demand prior to receipt of the demand notice? Or what if the corporate debtor did not take any action on the dispute since he wanted to preserve ongoing commercial relationship with his vendor?

Timelines under the IBC

The success of the IBC hinges on events taking place in a time-bound manner. Towards this, the IBC prescribes timelines for admission/rejection of CIRP applications (fourteen days), rectification of defects in CIRP application (seven days), and most importantly, for completion of CIRP (one hundred and eighty days, extendable to further ninety days in certain cases).

In a recent decision4, NCLAT opined on these timelines and held that the fourteen days’ time period given to it for admission/rejection of CIRP application is directory in nature. On the other hand, the seven days’ timeline given to the applicant for rectification of defects and the time period for completion of CIRP is mandatory. This means that if CIRP is not completed within the one hundred and eighty days’ period (if not extended) or two hundred and seventy days (if extended), the corporate must be liquidated.

We see some challenges in adherence to these timelines. Since the CIRP is driven by CoC (and overseen by an Insolvency Resolution Professional (‘IP”)), the timeline is completely dependent on how the CoC and IPs perform. The first challenge would be formation of CoC itself. Under the IBC, the interim IP is required to collate all creditor claims and form CoC. This is included within the one hundred and eighty days’ timeline and pre-supposes easy availability of complete and accurate data about the corporate from information utilities (i.e. firms registered under IBC which will stand ready to receive and deliver financial information about a corporate). However, registration and development of information utilities will take some time and till an information-rich environment is created, the formation of CoC itself would take time, especially where claims and positions of creditors are disputed or uncertain.

The second challenge would be inefficiencies that are inherent in the decision-making process involving large number of creditors, especially where public sector banks are involved. In the context of CDRs/JLFs, we have seen delays on account of lack of co-ordination among banks in taking decisions and approving restructuring plans. These issues are also going to arise during CIRP. And then the question is why should the corporate be mandatorily liquidated due to delays caused by the lenders themselves, in coming to a decision about a resolution plan.


While the IBC is indeed very ambitious and bold in its scope and intent, as more and more CIRP applications are filed, one can expect a torrent of new and interesting interpretational questions around the IBC, answers to which shall contribute to the jurisprudence relating to corporate insolvency in India.

1. Nikhil Mehta (HUF) & Ors. v. M/s AMR Infrastructures Ltd., C.P No. (ISB)-03(PB)/2017.
2. Col. Vinod Awasthy v. AMR Infrastructures Ltd., C.P. No. (IB)-10(PB)/2017, Mukesh Kumar & Anr. v. AMR Infrastructures Ltd, C.P No. (IB)-30(PB)/2017, SajiveKanwar v. AMR Infrastructure, C.P No. 06/2017, Pawan Dubey v. J.B.K. Developers Pvt. Ltd., C.P. No. (IB)-19(PB)/2017, Mr. Satish Mittal v. Ozone Builders & Developers Pvt. Ltd., C.P No. (IB)-66(PB)/2017.
3. Kirusa Software Private Limited v. Mobilox Innovations Private Limited, Company Appeal (AT) (Ins) No. 6 of 2017.
4. JK Jute Mills Company Ltd. v Surendra Trading Company, Company Appeals (AT) (Ins) No. 9 of 2017

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.

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