ease of recovery of debt from A Company against/ goods/services/ loan – Operational / Financial Creditors
ease of recovery
of debt from A Company against/ goods/services/ loan – Operational / Financial
Creditors
SHORT SUMMARY:
In this Flash editorial, the
author begins by referring the provisiosn of Insolvency & Bankruptcy Code,
2016. Further author will discuss how a natural person/ business man/ company
can apply for demand of due amount from the Creditors (Companies), what are the
terms and conditions for such demand, how much time it will take to recovery of
money etc.
The main thrust of the article, however, is upon the
“Ease of Recovery of Debt by Creditors (Individual /
Proprietor / Partnership Firm / LLP / Company etc.) from the companies to whom
Creditor has supplied goods, provide services and given loan etc.)” AND how
this code is beneficial to Common Peron, Small Businesses,
Real Estate Consumers, Supplier of Goods & Services, Banks, NBFC’, Society
etc.
This is article no. 229 of the series of editorials written by the
author on corporate laws {including Companies Act, 2013, SEBI, RBI Regulations,
IBC, LLP Act, 2008 etc.}
INTRODUCTION:
Recovery Proceeding can be start against Debtor/
Corporate Debtor in the event of default by the debtor. Debtor can be Company
Only.
Default means non-payment of debt when whole or any
part or installment of the amount of debt has become due and payable and is not
repaid by the debtor or the corporate debtor, as the case may be.
The following
persons could initiate the Recovery Process; on the admission of a default by
the Corporate Person:


“Operational Debt" means a claim in respect
of the provision of
§ Goods or
§ Services
§ employment or
§ a debt in respect of the
repayment 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;
Provisions under the
Code in relation to Recovery of Debt:
Focus of the Code:
This code use when an individual or organization is unable to meet its
outstanding financial / operational debt towards its lender as it becomes
due. The main focus of this legislation is at providing resurrection and
resolution in a time bound manner for maximization of value of debtor’s assets.
Initiation of Process in earlier law v/s IBC Code:
Unlike earlier law, where the primary onus to initiate a resolution
process lies with the debtor, and creditor may pursue separate actions for
recovery, security enforcement and debt restructuring, here the Code makes a
significant departure from the existing resolution regimen by shifting the
responsibility on the creditor to initiate the insolvency resolution process
against the corporate debtor.
Recovery Process:
If the default is above Rs.1
Lakh, the creditor (Supplier of Goods, Services, Lender of Loan,
Employee, Workmen etc.) may initiate insolvency resolution process. The Code
proposes two independent stages:
Insolvency
Resolution Process – during which financial creditors assess whether the
debtor’s business is viable to continue and the options for its rescue and
resurrection; and
Liquidation– if the
insolvency resolution process fails or financial creditors decide to wind down
and distribute the assets of the debtor.
Order of priority of payment of debts:
The code provides the priority list, on the basis of which proceeds can
be distributed following the liquidation of the company as below:
i.
Insolvency resolution cost and liquidation cost
|
ii.
workmen’s dues (for 24 months before commencement) and debts to secured
creditor (who have relinquished their security interest)
|
iii.
Wages and unpaid dues to employees (other than workmen) (for 12 months before
commencement)
|
iv.
Financial debts to unsecured creditors and workmen’s dues for earlier period
|
v.
Crown debts and debts to secured creditor following enforcement of security
interest
|
vi.
Remaining debts
|
vii.
Preference shareholders
|
viii. Equity
Shareholders or partners
|
Any surplus amount remaining after payment of debts shall be applied in
payment of interest, which is accrued since commencement date.
How this code is
helpful for Recovery of Debt by following Creditors:
I.
Supplier of Goods/ Services:
Under the Act, any person has supplied Goods or rendered services to
any Corporate Debtor; and such corporate debtor make default as non-payment of
debt or any part of debt, non-payment of installments due, then creditor can
initiate the action against the corporate debtor by filing of petition in NCLT.
Time Period of
Recovery:
Creditor will issue demand
notice to the debtor, if creditor doesn’t receive payment due within 10 days, then
it can file application in NCLT for initiating the recovery (Corporate
insolvency resolution) process. The NCLT within 14 days of application either
accept the application or reject the application.
Therefore, under this new code, within 24 days from the
date of issue of demand notice, petition filled by creditor either accept or
reject by NCLT. The unified regime envisages a structured and time-bound
process for insolvency.
Benefits:
Under this code there is no need to go to the high court for recovery of
the debt by the creditors, due to time bound provision. Or we can say that this is the fastest mode of
recovery of debt.
Example:
If Creditor A supply goods of Rs. 1 cr to the corporate debtor and
corporate debtor make the payment of Rs. 80 Lac and deny for payment of
remaining amount by any reasons then creditor can go to NCLT against such
debtor for recovery of 20 lac.
II.
Small Businesses:
As per the provisions mentioned above regarding supply of goods /
services, creditor have power to initiate process in NCLT for recovery of debt
with time bound manner and cost effective.
Earlier small business avoids initiating process against the corporate
debtor due to following reasons:
·
Earlier its took long time to admission the cases by the
adjudicating authorities due to lack of time bound guidelines.
·
Earlier, filling a matter courts which was costly affair.
·
Earlier the primary onus to initiate a resolution process
lies with the debtor
On to above mentioned grounds like Time; Cost etc., small business
owners avoid filing application in courts against the creditors to recover the
pending payments.
Under this code within 24 days of issue of demand notice creditor will
come to know that whether his petition admitted or not. It is less costly then
the application in the court as the fees for admission of application by the
operational creditor is Rs. 2,000/-.
As a result, one
can opine that this act bestow a great opportunity on the small business owners
to file applications for recovery of their debts.
III.
Employee and workmen dues:
Under the Code,
employees and workmen are also considered as part of operational creditor. If a
Company fails to make salaries payment of employees or workmen and the value of
payment is more than Rs. 1 lac then employees can file the application against
the Company with NCLT for initiation of process of Recovery.
Process, time,
cost of the application by the employees and workmen are same as filing of
application by creditor of supply of goods / services.
As a result, this
act gives a great opportunity to employees/ workmen of the Companies to file
applications for recovery of their dues.
IV.
Debtor of Loan:
Under the Code, if any person has rendered money (Loan) to any Corporate
Debtor; and such corporate debtor makes default as non-payment of debt,
interest or any part of debt, non-payment of installments due then lender can
initiate the action against the corporate debtor by filing of petition in NCLT.
Time Period of
Recovery:
Financial Creditor can file application in NCLT for initiating the
recovery (Corporate insolvency resolution) process. The NCLT, within 14 days of
application either accept the application or reject the application.
Therefore, under
this new code within 14 days from the date of filing of petition the NCLT either
accept or reject the application. However, this
code gives a chance to the financial creditor to recover his debt.
Conclusion:
Hence, considering the intention of the Law, one can opine that
Insolvency and Bankruptcy Code, 2016 is Game Changer for the corporate
debtors. Powers are vested with the creditors also along with corporate debtors
to initiate insolvency process against the corporate debtor. The Code promises
to bring about far-reaching reforms with a thrust on creditor driven insolvency
resolution. The aims of the code is early identification of financial
failure and maximizing the asset value of insolvent firms.
The unified regime envisages a structured and time-bound process for
insolvency resolution and liquidation, which should significantly improve debt
recovery rates and revitalize the ailing Indian corporate bond markets.
There is no doubt that once the Code is fully implemented, it is going
to be one of the best initiatives by the legislatures and a boon to the economy
in the broader sense.
(Author
– CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice
from Delhi and can be contacted at csdiveshgoyal@gmail.com)
Disclaimer:
The
entire contents of this document have been prepared on the basis of relevant
provisions and as per the information existing at the time of the preparation.
Although care has been taken to ensure the accuracy, completeness and
reliability of the information provided, I assume no responsibility therefore.
Users of this information are expected to refer to the relevant existing
provisions of applicable Laws. The user of the information agrees that the
information is not a professional advice and is subject to change without
notice. I assume no responsibility for the consequences of use of such
information. IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT,
SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION
WITH THE USE OF THE INFORMATION.
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