CAN A FOREIGN ENTITY FILE A PETITION FOR INITIATION OF THE CIRP BEFORE NCLT

Authored by Bhavpreet Singh Dhatt

INTRODUCTION

The Insolvency and Bankruptcy Code, 2016 (the “Code”) was enacted to improve the mechanism of insolvency resolution and protect and maximise the asset value of companies. The Code authorises a creditor to trigger the corporate insolvency resolution process of the debtor-in-default by filing an application before the National Company Law Tribunal (“NCLT”).

WHAT ARE FOREIGN ENTITIES?

The expression “foreign entities” has not been defined under the Code or the Companies Act, 2013. The Code does not make special provisions relating to the initiation of the corporate insolvency resolution process by foreign entities but accords them equal status as Indian creditors. This is clear from an analysis of the following definitions:

• “Person”[i] includes an individual, a Hindu Undivided Family, a company, a trust, a partnership, a limited liability partnership (LLP) and any other entity established under a statute and includes a person resident outside India.

• “Person resident outside India”[ii] is defined to mean a person other than one residing in India.

• “Person resident in India”[iii] is as defined under Section 2(v)[iv] of the Foreign Exchange Management Act, 1999.

• “Creditor”[v] is defined as “any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree-holder.”

As per the definitions under the Code, a “creditor” is a “person” to whom a debt is owed. “Person” has been defined under the Code includes an individual, a Hindu Undivided Family, a company, a trust, a partnership, a limited liability partnership (LLP) and any other entity established under a statute. Importantly, the definition of “person” includes non-residents. “Persons resident in India” and “persons residing outside India” have also been respectively defined under the Code. Therefore, a “person” is entitled to initiate proceedings under the Code, whether foreign or Indian, if he is an individual, a Hindu Undivided Family, a company, a trust, a partnership, an LLP or any other entity registered under a statute. This line of reasoning has been approved by NCLT Mumbai in Forever Glory[vi].

ANALYSIS OF CASE-LAWS UNDER THE CODE INVOLVING FOREIGN ENTITIES:

The Supreme Court, NCLAT and NCLT have laid down important principles relating to the right of foreign entities to initiate CIRP and their applications have been entertained. Some important case-laws are being discussed:

• Macquarie[vii]: The first important observations related to the rights of foreign creditors by the Supreme Court were made in Macquarie. The principal legal issue raised before the Supreme Court related to the requirement of obtaining a certificate from a bank or a financial institution under Section 9(3)(c). The court held that this was merely a directory requirement as it may operate in a discriminatory manner by creating a bar for foreign suppliers (as operational creditors) having foreign bankers and may frustrate their rights under the Code thereby violating Article 14. The Court also made extremely pertinent observations in para 21 which are being reproduced: “The fact that such foreign supplier is an operational creditor is established from a reading of the definition of “person” contained in Section 3(23), as including persons resident outside India, together with the definition of “operational creditor” contained in Section 5(20), which in turn is defined as “a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred”[viii]. It is clear from these observations that foreign entities could invoke the Code in the capacity of a creditor.

• Sunrise A/14[ix]: The Supreme Court followed and expanded its earlier view in Macquarie[x]. The Court observed that foreign companies initiating CIRP do not have to comply with the requirement of obtaining a certificate from an Indian bank or a financial institution due to impossibility of compliance. These observations again make it clear that foreign entities are not barred from invoking the Code as creditors.

• Peter Johnson John[xi]: This case pertained to the filing of an application under the Code after the grant of a decree by a foreign court. An application was filed by an employee as an operational creditor after a decree was passed by a foreign court granting arrears of salary and compensation. The decree was not complied by the judgment-debtor (viz. the employer) and the applicant-creditor sought its enforcement in India through a suit before the Bombay High Court under Section 13[xii] of CPC. Subsequently, the applicant approached the NCLT under Section 9 of the Code. The NCLT rejected the application holding that a suit was pending relating to the executability of the decree passed by the foreign court which constituted a dispute between the parties as on the date of filing of the application. The NCLAT upheld the NCLT judgment and observed that an ex parte foreign decree not fulfilling the requirements of Section 13 CPC cannot become the basis for the admission of a winding up petition.

• Forever Glory[xiii]: The right of a foreign entity to file an application under the Code was settled in this matter by the Mumbai Bench of the NCLT. The applicant was incorporated under the laws of Anguilla and had filed an application as an operational creditor for defaults in payment committed against the supply of batteries. The debtor raised a specific objection relating to the maintainability of an application by a foreign entity. This was rejected by the NCLT which placed reliance on Sections 3(23) and 3(25) of the Code to hold that the definition of “person” under the Code included a person who is a resident outside India.

• M/s Stanbic[xiv]: The facts involved therein were that the applicant was registered under the laws of the Republic of Ghana and filed an application as a financial creditor against the corporate guarantor relating to the defaults committed in respect of loans given to its wholly-owned subsidiary. Multiple legal proceedings had been initiated against the principal borrower and the guarantor in foreign courts. An objection was taken relating to the maintainability of the application filed before the NCLT Chennai on the ground that the creditor was not an Indian company and it did not fulfil the compliances required under the Code since it was signed by an agent (attorney) in Ghana. However, the NCLT did not examine this objection. The NCLT observed that the applicant had made out a prima facie case and rejected the contention about the decree being unenforceable. It was observed that the failure of the respondent to enter an appearance before the English court despite being duly served did not give rise to an inference that it was an unenforceable foreign decree and that the court was found in the list of reciprocating territories under Section 44A of CPC.

CORPORATE INSOLVENCY RESOLUTION PROCESS

What is the CIRP?

The process provided under the Code for the resolution of debts of the debtor-in-default is known as the corporate insolvency resolution process (“CIRP”). The necessary conditions for the initiation of CIRP are that the application must be maintainable under the Code and must fulfil the prescribed threshold under Section 4. Initiation of CIRP under the Code requires that a default of the value of INR 1 crore must have been made[xv]. “Default”[xvi] is the non-payment of debt when the whole or part thereof is due and payable. “Debt”[xvii] is a liability or obligation in respect of a claim which is due from any person.

Who could initiate the CIRP?

The Code permits only the following to initiate the CIRP – financial creditors, operational creditors and the corporate debtor itself. These creditors and the respective legal requirements for each of them are briefly discussed:

• Financial creditor: A financial creditor is a person to whom a financial debt is owed or the assignee or transferee thereof[xviii]. Financial debts are debts along with interest, which has been disbursed against the consideration for the ‘time value of money’[xix]. In general parlance, financial debts arise out of financial and banking transactions wherein money is lent for earning interest thereupon. An application by a financial creditor would lie under Section 7 of the Code and the creditor instituting the application would be liable to prove that the debtor (“corporate debtor”) has defaulted upon a financial debt of any of its financial creditors. There is no requirement for a prior legal notice for filing an application under Section 7.

• Operational creditor: An operational creditor is a person to whom an operational debt is owed or the assignee or transferee thereof[xx]. Operational debts[xxi] relate to claims arising out of the supply of goods or services, employment and dues payable to the Central or State Government or local authority. There is a statutory requirement of the issuance of a prior demand notice before the filing of an application before the NCLT[xxii]. Unlike in the case of a financial creditor, an operational creditor is permitted to move the NCLT for its default and not that of any other creditor.

• Corporate Debtor: The corporate debtor could initiate its own insolvency resolution by filing an application under Section 10 of the Code.

Who could be proceeded against under the CIRP?

The CIRP can only be initiated against a company registered under the Companies Act, 2013, Companies Act, 1956 or any special law[xxiii]. It may also be initiated against the personal guarantors to the debtor-in-default and any incorporated Limited Liability Partnership (LLP). Provisions relating to the insolvency resolution of individuals, partnership firms and proprietorship firms have not yet been notified. Provisions relating to cross-border insolvency under the Code have also not been notified yet.

Where does the application for CIRP lie?

An application for the initiation of CIRP would lie before the National Company Law Tribunal (“NCLT”) having territorial jurisdiction over the place where the registered office of the debtor is situated[xxiv]. It is pertinent to note that jurisdiction under the Code is vested in a single forum i.e. the NCLT (except for specific matters wherein jurisdiction has been conferred on the DRT) and that of the civil courts and other tribunals is barred. The NCLT is authorised to decide all questions arising in relation to the CIRP[xxv]. A statutory appeal has been provided to the National Company Law Appellate Tribunal (“NCLAT”)[xxvi]. A final appeal has been provided to the Supreme Court if there is a question of law requiring determination[xxvii].

Process under the CIRP:

Pre-admission: Upon the filing of an application under Section 7 or 9, the NCLT would examine it for procedural and documentary compliances under the respective provisions. If these are fulfilled along with the other statutory requirements (such as the minimum threshold of default) and there is prima facie evidence of the debtor having defaulted, the NCLT would issue a notice in the application requiring such debtor to enter an appearance in the proceedings. In practice, a large number of matters are settled at this stage on mutually agreeable terms and the application is withdrawn. If there is no settlement, the NCLT would provide an opportunity of hearing to the applicant-creditor and the debtor and either reject the application or admit the CIRP.

Post-admission: If CIRP is admitted, a mortarium would be imposed upon the institution of fresh and the continuation of the pending legal proceedings[xxviii]. An interim resolution professional (“IRP”) would be appointed by the NCLT at the time of admission of the CIRP[xxix] (the IRP recommended by the applicant-creditor is appointed unless disciplinary proceedings are pending against him). He would be responsible for the performance of various administrative and managerial responsibilities under the Code including performing important responsibilities in CIRP[xxx]. A committee of creditors (“COC”) comprising all financial creditors would be formed to steer and control the CIRP[xxxi]. The COC would also be responsible for admitting/rejecting resolution plans presented by various interested applicants. It is pertinent to note that the COC enjoys primacy in the exercise of commercial discretion and its decisions are not subject to judicial review except on the limited ground of violation of the Code or any Rules or Regulations[xxxii]. This entire CIRP is required to be completed within 330 days from the date of its commencement (i.e. the date from which it was admitted by the NCLT)[xxxiii]. If the process is not completed within this stipulated period or no resolution plan is submitted or accepted by the COC or the NCLT, then the Corporate Debtor would be liquidated.

CONCLUSION

The statutory provisions and the judicial decisions make it unequivocally clear that there is no bar imposed upon foreign entities under the Code and they are entitled to initiate the CIRP. The rights granted to foreign entities as creditors are on an equal footing with Indian creditors. However, if the proceedings sought to be initiated under the Code are based upon a decree passed by a foreign court, it may require additional compliances as under the Civil Procedure Code.

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[i]Section 3(23) of the Code [ii]Section 3(24) of the Cod [iii]Section 3(24) of the Code [iv]2. Definitions. – In this Act, unless the context otherwise requires, - (v) “person resident in India” means— (i) a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year but does not include— (A) a person who has gone out of India or who stays outside India, in either case— (a) for or on taking up employment outside India, or (b) for carrying on outside India a business or vocation outside India, or (c) for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period; (B) a person who has come to or stays in India, in either case, otherwise than— (a) for or on taking up employment in India, or (b) for carrying on in India a business or vocation in India, or (c) for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period; (ii) any person or body corporate registered or incorporated in India, (iii) an office, branch or agency in India owned or controlled by a person resident outside India, (iv) an office, branch or agency outside India owned or controlled by a person resident in India; [v]Section 3(10) of the Code [vi] Forever Glory Trading Limited v. Global Powersource (India) Limited, CP (IB) No. 3735/NCLT/MB/2018 decided on 03.06.2020 [vii] Macquarie Bank Limited v. Shilpi Cable Technologies Limited” reported as (2018) 2 SCC 674 [viii]These observations were relied upon in Zheijang Tongxiang Foreign Trade (Group) Co. v. Apex Drugs Limited, CP (IB) 269/9/HDB/2018 decided on 06.09.2018 [ix] Sunrise 14 A/S Denmark v. Ravi Mahajan, Civil Appeal No. 21794-95 of 2017 (SC) decided on 03.08.2018 [x] Macquarie Bank Limited v. Shilpi Cable Technologies Limited” reported as (2018) 2 SCC 674 [xi]Peter Johnson John v. KEC International Limited, CA (AT) (Insolvency) No. 188 of 2019 decided on 03.07.2019 [xii]13. When foreign judgment not conclusive.—A foreign judgment shall be conclusive as to any matter thereby directly adjudicated upon between the same parties or between parties under whom they or any of them claim litigating under the same title except— (a) where it has not been pronounced by a Court of competent jurisdiction; (b) where it has not been given on the merits of the case; (c) where it appears on the face of the proceedings to be founded on an incorrect view of international law or a refusal to recognise the law of India in cases in which such law is applicable; (d) where the proceedings in which the judgment was obtained are opposed to natural justice; (e) where it has been obtained by fraud; (f) where it sustains a claim founded on a breach of any law in force in India [xiii]Forever Glory Trading Limited v. Global Powersource (India) Limited, CP (IB) No. 3735/NCLT/MB/2018 decided on 03.06.202 [xiv]M/s Stanbic Bank Ghana Limited v. M/s Rajkumar Impex Private Limited, CP/670/IB/2017 (NCLT Chennai) decided on 27.04.2018 [xv] Earlier, the minimum amount of default under the Code was Rs 1 lac which was increased to Rs 1 crore vide Notification No. S.O. 1205(E) dated 24.03.2020 issued by the Ministry of Corporate Affairs, Government of India. [xvi]Section 3(12) of the Code [xvii]Section 3(11) of the Code [xviii]Section 5(7) of the Code [xix]Section 5(8) of the Code [xx]Section 5(20) of the Code [xxi]Section 5(21) of the Code [xxii]Under section 8 of the Code [xxiii]Section 2 of the Code [xxiv]Section 60(1) of the Code [xxv]Section 60(5) of the Code [xxvi]Section 61 of the Code [xxvii]Section 62 of the Code [xxviii]Section 14 of the Code [xxix]Section 13(1)(c) of the Code [xxx]Section 17 of the Code [xxxi]Section 21 of the Code [xxxii] This position has been settled in K. Sashidhar v. Indian Overseas Bank and Ors., (2019) 12 SCC 150 and other judgments [xxxiii]Proviso to Section 12(3) of the Code