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Evolving Jurisprudence Around Section 10 Of The Insolvency And Bankruptcy Code, 2016

This article deals with evolving jurisprudence around Section 10 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred as IBC) and its interplay with other provisions of the IBC. Section 10 of the IBC deals with the provisions relating to theinitiation of corporate insolvency resolution process (hereinafter referred as CIRP) by corporate applicant including corporate debtor in the case of defaults committed by any corporate debtor.

Firstly, the article deals with the introduction part and after that essential requirements of Section 10 of the IBC. It says that an application for the purpose of initiating CIRP should be consists of information relating to the books of account, details about creditors and the details of the resolution professional proposed to be appointed as an interim resolution etc. along with prescribed fee. The next part of the article deals with whether the National Company Law Tribunal (hereinafter referred as NCLT) has discretion to reject the debtor’s application for CIRP under Section 10 of the IBC? If yes, then to what extent?

The answer is in affirmative except for non-completion of the CIRP application. Further the article deals with interplay of section 10 with other provisions of the IBC (especially with Sections 65 & 66 of the IBC). And final part of the article deals with the conclusion part.

Introduction
Under the IBC, a financial creditor, an operational creditor or the corporate debtor itself may initiate the corporate insolvency resolution process) of the corporate debtor in the case of defaults committed by any corporate debtor.[1]While Sections 7 and 9 of the IBC deals with the provisions for initiation of CIRP by financial creditors and operational creditors respectively, a corporate applicant including corporate debtor can initiate CIRP under Section 10 of the IBC before the adjudicating authority.

Here, one important question arise i.e. who is the adjudicating authority for corporate person? The National Company Law Tribunal (NCLT) shall be adjudicating authority for the insolvency resolution process of a corporate person. Besides NCLT, there is an appellate authority i.e. National Company Law Appellate Tribunal (NCLAT) which has been established to hear appeals from NCLT decisions.

From 1st December, 2016, when the provisions on CIRP under IBC have come into effect, the debtors gets the right to voluntarily initiate CIRP by filing an application under Section 10 of the IBC with the NCLT in the case where its creditors may be indisposed to do so. It should be noted that the presumption as to misuse of Section 10 by corporate debtor cannot be ignored because the admission of CIRP leads to moratorium for the benefit of the debtor. It should also be noted that for the success of Section 10, it must be read with Sections 65 and 66 which deals with provisions relating to the fraudulent or malicious initiation of proceedings and fraudulent trading or wrongful trading respectively.

Essential Requirements of Section 10

Section 10 of the IBC provides for initiation of CIRP by corporate applicant including corporate debtor itself when there is a default committed by the corporate debtor. As per this Section, the corporate applicant is required to file an application for initiating CIRP with the adjudicating authority along with the prescribed fee and also provides extensive information relating to the:-
1) Details of creditors.
2) Evidence of debt and default.
3) Books of accounts.
4) Balance sheets.
5) Statements of affairs.
6) The resolution professional proposed to be appointed as an interim resolution professional.

Whether The National Company Law Tribunal (Nclt) Have Discretion To Reject The Debtor’s Application For Corporate Insolvency Resolution Process (CIRP) Under Section 10

In relation to the Section 10 of the IBC, an important question arise i.e., whether the NCLT have discretion to reject the debtor’s application for CIRP under Section 10 of the IBC? If yes, then to what extent?The answer is in affirmative except for non-completion of the CIRP application. To understand this issue following cases should be noted:-

In the case of Innoventive Industries Ltd. v. ICICI Bank[2],the National Company Law Appellate Tribunal (NCLAT) held that the National Company Law Tribunal (NCLT) have discretion to reject the debtor’s application under section 10 on the ground that where the debtor has made an application for CIRP with malicious intention to take advantage of the moratorium provisions of the IBC.

In the case of Leo Duct Engineers and Consultants Ltd.[3],NCLT, Mumbai held that for admission of CIRP by corporate applicant including corporate debtor under Section 10, the adjudicating authority has to consider the merits of each case and to see beyond what meets the eye, and also requires due application of mind before taking any decision. It has been further held by NCLT that application for CIRP should be rejected on the following grounds:-
1)Where initiation of the CIRP shall cause irreparable loss and injury to the creditors and an uncalled for protection to the borrowers and various guarantors.
2) Where the admission of the CIRP would have a serious impact on the financial creditors who have already set the wheel in motion to secure their debts.

In the case ofUnigreen Global Private Ltd.[4],NCLT, Principal Bench, New Delhi held that if the corporate debtors does not disclose all the facts including facts in relation to the debts owed by it to its creditors and were trying to misuse the provisions for CIRP under IBC for only taking benefit of moratorium on actions against the corporate and its creditors, the application for CIRP would be rejected.

From the above cases, it can be said that NCLT have discretion to reject the debtor’s application for CIRP under Section 10 on the following grounds:-

1)Where the debtor has made an application for CIRP with malicious intention to take advantage of the moratorium provisions of the IBC.
2) Where initiation of the CIRP shall cause irreparable loss and injury to the creditors and an uncalled for protection to the borrowers and various guarantors.
3) Where the admission of the CIRP would have a serious impact on the financial creditors who have already set the wheel in motion to secure their debts.
4) Where the corporate debtors does not disclose all the facts including facts in relation to the debts owed by it to its creditors.

Interplay of Section 10 With Other Provisions of The Insolvency And Bankruptcy Code, 2016 (IBC)

For the success of Section 10, it must be read with Sections 65 and 66 which deals with provisions relating to the fraudulent or malicious initiation of proceedings and fraudulent trading or wrongful trading respectively.

Section 65 of the IBC deals with the provisions relating to the penalty for fraudulent or malicious initiation of proceedings. The adjudicating authority may impose the penalty upon the applicant if it initiates CIRP fraudulently or with malicious intent for any purpose other than for the resolution of insolvency. The penalty which is imposed by adjudicating authority under Section 65 shall not be less than one lakh rupees, but may extend to one crore rupees.[5]This section especially focused on intent of the applicant behind filing the application for CIRP. According to many decisions of the NCLTs, the term intent used in Section 65 was only to seek moratorium related protections. It may be noted that the moratorium sought by the debtor against recovery proceedings cannot itself be a ground to impute fraudulent or malicious intent.

Section 66 of the IBC deals with the provisions relating to the fraudulent trading or wrongful trading. For the first time in India, Sub-section (2) of Section 66 [which is an important provision in relation to the Section 10] made director or partner of the corporate debtor personally liable for what is generally known as fraudulent trading or wrongful trading. Section 66 (2) is based on ‘wrongful trading’ provision of Section 214 of the UK Insolvency Act, 1986.

On an application made by a resolution professional during the corporate insolvency resolution process, the adjudicating authority may by an order direct that a director or partner of the corporate debtor, as the case may be, shall be liable to make such contribution to the assets of the corporate debtor as it may deem fit, if:-
1)before the insolvency commencement date, such director or partner knew or ought to have known that the there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process in respect of such corporate debtor; and

2) such director or partner did not exercise due diligence in minimizing the potential loss to the creditors of the corporate debtor.[6]

It is significant to note that like UK, in India, the directors are also to seek professional advice on the matter whether to file or not to file under Section 10 of the IBC.

Conclusion
It can be said that although Section 10 provides a right in the hands of corporate applicants including corporate debtors itself to resolve their insolvency especially in the case where its creditors may be indisposed to do so. However, several misuse or abuse of Section 10 by the corporate debtor cannot be ignored because the admission of CIRP leads to moratorium for the benefit of the debtor. It should also be noted that for the success of Section 10, it must be read with Sections 65 and 66. While Section 65 (1) imposed the penalty upon the applicant if it initiates CIRP fraudulently or with malicious intent for any purpose other than for the resolution of insolvency, Section 66 (2) made director or partner of the corporate debtor personally liable for what is generally known as fraudulent trading or wrongful trading. NCLT have discretion to reject the debtor’s application where the debtors misuse the provisions for CIRP under the IBC.

Endnotes
[1] The Insolvency and Bankruptcy Code, 2016, Section 6.
[2] Company Appeal (AT) (Insolvency) No. 1 & 2 of 2017.
[3] Company Appeal (AT) (Insolvency) No. 100 of 2017, available at: https://dasgovernance.com/2017/08/05/nclt-mumbai-bench-in-leo-duct-engineers-consultants-ltd/(Visited on April 11, 2019).
[4] Company Appeal (AT) (Insolvency) No. 81 of 2017, available at: https://dasgovernance.com/2017/08/04/nclt-principal-bench-in-unigreen-global-p-ltd/(Visited on April 11, 2019).
[5] The Insolvency and Bankruptcy Code, 2016, Sub-section (1) of Section 65.
[6] The Insolvency and Bankruptcy Code, 2016, Sub-section (2) of Section 66.