The Insolvency Resolution Process for Corporate Persons (Amendment Regulations), 2017, notified with effect from 16 August 2017, adds new angles to the framework and brings more clarity.
In a welcome move, the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Amendment) Regulations, 2017 have been notified with effect from 16 August 2017. The Amendment Regulations amend the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
Prior to notification of the Amendment Regulations, the Insolvency and Bankruptcy Code, 2016 (Code), read with the Regulations, bifurcated the claims of creditors into three categories, being (A) claims by financial creditors; (B) claims by operational creditors of the corporate debtor (who are not workmen or employees of the corporate debtor); and (C) claims by workmen or employees.
While ‘creditor’ is a wide term under the Code and includes any person to whom a debt is owed, the Code envisaged filing of claims only by claimants who fit into the bill of financial creditors, operational creditors or workmen or employees.
A ‘financial creditor’ is any person to whom a financial debt is owed. ‘Financial debt’ means a debt along with interest, if any, which is disbursed against the consideration for the time value of money. The definition of financial debt is not exhaustive but illustrates examples of financial debt such as: money borrowed against the payment of interest, any amount raised by acceptance under any acceptance credit facility, any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument, etc. Further, an ‘operational creditor’ is a person to whom an operational debt is owed. ‘Operational debt’ means a claim in respect of the provision of goods or services.
In the few months since the Code has come into force, it was not uncommon to come across instances where certain monetary obligations of the corporate debtor towards third parties did not constitute financial debt or an operational debt. An instance of this could be a claim for damages on the grounds of non-performance, fraud, oppression, mismanagement, etc., that a third party may have against the corporate debtor. As a consequence, even though such claims of third parties were legal and valid claims, such claimants found no remedy within the realms of the Code at the time of the corporate insolvency resolution process. It was only at the time of the liquidation process under Chapter III of the Code that such claims were accounted for in the liquidation waterfall for distribution of proceeds.
|REGULATION 9A HAS BEEN INSERTED TO PERMIT FILING OF CLAIMS BY CREDITORS...|
To remedy this, Regulation 9A has been inserted in the Regulations to permit filing of claims by creditors other than financial and operational creditors. In terms of Regulation 9A, the other creditors can prove the existence of the debt based on the records available in an information utility, if any, or based on other relevant documents sufficient to establish the claim, including documentary evidence demanding satisfaction of the claim, bank statements of the creditor showing non-satisfaction of claim or an order of court or tribunal that has adjudicated upon non-satisfaction of a claim.
The Regulations further provide forms for submission of claims by the aforesaid claimants. Form B is required to be filed in respect of claims by operational creditors except workmen and employees, Form C is required to be filed in respect of claims by financial creditors and Form D and E are required to be filed in respect of claims by workmen or employees and their authorised representatives respectively. The Amendment Regulations now provide for Form F, which is required to be duly filled and submitted in respect of claims by creditors (other than financial creditors and operational creditors).
Further in terms of the Amendment Regulations, financial creditors are now mandated to submit their proof of claims by electronic means only. All creditors other than financial creditors may submit their proof of claims in person, by post or by electronic means.
The Amendment Regulations provide respite to parties who did not fall within the purview of the definitions of financial creditor or operational creditor and were restricted from submitting their claims to the interim resolution professionals at the time of the corporate insolvency resolution process. This also ensures that no stakeholder who is bound by resolution plan or the liquidation waterfall at the time of liquidation is denied a fair opportunity of submitting its claims during the corporate insolvency resolution process.
The Amendment Regulations also sufficiently protect the interest of homebuyers where housing companies are undergoing resolution process and moratorium under the Code. The Amendment Regulations adequately resolve the unique problem of thousands of home buyers especially in cases where possession has not been handed over or the builder has defaulted. Such home buyers are now backed by subsidiary legislation for filing their legal claims and can submit Form F for their claims.
About the Authors: Shishir Mehta is Partner & Dhwani Shah is Associate with Khaitan & Co.