Despite being a relatively recent enactment, the Insolvency and Bankruptcy Code, 2016 has successfully carved an enriching jurisprudence for itself. It replaces the previous insolvency regime, which was fragmented and fraught with delays. While the Code has marked a sea change from the previous regime, it nevertheless faces regular scrutiny of application from the everflowing cases brought before it. Recently, the National Company Law Tribunal, Division Bench of Chennai on 9 December, 2020 in the case of M/s. Prithivraj Spinning Mill Private Limited v. Indian Overseas Bank, passed an order quashing the Insolvency Application made by the Corporate Applicant, while throwing light on the hitherto unexplored area within Section 10 of the Code.
FACTUAL BACKGROUND AND JUDGEMENT
M/s. Prithivraj Spinning Mill Private Limited (Corporate Applicant) applied for the initiation of Corporate Insolvency Resolution Process under Section 10 of IBC 2016. However, at the time of the proceeding, the Corporate Applicant paid off its debt to one of the Financial Creditors (State Bank of India, the 2nd Respondent). Subsequently, the Corporate Applicant changed its name to M/s. Marappar Textiles Private Limited after receiving a fresh certificate of incorporation from the Ministry of Corporate Affairs, issued by it. Later, the Board of Directors in its Board Meeting resolved to change its Registered Office of its factory premise. It is pertinent to note that all the activities mentioned above occur after the filing of the instant application and before its adjudication. Yet, the Corporate Applicant failed to disclose such facts in the general affidavit of Form – VI. The Adjudicatory Authority while stating that it could not pass an order of The Corporate Insolvency Resolution Process (CIRP) as against M/s. Prithivraj Spinning Mills Private Limited since the company’s name was not in existence as on that date, dismissed the case.
ANALYSIS
This is a textbook case wherein a lacuna within a statute is exploited, in an attempt to subvert the institutional best practices and defraud the stakeholders. Consider, for example, the Corporate Applicant’s act to change its name soon after filing for the insolvency application. Suppose the Adjudicating Authority were to allow for CIRP against it. In that case, the Interim Resolution Professional as per Section 15 of the Code has to release public announcement for inviting claims, wherein the name and address of the corporate debtor have to be publicly disseminated. This paper publication caused in relation to the Corporate Applicant would carry details in its new avatar, carrying its new name and address. The public announcement is required to provide for the last date for submission of such claims from the date of the appointment of the Interim Resolution Professional (IRP). Regulation 12(2) of the CIRP Regulations additionally provides that a creditor, who fails to submit claim with proof within the time stipulated in the public announcement, may submit the claim with proof to the IRP or the RP, as the case may be, on or before the ninetieth day of the insolvency commencement date. However, in the instant case, the publication of such altered information would defeat the purpose of public announcement as creditors would be unable to recognise the Corporate Applicant. This would resultantly affect the creditors’ rights, both financial and operational, as it would preclude them from filing their claims within the stipulated deadline, leading to huge financial losses.
The Code is silent in regards to the Corporate Applicant’s commercial conduct between the time of filing of insolvency application under Section 10 and its subsequent admission/rejection by the Adjudicating Authority. When the debt-ridden Corporate Applicant settled its dues with the second Respondent, the means adopted for making such payment were not disclosed to the Adjudicating Authority. This raises suspicion that it might have taken a loan from another creditor who might have been unaware of the relevant insolvency application filed under Section 10.
It is to fill in this structural gap that the Adjudicating Authority has made the following observation – ‘… in Section 10 of IBC, 2016, the Corporate Debtor is an Applicant and the status of the Corporate Debtor is that of a person who submits himself to the jurisdiction of this Tribunal to declare him as Insolvent, and in such a case, it should be construed that on the date of filing of the Application before this Tribunal under Section 10 of IBC, 2016, the Board of the Corporate Debtor is deemed to be virtually suspended…’
It further remarked – ‘… the Corporate Applicant, after filing of an application under Section 10 of IBC, 2016 is required to restrain itself from making any change to the constitution of the share holding pattern, list of secured/unsecured creditor stake holders, selling, encumbering properties, buying and all related activities are required to be kept in abeyance.’
Using this interpretive advance, the Tribunal has effectively asked the Corporate Applicant to maintain a status quo in relation to all the major decisions being taken during this period and to abstain from conducting business as a going concern. Such an interpretation assumes particular importance as the Code does not mention any such requirement. The author agrees with the view that is taken by the Adjudicating Authority. To rope in additional debt from creditors who are ignorant of the Insolvency Application does not serve anyone well. While such creditors may find recourse in the institutional insolvency mechanisms that are placed, the instant order would help them to avoid falling into such ditches in the first place.
CONCLUSION
The author would highlight the need to impose a heavy burden of obligation on the Corporate Applicant to correctly fill in the Form – VI application and amend it, as and when deemed necessary. Failure to do so, as seen in the instant case, keeps the stakeholders and the Adjudicating Authority in dark and amounts to concealment and suppression of material facts by the Corporate Applicant. The instant case has necessitated the need to relook the provisions of Section 10 of the Code and tighten the same.
The measures deployed by the Corporate Applicant smacks of malicious intent, could have potentially deceived the Tribunal, defrauded the creditors, lowered its losses and created a situation wherein the provisions of the Code are misused with impunity. The Adjudicating Authority while disposing of the case was wise in quickly filling the gap and averting it.
The public announcement is required to provide for the last date for submission of such claims from the date of the appointment of the Interim Resolution Professional (IRP). Regulation 12(2) of the CIRP Regulations additionally provides that a creditor, who fails to submit claim with proof within the time stipulated in the public announcement, may submit the claim with proof to the IRP or the RP, as the case may be, on or before the ninetieth day of the insolvency commencement date.
The Tribunal has effectively asked the Corporate Applicant to maintain a status quo in relation to all the major decisions being taken during this period and to abstain from conducting business. Such an interpretation assumes particular importance as the Code does not mention any such requirement. The author agrees with the view that is taken by the adjudicating authority.