Has NCLT interpreted provisions of Insolvency & Bankruptcy Code judicially? Analyzing Judgment of Principal Bench under section 7 of Insolvency & Bankruptcy Code, 2016 in AMR Infrastructures Limited

Legal interpretation of provisions of Insolvency & Bankruptcy Code, 2016 (IBC 2016 or IBC) commences with judgment of Principal Bench of National Company Law Tribunal rendered on 23rd January, 2017 in the matter of AMR Infrastructures Limited. IBC brings in new regime in insolvency of corporates. As opposed to provisions of the Companies Act, IBC 2016 provides for resolving the bankruptcy, staring at the companies. The provisions are now ‘corporate debtor friendly’ as against ‘creditor friendly’ under the earlier regime. IBC 2016 is premised on allowing a chance of fresh start to the companies in financial and business strain. In the AMR judgment, NCLT was called upon to interpret the definition of ‘financial creditor’ and ‘financial debt’ and the meaning of ‘time value of money’ appearing in financial debt definition.

Analyzing the judgment brings to the fore following questions: –

  1. Does IBC 2016 in any way comes to the aid of investors having paid substantial sums to the company in return of their promise to deliver flats or apartments or office premises?
  2. Was the NCLT correct in arriving at a conclusion that an agreement containing assured return does not satisfy the requirement of a financial debt?
  3. Was the NCLT competent to entertain the application under section 7 of IBC 2016 in view of fact that provisional liquidator stands appointed by orders of High Court, as noted by NCLT in its order?

These are early days under IBC and one judgment cannot be held to be conclusive in interpretation of the provisions of IBC. IBC 2016, for the uninformed, allows either a financial creditor or operational creditor to initiate corporate insolvency resolution process. IBC provides that a financial creditor or an operational creditor can apply to NCLT for initiating the corporate insolvency resolution process at the trigger point of default being committed by the company. ‘Default’ means non-payment of debt when whole or any part or instalment 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.

Commitment of default comprises one part; the other part being the eligibility criteria, that is, the applicant should either be a financial creditor or an operational creditor. Instead of using the generic term ‘creditor’, IBC has categorized them into financial and operational creditor with specific meaning attached to these two terms. Not all but only a financial creditor or operational creditor can initiate the resolution process. The only possible logic in segregating the creditors into financial and operational seems to be providing a preferential treatment to the financial creditor in as much as the occurrence of default by the company becomes the cause of action for a financial creditor whereas in the case of operational creditor, a secondary process of sending a notice of demand to the corporate debtor is to be fulfilled prior to initiating the resolution process. Instead of defining the operational creditor the way it has been done in IBC, the purpose of providing a preference to financial creditor would have served by only defining the financial creditor and treating the rest of the creditors as ‘non-financial creditors’ i.e. all creditors other than financial creditors. This would have simplified the interpretation process of the phrases ‘financial creditor’ and ‘operational creditor’ saving precious judicial time.

Let us examine the consequences of specific definitions of financial creditor and operational creditor. By implication, it seems reasonable to presume that the creditor should either be a financial creditor or operational creditor and in some circumstances may be both. Under IBC, a third possibility has emerged that the creditor is neither a financial creditor nor an operational creditor. Was this intended? By doing this, grave injustice has been done to several creditors who might have invested huge sums of money in a company engaged in constriction of real estate. The amount paid by customers would neither fall under the definition of financial debt nor operational debt. In these cases, the amount invested is generally substantial and in many cases the investors pay their life savings in the hope of getting their home or office. NCLT has come to a conclusion that amount paid under MOU for real estate, even though the MOU has ‘assured return’ clause after the expiry of period of promised delivery of property, is not a financial debt and hence the creditor does not fall under the category of ‘financial creditor’. NCLT has also concluded that ‘assured return’ clause would not satisfy the requirement of ‘time value of money’ appearing in the definition of ‘financial debt’. Looking at the definition of ‘operational debt’, the payment made for promised delivery of homes or offices will also not be treated as operational debt, there being no claim of ‘goods’ or ‘services’ against the corporate debtor. Immovable property cannot, by any stretch of imagination, be treated as ‘goods’. It is neither the ‘service’ to be rendered by the corporate debtor. Such investors having invested huge sums of money have been left to fend for themselves by invoking civil remedies. The anomaly seems unintentional but a clear cut case of drafting error. Under the existing regime of winding-up of companies under the company law, such creditors were being permitted to file petition for winding-up with the High Court against defaulting corporate debtors. Once the provisions of Companies Act, 2013 are repealed, the investors, like these, will only live in mirage of invoking the resolution process.

‘Assured return’ is a committed payment which the corporate debtor undertakes to pay in the event of failure on its part to make promised delivery. The ‘assured return’ partakes the character of compensation in terms of money, that is, it becomes the obligation of the corporate debtor to recompense the loss incurred by the investor for having remained invested longer than desired. With due respect, had the NCLT examined the assured return in this view, probably it would have come to a different conclusion. It tangled itself in mere technicalities of the phrases ‘time value of money’ and ‘financial debt’. The definition of ‘financial debt’ is an inclusive definition and should have been construed broadly rather than in a narrow spectrum.

Lastly, the NCLT has ignored the provisions of Section 446 read with Section 441 of the Companies Act, 1956 (these provisions are still effective). Having noted that provisional liquidator has been appointed in AMR, there was no occasion for the NCLT to entertain application under IBC in view of the clear cut bar provided in Section 446 of the 1956 Act. It should have saved its precious judicial time by dismissing the application in limine or should have kept it in abeyance till such time leave of the High Court was obtained by the applicant without entering the domain of interpreting the phrases ‘financial debt’, ‘financial creditor’ and ‘time value of money’ in a hurry.

This is just the beginning and it is expedient that NCLT should don the mantle of judicious interpreter to chart the path to be tread in times to come by the litigants. The interpretations will have far reaching impact and it is expected that provisions are examined deeply looking at Indian judicial precedents and cross-border jurisdictions as well.

Keep watching this space for more analysis of NCLT/NCLAT judgments.

© Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation for academic purposes alone and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.