INTRODUCTION
As one of the measures which would lead to ease of
doing business, the Insolvency and Bankruptcy Code, 2016 (the Code) was enacted
on 11 May 2016 and received the assent of the President of India on the 28 May,
2016 and put on the Statute Book on the same day. Under the Code, a financial
creditor or an operational creditor can prefer an application to the
Adjudicating Authority under the Act for initiation of speedy and time bound
insolvency resolution process against an operational debtor.
EXPRESSIONS 'DEBT' 'FINANCIAL DEBT', 'FINANCIAL
CREDITOR' 'OPERATION DEBT' AND 'OPERATIONAL CREDITOR' EXPLAINED
The term 'operational debtor' has been defined in
sub-section (8) of section 2 of the Code to mean a corporate person who owes a
debt to any other person. The word 'debt' has been defined in clause (11) of
section 3 of the Code to mean a liability or obligation in respect of a claim
which is due from any person and includes a financial debt and operational
debt.
The expression 'financial debt' has been defined in
clause (8) of section 5 to mean a debt along with interest, if any, which is
disbursed against the consideration for the time value of money and includes
(a) money borrowed against the payment of interest;
(b) any amount raised by acceptance under any
acceptance credit facility or its dematerialised equivalent;
(c) any amount raised pursuant to any note purchase
facility or the issue of bonds, notes, debentures, loan stock or any similar
instrument;
(d) the amount of any liability in respect of any
lease or hire purchase contract which is deemed as a finance or capital lease
under the Indian Accounting Standards or such other accounting standards as may
be prescribed;
(e) receivables sold or discounted other than any
receivables sold on non-recourse basis;
(f) any amount raised under any other transaction,
including any forward sale or purchase agreement, having the commercial
effect of borrowing;
(g) any derivative transaction entered into in
connection with protection against or benefit from fluctuation in any rate or
price and for calculating the value of any derivative transaction, only the
market value of such transaction shall be taken into account;
(h) any counter-indemnity obligation in respect of
a guarantee, indemnity, bond, documentary letter of credit or any other
instrument issued by a bank or financial institution;
(i) the amount of any liability in respect of any
of the guarantee or indemnity for any of the items referred to in (a) to (h)
above;
The phrase 'financial creditor' has been defined in
clause (7) of section 5 of the Code to mean any person to whom a financial debt
is owed and includes a person to whom such debt has been legally assigned or
transferred to'.
The expression 'operational debt', has been defined
in clause (21) of section 5 of the Code to mean 'a claim in respect of the
provision of goods or services including employment or a debt in respect of the
repayment of dues arising under any law for the time being in force and payable
to the Central Government, any State Government or any local authority'. The
phrase 'operational creditor' has been defined in clause (20) of section 5
to mean a person to whom an operational debt is owed and includes any person to
whom such debt has been legally assigned or transferred'. Initiation of
Insolvency Resolution Process On a careful and close analysis of the foregoing,
it would be apparent that only a person who has extended financial assistance
to a corporate debtor or one who has extended credit during the course of the
business activities of the corporate debtor can take recourse to the provisions
of the Code to initiate an insolvency resolution process, in the event of
default committed by the operational debtor in the discharge of his obligations
to the financial creditor or the operational creditor, as the case may be.
CAN A PERSON BOOKED APARTMENT WITH CORPORATE REAL
ESTATE DEVELOPERS TAKE INITIATE INSOLVENCY RESOLUTION PROCESS IN THE EVENT OF
NOT DELIVERY APARTMENT?
A person who has booked a flat or apartment with a
corporate real estate developer and who has given advance, from time to time,
to the real estate developer before the possession of the flat or apartment
booked by him is given to him cannot take re-course to the provisions of the
Code, in the event of the real estate developer not delivering the flat or
apartment at the time or extended time, agreed upon. The advance given by
him from time to time towards his booking of the flat or apartment is not a
debt in the strict sense of the term defined in the Code even though it is so
in the normal parlance. In the legal parlance the advance given is an amount
given in trust to the real estate developer and not a debt within the meaning
of the term 'debt' defined in the Code.
There is no provision in the Code to give
preference to the repayment of such amounts given in trust or treat such
persons as secured creditors. Such persons would rank as unsecured creditors,
with the result that depending upon the financial position of the real estate
developer they can either get back the full amount of advance or such part
thereof as could be paid to them in terms of the resolution plan drawn by the
insolvency resolution person. Such a course would be unequitable and unjust to
them, who in most cases have invested all their hard-earned resources or life
savings with a view to providing them a secured shelter t and to their
immediate family members.
In a recent case such persons had to knock at the
doors of the Supreme Court to get their grievances redressed. One should agree
that one should not be reduced to the position of knocking at the doors of
courts of law, including the highest court of the land to get their grievances
redressed. They may not have time and/or the resources to do so. The law should
protect, even if necessary by amending the Code, their interests.
As noticed earlier the term 'debt' has been defined
to mean, inter alia, a liability. But the term 'liability' has not been defined
in the Code. The writer did some research in this regard and happened to fall
upon the definition of 'liability' in the Singapore's Bankruptcy Act. The said
Act defines liability in the following words:
“liability” means a liability to pay money or
money's worth, irrespective of whether such liability is present or future,
certain or contingent or of an amount that is fixed or liquidated or that is
capable of being ascertained by fixed rules or as a matter of opinion, and
includes any such liability arising—
(a) under any written law;
(b) under contract, tort or bailment;
(c) as a result of a breach of trust by the person
liable; or (d) out of an obligation to make restitution
CONCLUSION
Possibly, if a definition of the term 'liability'
is inserted on the lines of the above definition into the Code by means of an
amendment thereto, will go a long way to providing a legal handle to such
persons who have invested their hard earned money to securing a secured shelter
to them and their immediate family members.
Special Thanks : Mr. T V Narayanswamy
Source
: ICSI Journal
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