JTJB Legal Update 2018 March
The Indian Insolvency and Bankruptcy Code 2016 has gained prominence for Singapore lenders, counterparties and insurers seeking debt recovery from Indian parties. The young Code ambitiously tried to reinvigorate India’s sluggish insolvency regime which was scattered across various legislations – by implementing a unified, timely procedure for debt-laden companies to either restructure or liquidate.
The Code’s effectiveness with foreign creditors however appeared to hit a major stumbling block when an Indian debtor effectively persuaded the NCLT (the Adjudicating Authority of the Code) and NCLAT (the appeal body of the NCLT) that a foreign creditor without an Indian bank account is precluded from invoking the Code’s insolvency regime.
The issue related to attempts by Macquarie Bank Limited, Singapore in two separate petitions under the Code to put two of its Indian debtors into liquidators. Macquarie Bank, found itself in the frustrating position of having both its separate petitions rejected by the NCLAT because of non-compliance with Section 9(3)(c) of the Code, as, among other things, it was not accompanied by a certificate from Macquarie’s financial institution in India confirming non-payment of the operational debt.
Section 9(3)(c) of the Code prescribes that an operational creditor’s application for insolvency “shall” be accompanied by “a copy of the certificate from the financial institutions maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor”. It should also be noted that “financial institutions” under the Code include only including Indian entities.
The NCLAT’s decision left foreign creditors jittery about their rights under the Code – since foreign creditors tend to deal almost exclusively with foreign financial institutions, it is difficult (if not impossible) for most to obtain the Section 9(3)(c) certificate from an Indian financial institution.
Dissatisfied, Macquarie took matters to the Indian Supreme Court, and the apex court put to bed the anxiety to foreign creditors in its ruling in Macquarie Bank v. Shilpi Cables, Civil Appeal 15135/2017. Leaning heavily in favour of commercial realities, the Supreme Court ruled that Section 9(3)(c) certificate is not a condition precedent to triggering the insolvency process under the Code.
The Court held that the use of the word “confirming” in Section 9(3)(c) made it clear that the certificate from financial institution was “only a piece of evidence” (albeit an important one) of a debtor’s non-payment and was therefore not mandatory. Proceeding to examine the Code in light of its purpose, the Court then highlighted the absurdity that could arise in circumstances where a debtor expressly admits an operational debt, but a creditor cannot initiate insolvency simply because it did not submit the Section 9(3)(c) certificate. Importantly, the Court made it clear that the Code could not be interpreted in a discriminatory manner to deprive foreign creditors of their rights under it.
The decision reinstates confidence for Singapore creditors seeking to initiate insolvency proceedings in India – the general tenor of the Supreme Court’s ruling shows a strong commitment to the protection that the Code confers on local and foreign creditors alike. However, given the nascent stage of the Code, novel and creative challenges to its language can be expected to continue.
This article does not intend nor purport to advise on Indian law and should not be relied upon as Indian legal advice. Independent legal advice from qualified Indian counsel should be obtained in relation to matters concerning the application of the Code.
|Baldev Bhinder / Ramandeep Kaur
Partner / Associate
BaldevBhinder@JTJB.com / RamandeepKaur@JTJB.com