Authored by Anuroop Omkar, Partner & Amit Bikram Panda, Associate
The Insolvency and Bankruptcy Code, 2016 (“Code”) was enacted by the India Parliament on May 28, 2016, to tackle the rise of Non-Performing Loans in the Indian banking sector and to bring down the so called “Defaulter’s Paradise”. Before the introduction of the Code, legal remedies available to a creditor of a defaulting debtor were plagued by various flaws as they were extremely fragmented and above all prone to various delays. The pre-Code regime was packed with legal lacunae and loopholes which were exploited by the promoters of the defaulting company to siphon off funds and considerably reduce the assets of the company which made recovery or restructuring of debts a distant dream.
India, being one of the fastest developing economies, provides ample room for business expansion and entrepreneurship, as a result, it has seen more and more Indian companies (“Parent Companies”) investing abroad by setting-up overseas subsidiaries. These Parent Companies often act as guarantors to the loans obtained by their overseas subsidiaries from foreign creditors (“Foreign Creditors”). These are called Parent Company Guarantees (“PCG”) which have become the norm now as they add a level of comfort to Foreign Creditors in respect of the contractual obligations of the overseas subsidiary of the Parent Company. Nonetheless, these Parent Company Guarantees give rise to complications when the overseas subsidiary defaults in repayment of loans extended to it by Foreign Creditors. Thus, the question arises that in the event a Foreign Creditor of an overseas subsidiary initiates Corporate Insolvency Resolution Process (“CIRP”) against the Parent Company under the Code with respect to, the guarantee issued on behalf of its overseas subsidiary, shall it get the same rights as bestowed upon the domestic creditors by the Code?
In order for us to delve into the issue of whether Foreign Creditors have the same rights as the domestic creditors we shall first start by analyzing whether a Foreign Creditor can start insolvency proceedings under the Code. Section 6 of the Code states that a CIRP can be initiated by a Financial Creditor, Operational Creditor, or the Corporate Debtor itself in an event of default. In Section 5(7) and 5(20) of the Code, Financial and Operational Creditors respectively are defined as any person to whom a Financial or Operational Debt respectively is owed. Further, a person is defined under Section 3(23) of the Code and includes ‘any person resident outside of India’.
Moreover, the Hon’ble National Company Law Tribunal, Chennai (“NCLT Chennai”) in Stanbic Bank Ghana v. Rajkumar Impex Private Limited[1] rejected the respondent’s contention that the petitioner company, a Ghana based bank, not being an Indian company within the meaning of Companies Act, 2013, is not entitled to invoke the Code. The NCLT, Chennai allowed the petitioner company to initiate CIRP against the respondent, an Indian company, as a financial creditor in respect of a guarantee that the Indian company had extended to its subsidiary in Ghana. Thus, it is clear that Foreign Creditors can initiate CIRP against an Indian company.
The Hon’ble Supreme Court in its decision in Macquarie Bank v. Shilpi Cable Technologies[2] has made it clear that the Code does not differentiate between Foreign Creditors and domestic creditors and that they have the same set of rights under the Code. In the above-mentioned case the Hon’ble National Company Law Tribunal (“NCLT”) and National Company Law Appellate Tribunal (“NCLAT”) both rejected the application of the petitioner who was an operational creditor with its registered office at Singapore, citing non-compliance of the petitioner with Section (9)(3)(c) of the Code. Section (9)(3)(c) of the Code mandate operational creditors to furnish a certificate from a financial institution maintaining the accounts of the same confirming that there in fact is an unpaid operational debt by the defaulting company. A financial institution is defined by the Code in Section 3(14) to include all scheduled banks and financial institutions defined in Section 45-I of the Reserve Bank of India Act, 1945, thereby, excluding all foreign financial institutions. This posed a critical disadvantage for the Foreign Creditor who wanted to initiate a CIRP against the Indian company and did not have accounts with any financial institution as defined under the Code.
The Hon’ble Supreme Court in the above-mentioned case, while setting aside the orders of Hon’ble NCLT and NCLAT, gave a purposive interpretation to Section (9)(3)(c) of the Code. It held that the provision in question is a mere directory in nature and not mandatory. The Hon’ble Supreme Court further opined that compliance with this particular provision shall be impossible in cases involving Foreign Creditors and it shall be discriminatory to those creditors who do not happen to bank with financial institutions as defined under the Code. Therefore, it is unambiguously clear from the interpretation of the Hon’ble Supreme Court that Foreign Creditors, as well as domestic creditors, have equal rights under the Code and there is no distinction between them.
The Hon’ble Supreme Court held that mere procedural hurdles shall not come in the way of Foreign Creditors exercising their rights and to keep all such Foreign Creditors outside the ambit of the Code shall not only be discriminatory but shall also defeat one of the key objectives of the Code i.e., to increase the ease of doing business in India.
The law regarding rights of Foreign Creditors is well settled and that the Hon’ble Supreme Court does not want an overly literal interpretation of the Code to impede the objective of the statute and make it less inclusive and accessible. The Hon’ble Supreme Court, as in the above-mentioned case, has time and again interpreted the Code as widely as possible so as to keep it in line with the current market requirements and the objectives that the Code has envisaged to achieve.