NCLT Advocate

The position

Proceedings under the Insolvency and Bankruptcy Code move faster than most managements expect. Once an application under Section 7 or 9 is admitted, a moratorium follows, the board stands suspended and a resolution professional takes over. The window in which a debt can be disputed, a demand notice answered or a settlement reached is the window before admission, and it is measured in weeks.

When clients come to this chamber

• A demand notice under Section 8 has been received from an operational creditor.
• A financial creditor has filed under Section 7 against your company.
• Money is owed to you by a company that will not pay.
• You are a personal guarantor to a corporate debt.
• You are a homebuyer or allottee with a claim against a developer in insolvency.
• Oppression, mismanagement or a shareholder dispute has to be brought before the Tribunal.

What the representation involves

• Applications under Sections 7, 9 and 10, and defence of applications already filed
• Replies to demand notices under Section 8, raising a pre-existing dispute where one exists
• Claims before the resolution professional and objections to their treatment
• Proceedings against personal guarantors to corporate debt
• Settlement and withdrawal applications under Section 12A
• Company petitions including oppression and mismanagement

The ten days that decide an operational creditor's application

An operational creditor must serve a demand notice under Section 8 before applying for insolvency. The corporate debtor has ten days to respond, and what it says in those ten days usually determines the outcome. Where a genuine dispute existed before the notice — a quality complaint raised in correspondence, a pending suit or arbitration, a counter-claim asserted in writing — establishing that in the reply defeats the application, because the Code is not a substitute for debt recovery where the debt is honestly disputed.

The dispute must be pre-existing and real. A denial manufactured after the notice arrives is recognised for what it is. This is why contemporaneous records matter so much: the email complaining of short supply eighteen months ago is worth more at this stage than any affidavit sworn today.

What admission changes, and why it is nearly irreversible

On admission a moratorium comes into force, the board stands suspended, and an interim resolution professional takes control. Recovery proceedings elsewhere stop, but so does the management's ability to run the company. Withdrawal after admission is possible under Section 12A, but requires the approval of creditors holding ninety per cent of the voting share of the committee, which is a high bar once a committee exists.

The asymmetry between the position before admission and after it is the single most important thing a director needs to understand. Settling on the eighth day after a demand notice is an ordinary commercial decision. Settling after admission requires the cooperation of a committee with its own interests.

Personal guarantors and directors

Proceedings against personal guarantors to corporate debt run alongside the corporate insolvency and reach assets that promoters often assume are insulated. A guarantee given years earlier for a facility long since restructured may still be live, and whether it was validly invoked, whether the creditor's conduct discharged it, and whether the demand complies with the contract are questions worth examining before liability is conceded.

Directors also face exposure of their own: applications alleging preferential, undervalued or fraudulent transactions, and proceedings for wrongful trading. Where a transaction is capable of innocent explanation, the explanation is best documented before it is demanded.