IBC or Civil Suit: A Litigant’s perspective

Should a person, go for an IBC petition before NCLT, or, an ordinary Civil suit, to recover his or her money? Many litigants must also be seeing various professionals encouraging people to lodge claims under the IBC as that gives a speedy remedy? Even the Government claims to have made a breakthrough with this newly codified law on Insolvency. So, should a litigant prefer the IBC to recover its money………. is it that simple? Let’s discuss! 

IBC or Civil Suit: A Litigant’s perspective 

“Nothing is as it seems. Black can appear white when the light is blinding but white loses all luster at the faintest sign of darkness.”

The Insolvency & Bankruptcy Code (or the IBC as referred to usually) came in force in the year 2016, replacing practically all laws that dealt with the subject of insolvency and bankruptcy. At present however, what is in force are the provisions that relate to the Companies or its Guarantors. I say ‘practically all laws’ and not ‘all laws’ because still certain erstwhile laws like SARFAESI, Recovery of Debts & Bankruptcy Act (RDBA), which are specie of the insolvency law, continue to be in force. But yes, with the advent of IBC, even SARFAESI and RDBA stand substantially governed by the former. 

After the notification of IBC, we saw a number of proceedings being initiated against several Companies, and mostly it were the banks and financial institutions that resorted to it. The benefit of this Code was that it significantly fast- tracked the whole process of declaring a Company ‘insolvent’, and the consequent seizure of the Company and its assets by an Insolvency Professional (or the IP)1. As per the news reports, the recoveries via IBC was far greater than what could be mopped up through SARFAESI, RDBA, Lok Adalats. The data revealed that Scheduled Commercial Banks (SCBs) recovered 56% of the NPAs via the IBC route, and only 33% via the SARFAESI route (the only other most efficient recovery mechanism, that banks have, next to the IBC). The biggest recovery for banks has been in case of Bhushan Steel which was bought over by Bamnipal Steel, a unit of Tata Steel. Bhushan Steel had defaulted on loans worth ₹56,022 crore. Bamnipal Steel paid ₹35,571 crore for the company. The rate of recovery was 63.5% of the defaulted loans2.The Government too claimed success of the law on several occasions3. So indeed for banks and FIs, the law was a success. But does that imply that every other person, whether an individual, firm or company, should resort to it. Let us examine. 

One of the fundamental rules in law and litigation is that every person who wants to exercise a legal remedy must do it “in light of the circumstances one faces”. This minor but utterly important rule makes all of the difference. Reason being, that ‘circumstance’ forms the groundwork or the foundation of a case that one initiates. So, if the format of the groundwork mismatches the case framework, such a case is more likely to fail (or say may not generate the intended results). By fail, I do not mean the outcome only, but the process and its effect as well. Because if the process / effect itself doesn’t suit the ‘circumstance’, the litigant is bound to lose out. 

Let’s understand this with an example. Suppose, in the year 2017, A supplied goods to B, worth Rs. 5,00,000/-. For this, B tenders a cheque of Rs. 5,00,000/- to A, which later bounces. At this point, A will usually have two remedies. One, he files an ordinary civil suit to recover money; two, he approaches a criminal court under Sec. 138, Negotiable Instruments Act (NIA) against B. Now A may opt for either of them, but chooses to initiate the cheque bounce case for two prime reasons: one, it is much cheaper than the Civil suit (as it doesn’t involve payment of ad valorem court fee, etc.); and two, it is a criminal action and can sentence B to imprisonment, and so might frighten B, due to which he may simply pay the cheque amount swiftly without waiting for the trial to happen. So on both these counts, the criminal action seems better. But then, before the Court B appears and pleads ‘not guilty’, and so the Court puts the matter for trial. Now, in the trial, witness of both A and B appear before the Court and get themselves examined and cross-examined, based on which the Court also hears arguments of both the sides. In this process, a couple of years are spent, and say in year 2020, the Court finds B ‘guilty’ and hence sentences him to an imprisonment for 01 year. B goes to jail to suffer the imprisonment. Now, notice that it was a criminal case, and so all the Court can do is to punish the guilty, and that’s what it did justly. But such an Order doesn’t recover the money to A, because a ‘recovery’ can happen only when Court passes an order/ decree to this effect, which is just not provided for under the NIA. And for getting a decree, a civil suit is to be lodged. But, A didn’t file it because he thought otherwise. Thus, despite fighting out before a Court for 3 years, A doesn’t get an order to recover money. So, a minor mis- judgement; and enough of a hassle. Now after 3 years, even if A decides to file a civil suit, such might get rejected by the Court because of the law of limitation, as per which, a civil suit for money is to be filed within a period of 03 years. So, all that emerges is that B is guilty, and sentenced for that, but will not pay Rs. 5,00,000/- to A. 

The above aptly explains how a mismatch of the ‘circumstances’ with the case framework can ruin one’s claim. Just like A chose to file the NIA action with a myopic view, anyone else may fall into a similar trap if he/ she chooses to file an IBC petition, instead, without understanding its dynamics. Whereas, instilling fear in opponent’s mind or saving expenditure have nothing to do with the ‘dynamics’ or your ‘objective’. 

The IBC is primarily been designed to help the large lenders, like Banks and NBFCs, who firstly have a sound paper-work for their transactions, drawn up by professionals. Hence, they are in a position to place an undisputed claim, before NCLT, against the indebted Company. This is something which is not very usual in case of any other litigant, like an individual, businessman, firm, vendor etc. One will recall that this Code came exactly at a time when our Banks were facing enormous NPAs, and the Government was desperate to tackle that4. Hence, this law was drafted primarily to deal with the debt delinquencies faced by banks & NBFCs. But then the second aspect, when rendering a Company ‘insolvent’ impinges upon rights of all other stakeholders. This happens, because in insolvency, the very running of the Company is put to a halt (or it becomes doubtful). And when that happens, the ‘cash- flow’ itself is paused, and so no payments! Whether of salaries, bills, loan installments, taxes, supplies, purchases, etc.; no payment can happen, unless the Court or the Tribunal (which is NCLT) permits. That’s why the law has to include all stakeholders when ‘insolvency’ sets in. These other stakeholders may be the employees of the Company, vendors, suppliers, customers or investors. 

Next, the third aspect, a corollary to the second. If any one of those stakeholders instead approaches the NCLT under IBC for initiating the ‘insolvency’, and the petition gets admitted, that applicant is immediately reduced to just one of the many creditors of the whole Company in that very case, because even though he approached first with his own individual claim, the NCLT will seize the whole Company and put it for resolution, where upon the IP will ask all stakeholders (and not just this individual person who applied first) to lodge claims, including that of the banks and NBFCs. Which implies further, now, the case is not anymore between that individual stakeholder and the Company only (which happens in a civil suit), but one between the Company and ALL the stakeholders of the Company; at that single point of time. This fundamental difference changes the whole dynamics. As the moment insolvency is triggered, the individual stakeholder (no matter that he went first to NCLT) loses all control from the case, unlike in a suit for money recovery5. He/ she will now obviously have a much restricted role in the entire IBC litigation/ resolution process; because now there are not just two parties to the litigation, but multiple parties; all of whom are together raising claims against that one debtor Company. And when it’s a real- estate debtor Company, there might be thousands of such parties, like in cases of Amrapali or Jaypee, where thousands of home buyers are stuck (though these cases were initiated by the banks). In such a scenario, when all the claims are called in ‘one single go’, the assets of the debtor Company may just not be sufficient to honour them right away. Because otherwise, in a usual course, a Company manages the payments or the payment cycle, depending upon available cash, pays- up either in phases, seeks deferment, discounts, undertakes negotiation etc., the tools which would no more be available to the debtor Company when it faces the insolvency order. Everything falls in disarray: the payment cycle gets disrupted. A real ‘cash flow’ crisis! 

When that happens, a litigant is faced with a complex situation, where tussle amongst the creditors interse is but obvious. The size of his litigation just got magnified more than he might have even comprehended, ever. And handling a situation like that requires immense expertise, knowledge, experience and skill…. And Energy, to fight out one’s claim; and usually an individual litigant doesn’t have it. Neither he/ she has the ability, nor the money to sustain it. With the banks and NBFCs, on the other hand, are guided by professionals and legal teams at every step, and so they have already designed their processes accordingly; have the ability and the means to tackle such complex issues. An individual litigant must be wary of these things. 

Whatever the case may be, whether one goes with civil suit or IBC or anything else, one must have a holistic view. Going with an IBC petition or under the NIA even, just to instill some form of ‘fear’ in the debtor’s mind, is certainly not a prudent approach. In legal fraternity, it is well said, “never underestimate your opponent”; what one thinks would instill fear in other’s mind, may turn out to be a mere wishful thinking, and nothing further. So, the key is: have a holistic view. A litigant today, say a small businessman, has several options to enforce his/her claim: civil suit, arbitration, NIA, MSME mechanism, etc.; IBC is not the sole key. Every case is unique in its own way, and so the litigant must seek an objective advice from his or her lawyer. He/ She must ask the right questions before he accepts a legal advice. 

- D. Bhattacharya, DB Law Offices

1 For illustration, refer link https://www.thehindubusinessline.com/money-and-banking/ibc-boosts-the-recovery-of-stressed-assets/article30390240.ece
2 refer link https://www.livemint.com/industry/banking/why-ibc-success-in-recovering-bad-loans-is-middling-1565551101789.html
3 https://economictimes.indiatimes.com/news/politics-and-nation/remembering-arun-jaitley-man-who-ushered-in-major-reforms-like-gst-ibc/videoshow/77720499.cms
4 https://www.businesstoday.in/opinion/prosaic-view/npa-nclt-reserve-bank-of-india-liquidation-banks-ibc-process/story/265782.html
5 [2017] 140 CLA 217 (NCLAT): held that an IBC petition is not one for recovery of money