Ease of Recovery of Bad Debt through Insolvency for Manufacturers/Suppliers/Service Providers By Adv Sharlee Garg

Are you seeking a solution to recover lost money or are you suffering from bad debt? 

If you are a manufacturer or a Creditor who has given a loan or provided services or supplied goods, etc. to a Company and the Debtor/Corporate debtor has not paid or defaulted on the payment, then the new Insolvency & Bankruptcy Code, 2016, is the answer to all your woes.

How does the Insolvency & Bankruptcy Code, 2016, help manufacturers & Small Businesses?

The Insolvency & Bankruptcy Code, 2016 has been changed and new provisions have been incorporated to provide relief to Creditors, that too, in a specified period. This is a great diversion from the previous provisions in the law where only the Debtor could initiate insolvency but with the new Code, a Creditor whose defaulted amount exceeds more than One Lakh can initiate insolvency process. The Limitation period for filing the claim in NCLT is 3 Years. B.K Educational Services vs Parag Gupta and Associates, 2017

Recent Case Laws

IL&FS CASE: Resolution Professionals Appointed to rectify default and rescue the company.

The present situation of IL&FS is similar to “Lehman Brothers crisis” that happened way back in 2008. In the present time what has happened in IL&FS cannot be undone but the need of the hour is to find recourse for IL&FS. The biggest challenge for IL&FS as of now is to raise funds quickly to avoid any further debt defaults. The new board of IL&FS elected Arpwood capital and JM Financial Ltd. as Financial and Transaction Advisor (FTAs) along with Alvarez &Marsal (A&M) as restructuring advisor. These advisors shall formulate and execute a resolution plan for debt burdened IL&FS.

To know more about the case follow the below web link: https://www.muds.co.in/ilfs-case-unveiling-curtains/

What are the specific provisions under the Insolvency & Bankruptcy Code, 2016?

The biggest positive thrust of the Code is the provision of taking the initiative of the recovery of debt by the sufferer, that is, the Creditor. According to the old Code, a Creditor had no rights to initiate any action & was bound to approach the court & take legal recourse. This is a major shift from the previous law and this helps in resolving debt issues in an effective and time-bound manner. The amount limit of one lakh & above is another factor that stresses the power of the Creditor.

Let’s see how the process of recovery works under the provisions of the Code:

A time period of 10 days is given to the Debtors to settle/pay the disputed amount. When the debtors are unable to pay the disputed amount to the Creditors viz Traders, Employees or Manufacturers, then the Insolvency Petition against the abovesaid persons are filed in the respective NCLT in the state having jurisdiction over the matter under Section 9 of the IBC, 2016. 

Also, no demand notice is served to the opposite party before filing the petition as a financial creditor under Section 7 of the Insolvency and Bankruptcy Code, 2018. If the default exceeds one lakh rupees then a Creditor may initiate the insolvency process.

The Code specifies two stages for this-

#1. Insolvency Resolution- the financial/operational creditors assess if there may be chances of rescue & resurrection of the debtor’s business.

#2. Liquidation- if the insolvency resolution does not work and the financial creditors decide to wind up the business & distribute the assets of the company among themselves.

In case of liquidation, the Code mentions a priority list and on the basis of it, the proceeds may be distributed.

How the Code is beneficial to suppliers of Goods & Services & small businesses?

The Code very clearly specifies that any entity who may have supplied goods and/or rendered services to a Debtor/Corporate Debtor and such party has defaulted in the form of whole or part payment, then the Creditor may initiate an action against the defaulter and file a petition in NCLT.

What are the benefits of the Code for Creditors?

This is a time bound process for recovery of debt and as the Creditor may initiate the process, the need of approaching the court & starting a legal action does not arise. This cuts down on the time & money that goes in legalities, which used to adversely affect the small businesses, with limited means.

What can you do if you want to recover your debt from defaulting Debtor?

The changes & incorporation of new clauses in the Insolvency & Bankruptcy Code, 2016 gives you the right to act immediately if you have outstanding debt against any entity. 

Through two easy steps, you can recover your money within a limited period and without any hassles.

The Author is associated with Muds Management Private Limited

“Insolvency Gives you a possible way to cope & renovate...It depends on your mentality what you Choose-Nissi ” - Shweta Gupta, Founder, and CEO, MUDS Management Pvt. Ltd.

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