News analysis | Industry

Customer rights remain grey area in Insolvency & Bankruptcy code

India High Resolution Debt Concept   | Photo Credit: XtockImages

The Insolvency and Bankruptcy Code (IBC), 2016 no doubt is a path-breaking initiative in the whole reform process.

Not surprisingly, it has triggered huge debate and one of the key grey areas that had emerged in a recent cases pertained to rights of the customers in an insolvency process.

The Supreme Court had reportedly indicated that it would settle the grey areas in the code to see what role homebuyers could play in liquidation proceedings, while hearing arguments in the Jaypee Infratech case.

When the IBC 2016 was introduced, it classified company creditors into two categories — financial creditors (banks and financial intuitions) and operational creditors (suppliers and vendors). It did not address the position of other creditors or customers who could not fit into either of the two categories. The other creditors comprised segments like homebuyers, deposit holders and customers who had made advance payment for purchase, etc.

The customer angle came into spotlight in the case of homebuyers of Jaypee Infratech, customers of telecom firm Aircel and Nathella Jewellery.

An amendment was brought in to the corporate insolvency resolution process regulations in August 2017, whereby a new rule was introduced.

Regulation 9A created a new residuary category of creditors, namely, other creditors (all creditors other than financial and operational). This enables other creditors to file claims against a firm under insolvency by filing Form F with the Resolution Professional (RP). Despite the other creditors’ rule being brought in, there is still uncertainty for customers who had paid advances to the company.

“The key issue still remains whether advances paid by customers are treated similar to that of debt owed by the company to banks and other vendors in the normal course of business and the order of priority in which repayment will be made in the insolvency process,” said S. Dhanapal, senior partner, S. Dhanapal and Associates, a company secretaries firm.

The recent cases of Aircel and Nathella have again brought into focus the question whether customers who had paid advances to these companies can file their claims in Form F (meant for other creditors) with the RP since their position as far as repayment is concerned still remains to be determined, he added.

According to Monish Panda, founder, Monish Panda Associates, there is no definite rule on the treatment of customers under the IBC. “The rights and reliefs available to the customer depend upon the nature of relationship with the corporate debtor (company under insolvency process),’’ he said.

In the case of Jaypee Infratech, though homebuyers do not fall under the definition of financial creditors, the Supreme Court intervened and directed that the dues owed to buyers should be paid off first. Based upon such intervention, the Insolvency Law Committee has recommended that homebuyers with an agreement with the developers should be treated as financial creditors.

“A similar approach is being followed in the case of Amrapali [a realtor]. However, these exceptional cases cannot be said to lay down the general rule on treatment of deposits by customers,’’ he felt. According to Mr. Panda, it is not possible to lay down one general way of treating customers under the IBC considering the complexities of business models and the dynamics of day-to- day transactions and can only be determined on a scheme-to- scheme basis.

Vishal Gandhi, founder, Gandhi and Associates, said that the law required to be changed slightly in cases where “a creditor is neither a financial nor an operational creditor, but yet has a substantial amount of money, exceeding a certain threshold, to be recovered.’’

In situations like that, such a creditor/customer too should deemed to be a financial creditor and/or permitted to be part of the committee of creditors and have a vote, he said.

According to A.K. Mylsamy & Associates LLP, customers/consumers in general do not know whether they could also join the list of affected parties in the insolvency resolution process as the IBC had not defined consumers in any of the categories.

Legal protection

Efforts, no doubt, are on to provide legal protection to safeguard the interests of depositors. IBC is still emerging and in early days. The moot question, however, is: how do we classify customers of Aircel, Nathella and the like?

Their individual exposure to these firms may be small, no doubt. But, collectively, they form a major chunk of money owed. Hopefully, the Supreme Court will step in to clarify this major grey area in the code, which is proving a pain point for customers of assorted kinds and where a quick solution needs to emerge.

This article is closed for comments.
Please Email the Editor

Printable version | Apr 14, 2021 4:12:54 AM |

Next Story