Dr Sahadulla and the infinite loop!
I happened to read two messages in social media platforms in a span of twenty four hours, which provoked my thoughts due to the striking similarity in those messages. The first one is a video message with the title “ Dr Sahadulla , the MD of KIMS became pauper” in which, Mr. Shajan, the self-proclaimed evangelist of ‘Marunadan Malayali’ questioning all the ills and odds under the sun, is celebrating the news about a notice published in newspapers under section 102 of the Insolvency and Bankruptcy Code 2016. Another write up which I read was a sarcastic note made by Mr Tony Thomas, a very prominent corporate personality, on his facebook page. In his message, he took a dig on the present socio-political atmosphere of the State by comparing it as ‘Churuli- An infinite loop’, where the people of the State are behaving as if they are caught up in the infinite loop and proclaiming that to get out of this dirty loop, the fellow citizens have to identify the ‘bridge’ to cross the border to a new and free world.
Mr. Shajen, in his video, had made a stinging personal attack on Dr Sahadulla with a clear intention to belittle him and tarnish his image among the society by concealing the material facts or by willfully not disclosing the full picture behind the news. He had projected Dr Sahadulla as a criminal , thief and what not!!, for appearing his name in a legal notice and called him as ‘pauper’. Is that the truth? Though I am not clear about the reason behind such a targeted attack, as an Advocate and Insolvency Professional, I found that many of the statements made by Mr Shajen is exaggerated and aimed to create confusion in the mind of his audience. It is wrong and shameful to color a person as a thief without knowing the facts and it is cruel to unnecessarily belittling him among the public without understanding the law .
As per the provisions of the Insolvency and Bankruptcy Code, when a Corporate Person(Company /LLP) is unable to meet its debt obligations, the creditors can approach the Adjudicating Authority, the National Company Law Tribunal(NCLT), for invoking the Corporate Insolvency Resolution Process (CIRP) against it. If satisfied with the contents of the application submitted by the Creditor, the NCLT shall admit the application and initiate the CIRP against the Corporate Debtor. On its initiation, the Resolution Professional shall step into the shoes of the promoters of the Corporate Debtor and strives to operate it as a going concern with the help of Committee of Creditors. The Resolution Professional , with the assistance and advice of Committee of Creditors, invites the interested buyers to take over the defaulting company along with its debts. The interested parties can submit the plan to takeover the corporate debtor before the Resolution Professional and Committee of Creditors for its consideration. The price and value of the (assets) corporate debtor is being arrived through a proper price discovery mechanism as envisaged in the Insolvency and Bankruptcy Code(IBC). In practical sense, a buyer who is agreeing to takeover a distressed asset shall look for a better price and he will negotiate with Committee to have a better deal in all aspects. During the negotiation and plan approval process, the Committee of Creditors, which consist only of financial institutions, may approve the best plan which is meeting all the specific parameters of the law. Once the Committee approves a plan, then the same shall be forwarded to the NCLT for its approval. NCLT after getting satisfied with the compliance of the plan with the law, approve the same. On approval of the plan, the same shall be binding on the corporate debtor and its employees, members including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed, guarantors and other stakeholders involved in the resolution plan.
In most of the cases, the amount quoted by the buyer may not be sufficient to meet the entire debt obligations of the Corporate Debtor, considering various aspects such as valuation , economic conditions, cost for revival of the corporate debtor etc. As the scheme of the code is to ‘revive the corporate debtor and thereby rejuvenate the credit eco system’ , the recovery of the debt of the creditors is not the first priority. Due to that reason the creditors may have to forgo their money, either in part or in full, and make some compromises during the negotiation process. Once a plan is approved by the NCLT, then the Corporate Debtor is getting a fresh start in a clean slate and the creditors including its employees, members including the Central Government, any State Government or any local authority have to be satisfied with the allocation given to them in the Resolution Plan. The Corporate Debtor is fully relieved from its debt obligations and it is no more responsible for its previous debts.
Consequent to the approval of the plan, the old promoters are also getting relieved from all the liabilities and they can carry on with their life further. But, interestingly, due to the partial invocation of the provisions of the Part III of the Code, they are not getting relieved from the debt nets if they had given their personal guarantee to the creditors!
The banks , who are the lenders to the companies, shall always insists for personal guarantees of its promoters as well as the directors, as a pre-condition to extend the loan facilities. The said guarantee is to nullify the protection given to the promoters under the ‘limited liability clause’ of a company and to make them personally ‘unlimitedly liable’ for the debts of the company, in case of any default. A personal guarantor is a surety to the bank as he guarantees the bank to repay the debts in case the company is making default in repayment of its loan. While determining the fate of the Personal Guarantors, the Apex Court underlines that, the release or discharge of the principal borrower(Corporate Debtor) from the debt owed by its creditor, by an involuntary process ie by operation of law, or due to liquidation or insolvency proceedings, does not absolve the surety/guarantor of his or her liability, which arises out of an independent contract and also observed that the same logic applies to personal grantors of corporate debtors.
So, from the above, one can understand that the initiation of Insolvency proceedings against a personal guarantor is not equivalent to declaring him as ‘pauper’. It is a process that is being observed by the law to protect the interest of the Creditors who had lent money to a Corporate person. In the matter of Dr M I Sahadulla, the appellate tribunal had dismissed the proceedings against the Corporate Debtor (where he is only a guarantor) and there is no proceedings pending against the said Company. The courts had given time to the company to settle the loan and the said period is in effect. However, the banks had approached the NCLT for initiating the insolvency proceedings against the personal guarantors as part of their duty to recover the money. Though it is a parallel proceedings, the banks shall explore the possibility of getting a resolution plan from a prospective ‘buyer’. If the said resolution attempt fails, then only the question of liquidation of the company will arise. If the assets of the company are not sufficient to meet the liability of the Company, then only the banks will encroach upon the assets of the personal guarantors. So there is a long road to travel and there are many more options before selling the assets of the guarantor. Without knowing these facts, one should not come to a conclusion and in my view , attempts contrary to that is mere sadism and sheer cruelty. Mr Shajen, Shame on you!!
We will not grow as a society unless and until we learn to sympathise on the down fall of others. Doing business is not a crime and all business personnel are not criminals. As rightly pointed out by Mr. Tony Thomas, we are in an infinite loop, and it is difficult to escape from it, unless and until we search for the bridge and cross the same at the earliest.
Bijoy P Pulipra LL.B. FCS, IP, RV Advocate