Financial creditors as key contributors: Importance of hearing intervenors in debt-related insolvency matters

The Insolvency and Bankruptcy Code, 2016 (“Code”) is a dynamic and evolving law that has undergone several amendments since its inception. These amendments reflect the need to address emerging challenges and improve the effectiveness of the legislation. Despite its evolving nature, the Code still faces certain grey areas that require further clarity. These areas include ambiguous interpretations of certain provisions and inconsistent application of the law across different cases. One such example of this is the filing of an intervention application in a petition filed under Section 7 of the Insolvency and Bankruptcy Code, 2016.

Intervention applications, especially those filed by financial creditors, may serve as a means for the Adjudicating Authority to obtain clarity and crucial information, knowledge, expertise, and insights in the workings of the Corporate Debtor. By granting intervenors the opportunity to be heard, a comprehensive understanding of the financial situation and solvency of the corporate debtor can be obtained, leading to better-informed decisions.

When a financial creditor who has lent money to the corporate debtor seeks to intervene, their inclusion becomes relevant. Such creditors may possess vital information regarding the debtor's financial standing, repayment history and potential resolution options. The involvement of financial creditors through such intervention can bring transparency to the proceedings and facilitate a more accurate assessment of the debtor's financial position. It is for this reason that the Committee of Creditors is constituted and comprises solely of creditors, for their specific knowledge and expertise aside from their financial exposure.

The Supreme Court in the case of Vidarbha Industries Power Limited vs. Axis Bank Limited (2022 SCC OnLine SC 841), laid down that the Adjudicating Authority while hearing an application under Section 7 of the Code is required to not only ascertain the existence of a debt and default but is also required to take into consideration the financial health of the corporate debtor. While the said judgments may have been passed keeping in mind the facts involved therein, it does highlight the relevance of solvency of the corporate debtor.

The main purpose, objective and spirit for the enactment of the Code as stated in the preamble is for the reorganization and insolvency resolution of the corporate persons and courts have time and again reiterated that the provisions of the Code cannot be used as a substitute for recovery proceedings. The Hon’ble Supreme Court of India in the matter Swiss Ribbons Private Limited and Anr. vs. Union of India and Ors. (2019 4 SCC 17) has carefully and categorically held that the main intent and purpose of the Code is maximizing the value of assets in the process of ‘resolution’ and that the process under the Code is not of recovery proceedings and the main aim is to keep the corporate debtor as a going concern by maximizing the value of its assets. Relevant extracts of Swiss Ribbons Private Limited and Anr. vs. Union of India and Ors. (2019 4 SCC 17) are captured below:

“It can thus be seen that the primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation. The Code is thus a beneficial legislation which puts the corporate debtor back on its feet, not being a mere recovery legislation for creditors."

Therefore, an application for intervention may assist the Adjudicating Authority in weeding out frivolous applications and shed light on the solvency and financial status of the corporate debtor. The Hon’ble NCLAT in the matter of CFM Asset Reconstruction Private Limited vs. Saudi Basic Industries Corporation Limited (Company Appeal (AT)(Ins) No. 1231 of 2022), has held that a Financial Creditor cannot ordinarily be allowed to intervene in the proceedings of insolvency. However, if there are reasons and allegations which require consideration by the Adjudicating Authority, intervention can be allowed. In the abovementioned case, the appellants were allowed to intervene in a Section 9 Application on account of exceptional facts and circumstances.

Further, the Hon’ble NCLT in the case of Sh. Suresh Kumar Verma & Ors v. Eco Green Buildtech Private Limited (C.P.(IB) No. 129 of 2023) had allowed an intervention application filed by SBICAP Ventures Limited (Fund Manager of SWAMIH Investment Fund I) and had given an opportunity to the manager of SWAMIH to put the corporate debtor back to its feet and ensure that the petitioners/ flat buyers are given possession of the units allotted to them. The Hon’ble NCLT had stated that once an order is passed under Section 7(5)(a) of the IBC, 2016 and Corporate Insolvency Resolution Process (CIRP) is initiated, a lengthy process is initiated to revive the corporate debtor. Even after the process is completed, there is no guarantee that the corporate debtor will be revived or put back on its feet. The purpose of IBC, according to the Hon’ble NCLT, is to guarantee that the corporate debtor receives outside assistance in order to get back on its feet.

The Hon’ble NCLT, while passing the present order took note of the case E.S. Krishnamurthy & Ors. vs. M/s Bharath Hi Tech Builders Pvt. Ltd. [Civil Appeal No. 3325 of 2020], wherein it was held that it is not always necessary to send the corporate debtor to CIRP. The Hon’ble NCLT also took note of the case State Bank of India vs. M/s Krishidhan Seeds Pvt. Ltd, where the NCLT, after acknowledging the earnest effort of the corporate debtor management to extricate the company from its debt predicament, opted not to immediately admit the corporate debtor into CIRP.

In the realm of corporate insolvency resolution processes, the acceptance of intervention applications, especially when they involve key points of consideration, should be seen as the norm rather than the exception. Recognizing the value and expertise that intervenors, such as the financial creditors, bring to the table, the Adjudicating Authority should ordinarily entertain such applications to ensure a comprehensive and informed decision-making process. However, it is essential to establish robust guidelines to govern the acceptance and processing of intervention applications. These guidelines should outline the parameters such as the prima facie objective of intervention and the nature of the party who can be entertained, viz. its relationship with the corporate debtor in question. By implementing a structured framework, the Adjudicating Authority can ensure consistency, clarity and fairness in assessing intervention applications.

About the authors: Angad Varma is a Partner, Saurabh Nikalje is a Senior Associate, and Kevin Chadha is an Associate at Dua Associates.

Views expressed are personal.