Creditors browbeat debtors with bankruptcy threat

By Supriya Majumdar, Vidhii Partners
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“When secured creditors like the respondent are driven from pillar to post to recover what is legitimately due to them, in attempting to avail of more than one remedy at the same time, they do not blow hot and cold, but they blow hot and hotter,” wrote justices Rohinton Nariman and Navin Sinha in their judgment in Swaraj Infrastructure Pvt Ltd v Kotak Mahindra Bank Ltd.

creditors
Supriya Majumdar
Associate
Vidhii Partners.

The legislators’ intention to give primacy to the recovery of debts of secured creditors and reduce hurdles created by borrowers, guarantors or mortgagors has strengthened under the Insolvency and Bankruptcy Code, 2016 (IBC), which gives such creditors a priority. Section 52 of the IBC gives secured creditors the right to either relinquish their security and queue up for payment with other creditors, or realize their security independently and then claim the remaining debt under the waterfall mechanism. However, secured creditors tend to misuse the provision by filing insolvency proceedings against going concerns without utilizing their valuable security, so as to put pressure on the debtor to make upfront payments, making it an alternative recovery mechanism. This strategy, permissible in the old regime of insolvency laws and adopted under IBC, defeats the very objective of the code, which is to reorganize and resolve debt-ridden companies while maximizing the value of the company’s assets and promoting entrepreneurship.

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Supriya Majumdar is an associate at Vidhii Partners.

creditors

Vidhii Partners
G/F Construction House
5, Walchand Hirachand Marg
Ballard Estate
Mumbai – 400 001
New Delhi | Kolkata | Bengaluru
Contact details
Tel: +91 22 4355 8555
Fax: +91 22 4355 8550
Email: vidhii.mumbai@vidhiipartners.com
Website: www.vidhiipartners.com

 

 

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