(a) Where a corporate borrower is in financial difficulty and an unsecured debt has become due, would it be usual or customary for an unsecured creditor (particularly, a bank creditor) and/or the corporate borrower to attempt to negotiate some suitable arrangement for repayment of the debt before the creditor invokes legal recovery methods?

The question E1 is the same question as question C3 and has already been answered.

(a) What mechanisms are available under the legal system of this economy for unsecured creditors to collect debts owed to them by the corporate debtor?

(b) In practice, which method(s) of recovery of unsecured debts are most commonly employed by unsecured creditors of a corporate debtor?

 

The unpaid creditor can institute an ordinary civil suit for a money claim against a corporate debtor. If the unpaid debt is admitted by the corporate debtor then under the provisions of Section 434 of the Companies Act, if the debt exceeds a sum of Rs.500/- a winding up action can be instituted by issuing a winding up notice. Under such a notice the corporate debtor has to pay up an admitted debt within 21 days and if it is unable to pay up such debt, a Company Petition for winding up on the ground of inability to pay is available.

If the claim of the unsecured creditor is small or insignificant in comparison to the claim of the secured creditors, the company court directs scheduled payments to the unsecured creditors after issuing notice to the company and ascertaining the position from the company's balance sheets of the nature and extent of the security and the particulars of the secured creditors. The company court does not readily wind up companies unless there is a persistent default of several creditors or the magnitude of unsecured debt is adequate and of sufficient extent. The Company Court is slow to displace the worker's interest and cause the termination of employment consequential upon a winding up order. Once a civil suit is instituted an ordinary civil action is initiated and a trial of the claim is commenced. If it results in a judgement debt then the same procedure as is available for a secured creditors execution is available for the execution of the judgement debt.

E3. Effectiveness of judicial system

(a) How effective is the judicial and court system for the purposes of debt collection?

 

The recovery procedure for debt collection is slow and tardy. The unsecured creditor has to first prove his claim before the court action in execution and result in debt collection. Unsecured creditors, like Lessors and hire purchase contractors, normally resort to private action to recover back their leased properties or hired properties by appointing security agents after notices have been issued as the process of obtaining court directions and court recovery is slow and cumbersome.

If a judgement is delivered and it results in a judgement debt, the process is still slow as it requires service upon a company and a requirement of ascertainment of the judgement debtor's assets which can be attached or sold in execution.

(a) What effect, if any, does the commencement of insolvency proceedings against a corporate debtor have on debt recovery proceedings?

 

(b) What effect, if any, does the formal pronouncement of an insolvency administration in respect of the corporate debtor have on debt recovery proceedings?

 

We have already answered the issue in relation to the response to Question C5.