Initiation of Corporate Insolvency Resolution Process by Financial Creditors under Section 7 of the IBC: Scope, Requirements, and Procedures – By Shivam Jadaun

Initiation of Corporate Insolvency Resolution Process by Financial Creditors under Section 7 of the IBC: Scope, Requirements, and Procedures

Shivam Jadaun
Fifth Year, B.A. LL.B (Hons.), Faculty of Law, Jamia Millia Islamia, New Delhi 

 Introduction

A financial creditor[1] is a person to whom a financial debt is owed, including a person to whom such debt has been legally assigned or transferred. To be considered a financial creditor, the debt owed to the person must meet the definition of “financial debt” under “Section 5(8)” of the IBC, 2016.

Moreover, financial creditors under the Insolvency and Bankruptcy Code, 2016 (IBC) are those who have extended financial facilities like loans, debentures or other debt instruments to the corporate debtor, as opposed to operational creditors who have provided goods and services in the ordinary course of business.

Under the IBC, financial creditors are crucial in initiating the Corporate Insolvency Resolution Process (CIRP) against corporate debtors. Section 7 of the IBC code specifically empowers financial creditors to file an application before the National Company Law Tribunal (NCLT) to initiate CIRP upon the occurrence of a default by the corporate debtor. This article delves into the scope and requirements for financial creditors to initiate the CIRP under Section 7 of the IBC. It examines the conditions for filing a Section 7 application, the information and documents required, and the process followed by the NCLT in admitting or rejecting such applications.

Section – 7 of the IBC, 2016 and its requirements

Section 7 of the IBC, 2016[2], enables a financial creditor to initiate the corporate insolvency resolution process CIRP against a corporate debtor when a default occurs. The application for CIRP can be made individually or jointly with other financial creditors and must be submitted to the Adjudicating Authority (NCLT) with evidence of default and other required information. Upon receiving the application, the Adjudicating Authority has 14 days to verify the default.

If the application is complete and no disciplinary actions are pending against the proposed resolution professional, the Authority admits the application, starting the CIRP and If the application is incomplete, the applicant is given seven days to correct any defects. Once admitted, the CIRP begins, and the Authority informs both the financial creditor and the corporate debtor of its decision.

The process of insolvency of corporate debtors under the code applies where the minimum default amount is INR 1 crore. Initially, the minimum amount of default for initiating CIRP was originally INR 1 lakh, but the Government vide notification dated 24th March 2020, increased the same to INR 1 crore[3].

It is pertinent to note that, CIRP may be initiated by either:

1. A financial creditor (FC) under Section 7
2. An operational creditor (OC) under Section 9
3. A corporate applicant of a corporate debtor under Section 10 of IBC, 2016.

Procedure for Initiation of CIRP under IBC by Financial creditor

• Filing an Application Before Adjudicating Authority (AA) under Section 7(1):

A financial creditor, either individually or jointly with other financial creditors, or any person authorized by the Central Government, may file an application to initiate CIRP against a corporate debtor upon the occurrence of a default.

Further, with respect to the Notification dated 27th February 2019[4], the persons who can file an application on behalf of a financial creditor include:

1. A guardian
2. An executor or administrator of the estate of a financial creditor
3. A trustee
4. A person duly authorized by the Board of Directors of a company.

• Requisites of the Application form and the fees under Section 7(2):

The Financial Creditor, or a group of them, must make an application in Form 1[5], under Section 7, read with Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016). The application must include necessary documents and records, and in the case of an assignee or transferee, a copy of the assignment or transfer agreement. Further, the application must be served to the registered office of the corporate debtor and the Board before filing with the Adjudicating Authority, i.e. NCLT.

According to the schedule to sub-rule (3) of rule 10 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, the fee for filing a CIRP application by a financial creditor is Rs. 25,000.

• Required Enclosures with the Application under Section 7(3):

While making the application, it must include these enclosures:

1. Record of default from an information utility or other specified evidence
2. Name of the proposed interim resolution professional
3. Any other specified information

• Time-Period for Ascertainment of Default by AA under Section 7(4):

The Adjudicating Authority must ascertain the existence of default within 14 days of receiving the application, whether a default has occurred or not, either from the records of an information utility or other evidence provided by the financial creditor which is directory not mandatory in nature. Further, non-adherence to this will not make the application null and void.

Grounds of Admission or Rejection of Application by AA under Section 7(5):

 The AA will admit the application if:

1. A default has occurred
2. The application is complete
3. No disciplinary proceedings are pending against the proposed resolution Professional.

If the above conditions are not met, the AA “may” reject the application, but must give notice to rectify the defect within 7 days before rejecting it as following the principle of Natural Justice. The timeline is mandatory. Further, non-adherence to this will make the application null and void.

The principle related to the seven days has been upheld in the case of Supreme Court Ruling in Surendra Trading Company v. Juggilal Kamlapat Jute Mills Company Ltd. (2017)[6]: the court held that the 7-day period for rectifying defects is directory, not mandatory and will not make the proceedings null and void.

For the term “May” The Supreme Court in Vidarbha Industries Power Ltd. v. Axis Bank Ltd.[7] interpreted Section 7(5) to imply that the NCLT has the discretionary power in admitting applications. This decision allowed the NCLT to consider the financial health and viability of the corporate debtor, potentially rejecting applications despite the existence of default.

The facts of this landmark case are as follows; VIPL, a power-generating company, faced financial challenges due to loan repayment delays stemming from regulatory issues. Axis Bank, one of VIPL’s lenders, sought to initiate the Corporate Insolvency Resolution Process (CIRP) under Section 7 of the IBC. VIPL argued that the NCLT had discretionary power, contending that Section 7(5)(a) allows for consideration of the corporate debtor’s financial health alongside default. Axis Bank argued for a mandatory interpretation. The Supreme Court ruled that the NCLT holds discretionary power, permitting it to assess a corporate debtor’s financial health beyond mere default, potentially allowing rejections of applications despite defaults.

Subsequently, The Vidarbha ruling created ambiguity, leading to contrasting decisions in various cases.

Further, In the case of M. Suresh Kumar Reddy v. Canara Bank[8], the Supreme Court clarified that despite the Vidarbha Industries case, the NCLT generally must accept applications under Section 7 of the IBC if there is clear debt and default evidence unless exceptional circumstances exist. The ruling reaffirms previous decisions emphasizing the NCLT’s limited discretion in rejecting Section 7 petitions and settles debates.

Several NCLT decisions have shown a tendency to use discretion, considering the viability of the Corporate Debtor. The case laws related to the same principle of discretion are as follows:

• • In the case of Central Bank of India v. Simplex Infrastructures Ltd.[9], the

Application was rejected due to the debtor’s significant pending arbitral awards.

• • Further, In the case of HDFC Bank Ltd. v. John Energy Ltd.[10], the Application was rejected considering the Corporate Debtors’ significant market presence and active contracts.
  • In the case of SBI v. Krishidhan Seeds (P) Ltd.[11], the Application was kept in abeyance due to the debtor’s efforts to revive it.

• Post Admission of the Application by the NCLT, these requirements have to be full-filled as well;

1. • Appointment of Interim Resolution Professional by Adjudicating Authority Under Section 16(1) Of IBC, 2016. The interim resolution professional serves for up to thirty days from appointment until the resolution professional under Section 22 is appointed. This provision is also directory in nature and non-adherence to this will not make the application null and void.
   • There shall be a Declaration of Moratorium under Section 14 and a Public Announcement Under Section 15 by the Interim Resolution Professional to invite claims from creditors of the Corporate Debtor.
   • Submission Of Proof of Claims by Creditors To IRP.

• Post the Requirements, mentioned above The IRP will gather all the claims, verify them, and ascertain the status of the Corporate Debtor Under Section 18 of the IBC, 2016.
• The interim resolution professional (IRP) will constitute the “Committee of Creditors” under Section 21 of the IBC, 2016. The CoC comprises all the financial creditors of the corporate debtor. However, a related party to whom the corporate debtor owes a financial debt does not have any right of representation, participation or voting in the CoC. The first meeting of the Committee of Creditors shall be held within seven days of the constitution of the Committee of Creditors.
• Post Constitution of the Committee of Creditors, there shall be an Appointment of a Resolution Professional Under Section 22 of the IBC, 2016.

The Role of a Resolution Professional has been stipulated Under Section 25 Of The IBC, 2016 which is as follows;

• • To invite prospective resolution plan.
  • To examine the resolution plan.
  • To act on behalf of the corporate debtor.
  • To submit the plan before the AA for approval.
  • To file information collected with the information utility.
  • To appoint legal professionals and accountants.
  • To present the resolution plan before the CoC.
  • To preserve, protect, and monitor the assets of the corporate debtor.
• The resolution professional will prepare the resolution plan under Section 29 of the act and the Resolution plan has to be proposed and approved by at least 66 % majority by the creditors under Section 30 (4) of the act.
• Further, Post approval of the Resolution plan, The Filing of the Resolution plan has to be done before the Adjudicating authority i.e. NCLT. Either the AA will approve the resolution plan under Section 31 of the act or it will liquidate the corporate debtor’s assets under Section 33 of the act.
• As per Section 12(1) of the Code, the CIRP shall be completed within 180 days from the date of admission of the application to initiate such process. The timeline is mandatory and Non-compliance to it will result in the application becoming null and void. The Adjudicating Authority may grant a one-time extension of 90 days. The maximum time within which CIRP must be mandatorily completed, including any extension or litigation period, is 330 days. However, in exceptional cases, the said time limit can be extended even beyond 330 days.

The Supreme Court in the matter of Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Others[12] held that the Adjudicating Authority may extend the timeline for completion of CIRP beyond 330 days in exceptional cases where the relevant litigants could not be held liable for such delay and the said extension is in the interest of all stakeholders.

Commencement and Limitation under the act 

The date of Commencement of CIRP is stipulated under Section 7(6) of the act. It commences with an order from the Adjudicating Authority (AA) admitting an application filed by a financial creditor, operational creditor, or corporate applicant.

Moreover, the period of limitation for filing an application under Section 7 of the IBC is three years from the date of default, which can be extended only by application under Section 5 of the Limitation Act if a case for condonation of delay is made out.

Jurisdiction of the cases under Section 7 of the act 

• Territorial Jurisdiction is stipulated under Section 60(1) of the act. The relevant bench of the National Company Law Tribunal (NCLT) where the registered office of the corporate debtor is located has territorial jurisdiction over insolvency resolution and liquidation proceedings.
• Residuary Jurisdiction under Section 60(5). The NCLT has residuary jurisdiction to consider all questions of law or fact arising out of or concerning the corporate debtor’s insolvency resolution or liquidation under the IBC. This jurisdiction is exclusive and bars other courts from hearing such applications or procedures.
• Moreover, there has been Conflict with Civil Courts concerning the Insolvency matters. The IBC bars civil courts from hearing matters that fall within the purview of the NCLT’s jurisdiction. Section 430 of the Companies Act, 2013, and Section 63 of the IBC ensure that civil courts do not interfere with insolvency proceedings.
• Special Courts[13] under the IBC are designated to try criminal offences punishable under the Companies Act, 2013, with imprisonment of two years or more. These courts are established under Chapter XXVIII of the Companies Act and are empowered to take cognizance of offences only on a complaint made by the Central Government, the Insolvency and Bankruptcy Board of India (IBBI), or an authorized person.

The NCLAT’s decision in the case of, Anil Kumar Malhotra v. M/s Mahindra & Mahindra Financial Services Ltd[14]. emphasizes that NCLT’s territorial jurisdiction, defined by the Insolvency and Bankruptcy Code, cannot be overridden by contractual agreements. Even if a facility agreement designates Mumbai courts, NCLT New Delhi, where the corporate debtor is registered, maintains jurisdiction. This ruling dismisses the appeal by the suspended director of the corporate debtor.

In the case of JK Jute Mills Company Ltd. v. M/s Surendra Trading Company[15], the NCLAT held that time is of the essence under the Code, which requires the NCLT and all stakeholders to perform within the time limits prescribed except in exceptional circumstances. However, the NCLAT held that the 14-day timeline is a directive, and the NCLT has inherent powers to extend the 14 days on a case-to-case basis in the interest of fairness and justice. It was further observed that the period of 7 days to rectify the defects in the application is mandatorily compiled and no concession could be granted in this regard. Also, the period for the entire resolution process as prescribed by Section 12 of the code is the maximum time provided for completion.

A Brief Timeline (As Stipulated in the Code)

Thus, the process has to be compulsorily completed within 330 days including the extensions granted. Section 12(3) further provides for an extension of 90 days for proceedings that go beyond 330 days due to unavoidable delays.

Conclusion

In conclusion, Based on Section 7 of the Insolvency and Bankruptcy Code, 2016, financial creditors wield a crucial tool to initiate Corporate Insolvency Resolution Processes (CIRP) against defaulting corporate debtors. This provision mandates detailed applications supported by evidence of default, filed before the National Company Law Tribunal (NCLT). Upon admission, it commences with the appointment of an interim resolution professional and the formation of a Committee of Creditors (CoC). Judicial interpretations underscore that while default is necessary, the NCLT retains discretionary powers to consider a debtor’s financial health. Timely completion within statutory timelines, including extensions under exceptional circumstances, ensures efficient resolution or liquidation, reinforcing the framework’s goal of protecting stakeholders and promoting economic stability.

References:

[1] The Institute of Company Secretaries of India, Insolvency and bankruptcy law & practice. Available at (https://www.icsi.edu/media/webmodules/Insolvency%20law%20and%20practice.pdf).

[2] Section 7, IBC Laws, Initiation of corporate insolvency resolution process by financial creditor. Available at (https://ibclaw.in/section-7-initiation-of-corporate-insolvency-resolution-process-by-financial-creditor-chapter-ii-corporate-insolvency-resolution-processcirp-part-ii-insolvency-resolution-and-liquidation-for-corpor/).

[3] Ministry of Corporate Affairs. (2020, March 24). Notification. Available at (https://www.mca.gov.in/Ministry/pdf/Notification_28032020.pdf).

[4] Ministry of Corporate Affairs. (2019, February 27). Notification. Available at (https://ibbi.gov.in/webadmin/pdf/whatsnew/2019/Mar/199039_2019-03-04%2022:05:21.pdf).

[5] Form 1, Under section 7 of the Insolvency and Bankruptcy Code, 2016 read with Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Available at (https://www.llcairp.com/wp-content/themes/pdf/IBC%20Forms/Form-1.pdf).

[6] [2017] ibclaw.in 08 SC

[7] (2022) ibclaw.in 118 SC

[8] (2022) ibclaw.in 1080 NCLAT

[9] NCLT dismisses Central Bank insolvency plea against Simplex Infrastructures Judgement

[10] 2023 SCC OnLine NCLT 246

[11] (2022) ibclaw.in 40 SC

[12] (2019) ibclaw.in 07 SC

[13] The Institute of Company Secretaries of India, Framework for “Special Courts” under IBC. Available at (https://icsiiip.in/panel/assets/images/knowledge_capsules/16331593927762IBC_Knowledge_Capsule_19_%283%29.pdf).

[14] (2022) ibclaw.in 301 NCLAT

[15] [2017] ibclaw.in 08 SC