CIRP by Financial Creditor – Section 7 of IBC

The Insolvency and Bankruptcy Code, 2016 (IBC) was enacted to provide a consolidated and time-bound process for resolving insolvency in India. Before the enactment of the IBC, laws relating to insolvency were scattered across various legislations, resulting in delays and inefficiencies. The Code brought in a comprehensive framework that balances the interests of creditors and debtors, while ensuring that distressed companies can either be revived or liquidated in a systematic manner.

A very important provision under this framework is Section 7 of the IBC, which gives financial creditors the power to initiate the Corporate Insolvency Resolution Process (CIRP) against a corporate debtor in the event of a default. Financial creditors include banks, financial institutions, and other entities who have extended financial credit such as loans, debentures, or other credit instruments.

This article explains in detail the scope, requirements, procedure, case laws, and judicial interpretations relating to Section 7 of the IBC.

Who is a Financial Creditor?

The term financial creditor is defined in Section 5(7) of the IBC as any person to whom a financial debt is owed, and includes a person to whom such debt has been legally assigned or transferred.

A financial debt as per Section 5(8) means a debt along with interest, if any, which is disbursed against the consideration for the time value of money. In simple terms, this includes loans, debentures, bonds, or any such financial arrangement where money is lent with the expectation of repayment along with interest.

Financial creditors differ from operational creditors, who supply goods or services in the ordinary course of business. While operational creditors can also initiate CIRP, the Code places financial creditors in a more central position, as they form the Committee of Creditors (CoC) and play a decisive role in the insolvency resolution process.

Section 7 of the IBC: Statutory Provision

Section 7(1) empowers a financial creditor, either individually or jointly with other financial creditors, to file an application before the Adjudicating Authority (National Company Law Tribunal – NCLT) for initiating CIRP when a default has occurred.

The provision also lays down certain requirements:

• For financial creditors falling under Section 21(6A) (like classes of creditors), the application must be filed jointly by at least 100 creditors or 10% of the total number of creditors in that class, whichever is less.
• For real estate allottees, the application must be filed by at least 100 allottees under the same project or 10% of total allottees of that project, whichever is less. This amendment was brought in 2019 to prevent misuse by individual home buyers filing cases against real estate developers.

Thus, Section 7 provides a clear statutory right to financial creditors to act against a defaulting debtor, but also builds safeguards to prevent frivolous or excessive filings.

Minimum Default Requirement under Section 7 of IBC

Originally, the Code allowed CIRP to be initiated for a default of at least ₹1 lakh. However, in view of the COVID-19 pandemic and to protect small businesses, the Central Government increased the minimum default threshold to ₹1 crore through a notification dated 24th March 2020.

This increase has limited insolvency proceedings to larger defaults, ensuring that small companies and debtors are not dragged into insolvency for relatively minor amounts.

Procedure for Initiating CIRP under Section 7

Filing the Application

• A financial creditor can file an application in Form 1 under Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016.
• The application can be filed individually, jointly, or by an authorised person such as a trustee, guardian, executor, or authorised representative of the financial creditor.
• The prescribed filing fee is ₹25,000.
  

Enclosures Required

The application must be supported by:

• Record of default from an Information Utility, or other evidence of default.
• Name of the proposed Interim Resolution Professional (IRP).
• Any other documents as prescribed by the Board.

Scrutiny by the Adjudicating Authority (NCLT)

• On receiving the application, the NCLT must ascertain the existence of default within 14 days.
• If the application is complete and no disciplinary proceedings are pending against the proposed IRP, the application is admitted.
• If incomplete, the applicant is given 7 days to rectify defects.

Grounds of Admission or Rejection

• The application is admitted if:
  • A default has occurred,
  • The application is complete, and
  • No disciplinary proceedings are pending against the proposed IRP.
• If any of these conditions are not met, the NCLT may reject the application, but only after giving the applicant a chance to rectify defects within 7 days.

Communication of Order

Within 7 days of admitting or rejecting the application, the NCLT must communicate its decision to both the financial creditor and the corporate debtor.

Landmark Cases Related to CIRP by Financial Creditor – Section 7 of IBC

Surendra Trading Company v. Juggilal Kamlapat Jute Mills (2017)

The Supreme Court held that the 7-day period for rectifying defects in an application is directory and not mandatory. Non-compliance does not make the application invalid.

Vidarbha Industries Power Ltd. v. Axis Bank Ltd. (2022)

The Supreme Court in this case interpreted Section 7(5) to mean that NCLT has discretion in admitting applications. Even if a default exists, the NCLT may consider other factors such as the financial health of the debtor before admitting the case.

This ruling introduced uncertainty, as it deviated from the earlier principle that NCLT had a limited role once debt and default were established.

M. Suresh Kumar Reddy v. Canara Bank (2023)

The Supreme Court clarified that despite Vidarbha, the general rule is that if debt and default are proven, NCLT must admit the application unless there are exceptional circumstances. This restored some certainty to the process.

Process After Admission of Application

Once the application is admitted by the NCLT, the following steps take place:

1. Declaration of Moratorium – Under Section 14, the NCLT declares a moratorium on suits, recovery actions, and enforcement proceedings against the debtor.
2. Appointment of Interim Resolution Professional (IRP) – The IRP is appointed for an initial period of 30 days.
3. Public Announcement – The IRP makes a public announcement under Section 15 inviting claims from creditors.
4. Verification of Claims – The IRP verifies claims and takes control of the corporate debtor’s assets.
5. Constitution of Committee of Creditors (CoC) – The IRP forms the CoC comprising all financial creditors. Related parties of the debtor are excluded from voting rights.
6. Appointment of Resolution Professional (RP) – The CoC appoints the RP, who takes over from the IRP.
7. Resolution Plan – The RP invites, examines, and submits resolution plans. Approval requires at least 66% vote of the CoC.
8. NCLT Approval – If the CoC approves a resolution plan, it is submitted to the NCLT for final approval. If rejected, the debtor goes into liquidation.

Timelines Under the Code

One of the unique features of the IBC is its strict timelines.

• CIRP must be completed within 180 days from the date of admission.
• A one-time extension of 90 days can be granted, making it 270 days in total.
• Later, the law was amended to provide a maximum limit of 330 days, including litigation delays.
• In Essar Steel India Ltd. v. Satish Kumar Gupta (2019), the Supreme Court held that even though 330 days is mandatory, in exceptional cases NCLT may allow further extension in the interest of justice.

This strict timeline ensures that insolvency resolution is swift and does not drag on indefinitely.

Jurisdiction under Section 7

• Territorial Jurisdiction: As per Section 60(1), the NCLT having jurisdiction over the place where the registered office of the corporate debtor is located will hear the case.
• Residuary Jurisdiction: Section 60(5) gives NCLT exclusive powers to decide all questions of law or fact relating to insolvency or liquidation proceedings.
• Exclusion of Civil Courts: Section 63 of the IBC and Section 430 of the Companies Act, 2013 bar civil courts from interfering in matters within NCLT’s jurisdiction.

In Anil Kumar Malhotra v. Mahindra & Mahindra Financial Services Ltd., the NCLAT held that contractual agreements between parties cannot override NCLT’s statutory jurisdiction under the IBC.

Important Case Laws on Section 7

1. Central Bank of India v. Simplex Infrastructures Ltd. – Application was rejected as the debtor had significant arbitral awards in its favour.
2. HDFC Bank v. John Energy Ltd. – Application was rejected considering the ongoing viability of the debtor’s contracts.
3. SBI v. Krishidhan Seeds Pvt. Ltd. – Application was kept in abeyance due to revival efforts by the debtor.
4. Essar Steel Case (2019) – Reaffirmed that CoC has commercial wisdom in approving or rejecting resolution plans, with limited judicial review.

Limitation Period

The limitation period for filing an application under Section 7 is three years from the date of default, as per the Limitation Act, 1963. Delay can be condoned if sufficient cause is shown under Section 5 of the Limitation Act.

Conclusion

Section 7 of the IBC provides a powerful remedy to financial creditors for initiating insolvency proceedings against defaulting corporate debtors. It ensures that creditors are not left helpless in cases of prolonged defaults and gives them an organised framework to either revive or liquidate the debtor.

At the same time, judicial decisions have introduced important checks and balances, ensuring that insolvency is not misused to pressurise debtors. The amendments for home buyers and threshold limits further reflect the legislature’s attempt to strike a balance between creditor protection and prevention of frivolous litigation.