Initiation of Insolvency Proceedings under Section 7, 9 & 10 of Insolvency and Bankruptcy Code

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Introduction 

The insolvency and bankruptcy code was enacted in May-28-2016. It’s a framework which was formed for the consolidation of insolvency resolution of Corporations, Partnership firms as well as Individuals. The 5 questions that raise up relating to IBC are –

  • WHY ?    – To speed up resolutions of stressed assets in the country.
  • WHO?     – Individuals, Partnership firms and Companies.
  • WHEN?   – Authority to decide insolvency application within 180 days
  • WHERE? – Fast track process of 90 days available for specified entities.
  • HOW?     – Adjudicating authority for corporates NCLT and DRT for partnership firms and individuals.

The right to exit is one of the main rights any corporate body must exercise, this code of IBC provides the Right to Exit to all corporate bodies in the economy as it creates the law to liquidate the company due to insolvency and bankruptcy. IBC has 2 different foundings

  1. Regulators
  2. Adjudicators

The regulatory body constitutes IBBI (Insolvency and Bankruptcy Board of India) and establishes 3 subordinates that are IRA (Insolvency Resolution Agencies), IP (insolvency professionals) and IU (Information Utilities). if there is any debt recast plan in any company the IRA make the code and ethics to complete the process and IP manages the company till the process is completed and the IU collects the financial info of the company to recast the debt. The debt recast plan is nothing but an analysis of how to resolve the problem of debt in a company. In the case of  Swiss Ribbons Vs Union of India[1], the supreme court has held that the main objective of the IBC is to ensure the revival and continuation of the corporate debtor. Thus, the IBC has a larger public-welfare consideration in play.

The Adjudicating authorities are NCLT ( National Company Law Tribunal ) for corporate entities and DRT ( Debt Recovery Tribunal ) for non-corporate entities.

Benefits of IBC

  1. Ease of doing business introduction if IBC led to ease of entry, competition and exit for a corporate body
  2. Banks and ARC: if any company is getting closed then all the assets and the loans will be analysed and through the process of liquidation banks can recover their loan. ARC ( Asset reconstruction company ) works on buying bad loans ( which don’t come back on time ) from the bank and resolving it through the process of Haircut.
  3. Locked up assets if any company is closed then its building or its assets gets locked up. IBC helps in freeing up locked up asses becomes easy.
  4. Increase in investments when there is a time-bound law on liquidation and bankruptcy then there is a benefit as there is a right to exit.
  5. The corporate bond market will improve general people in investing in corporate bonds.

History

The recovery actions by creditors in India which was either through the contract act or with the help of specific laws such as the Recovery of Debts Due to Banks and Financial Institutions Act, 1993[2] and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002[3] which didn’t have apt results. This restricted the certainty of the lenders and access to the debt was decreasing day by day.  This Insolvency and Bankruptcy Code was introduced by analysing 4 main standards –

  1. Insolvency Professionals
  2. Information utilities
  3. Adjudicating authorities
  4. Regulator – Insolvency and bankruptcy board of India.

The bill was passed in the year 2016 and was brought into force in the same year it had an amendment again in the year 2018 which majorly included financial creditor, resolution application, eligibility criteria and many other aspects.

In one of the verdicts, Supreme Court stated that it is no longer a “ defaulter’s paradise” it is the code for reorganisation and insolvency resolution of corporate debtors and maximising the value of their assets. In turn, it promotes entrepreneurship, then enhances the viability of credit in hands of the banks and financial institutions and provides legal framework to develop the credit markets.  

Ignition Of Insolvency Procedure

Insolvency procedure can be initiated by 3 different people –

  • by Financial Creditor,
  • by Operational Creditors and
  • by Corporate Debtor.

Financial Creditor 

Section 5(7) of IBC has defined financial creditor as “financial creditor” which means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to. [4]

Through section 7 the financial creditor of the company can initiate the insolvency resolution process through the help of adjudicating authority that is within 14 days of the receipt of the application as certain existence of default and then the adjudicating authority will give notice to the applicant to rectify the defect within the period of 7 days. later, the adjudicating authority by order within the period of 7 days will admit the application or reject it and after the admission of the application by the authority the insolvency proceedings will be started and the sum, total of the whole default must be 1,00,000/- or more.

Section 7: Initiation of corporate insolvency resolution process by financial creditor.

 (1) A financial creditor either by itself or jointly with [other financial creditors, or any other person on behalf of the financial creditor, as may be notified by the Central Government] may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred.

Explanation.—For the purposes of this sub-section, a default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor.

(2) The financial creditor shall make an application under sub-section (1) in such form and manner and accompanied with such fee as may be prescribed[5].

(3) The financial creditor shall, along with the application furnish—

        (a) record of the default recorded with the information utility or such other record or  evidence of default as may be specified[6];

      (b) the name of the resolution professional proposed to act as an interim resolution   professional; and

          (c) any other information as may be specified by the Board[7].

(4) The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor under sub-section (3).[Provided that if the Adjudicating Authority has not ascertained the existence of default and passed an order under sub-section (5) within such time, it shall record its reasons in writing for the same.]

(5) Where the Adjudicating Authority is satisfied that—

        (a) a default has occurred and the application under sub-section (2) is complete, and there is no disciplinary proceedings pending against the proposed resolution professional, it may, by order, admit such application; or

         (b) default has not occurred or the application under sub-section (2) is incomplete or any disciplinary proceeding is pending against the proposed resolution professional, it may, by order, reject such application:

Provided that the Adjudicating Authority shall, before rejecting the application under clause (b) of sub-section (5), give a notice to the applicant to rectify the defect in his application within seven days of receipt of such notice from the Adjudicating Authority.

(6) The corporate insolvency resolution process shall commence from the date of admission of the application under sub-section (5).

(7) The Adjudicating Authority shall communicate—

      (a) the order under clause (a) of sub-section (5) to the financial creditor and the corporate debtor;

       (b) the order under clause (b) of sub-section (5) to the financial creditor,

within seven days of admission or rejection of such application, as the case may be.

In the case of Ferro Alloys Corpn. Ltd. v. Rural Electrification Corpn. Ltd.[8], the Financial Creditor filed an application under section 7 of IBC against the guarantor (being a company). The principal borrower was also a corporate person. The NCLAT held that such an application was maintainable as a Corporate Insolvency Resolution Process can be initiated against a corporate guarantor before initiating a CIRP against the Principal Borrower. The Hon’ble Supreme Court upheld the order of the National Company Law Appellate Tribunal. Pertinently this was a case where the Principal Borrower was also a corporate person.

Operational Creditor

Section 5(20) and (21)[9], Operational Creditors under IBC refer to those to whom any debt is owed by a Corporate Debtor, such debt being recognised as an “operational debt‘, i.e. one that has been incurred with respect to the provision of goods and services, including employment or with respect to payment of dues under any law to the government. While financial debts are owed with respect to money, operational debts are owed with respect to the provision of goods and services.

Section 8 and 9 of IBC establishes the procedure for initiating the insolvency proceedings through the operational creditor. When there is a default on the part of the corporate debtor then the operational creditor will demand through the notice of nonpayment. The corporate debtor within 10 days of the receipt of the demand notice or copy of the invoice to the operational creditor pays the unpaid operational debt then the matter will be closed, if not then the existence of the dispute will be identified and within 10 days of the time the application to the adjudicating authority will be filed to initiate the insolvency resolution process then the authority will pass an order within 14 days upon admitting the application or rejecting it and the sum total of the whole default must be 1,00,000/- or more.

Section 9: Application for initiation of corporate insolvency resolution process by operational creditor.

(1) After the expiry of the period of ten days from the date of delivery of the notice or invoice demanding payment under sub-section (1) of section 8[10], if the operational creditor[11] does not receive payment from the corporate debtor[12] or notice of the dispute[13]under sub-section (2) of section 8, the operational creditor may file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process.

(2) The application under sub-section (1) shall be filed in such form and manner and accompanied with such fee as may be prescriAbed[14].

(3) The operational creditor shall, along with the application furnish—

 (a) a copy of the invoice demanding payment or demand notice delivered by the operational creditor to the corporate debtor;

(b) an affidavit to the effect that there is no notice given by the corporate debtor relating to a dispute of the unpaid operational debt;

(c) a copy of the certificate from the financial institutions maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt

[by the corporate debtor, if available;]

[(d) a copy of any record with information utility confirming that there is no payment of an unpaid operational debt by the corporate debtor, if available; and

(e) any other proof confirming that there is no payment of any unpaid operational debt by the corporate debtor or such other information, as may be prescribed.]

(4) An operational creditor initiating a corporate insolvency resolution process under this section, may propose a resolution professional to act as an interim resolution professional.

(5) The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), by an order—

(i) admit the application and communicate such decision to the operational                                       creditor and the corporate debtor if,—

         (a) the application made under sub-section (2) is complete;

         (b) there is no [payment] of the unpaid operational debt;

         (c) the invoice or notice for payment to the corporate debtor has been delivered by  the operational creditor;

           (d) no notice of dispute has been received by the operational creditor or there is no record of dispute in the information utility; and

           (e) there is no disciplinary proceeding pending against any resolution professional proposed under sub-section (4), if any.

 (ii) reject the application and communicate such decision to the operational creditor and the corporate debtor, if—

         (a) the application made under sub-section (2) is incomplete;

         (b) there has been [payment] of the unpaid operational debt;

         (c) the creditor has not delivered the invoice or notice for payment to the corporate debtor;

         (d) notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility; or

         (e) any disciplinary proceeding is pending against any proposed resolution professional:

Provided that Adjudicating Authority, shall before rejecting an application under sub-clause (a) of clause (ii) give a notice to the applicant to rectify the defect in his application within seven days of the date of receipt of such notice from the adjudicating Authority.

(6) The corporate insolvency resolution process shall commence from the date of admission of the application under sub-section (5) of this section.

Corporate Debtor

A corporate debtor is other wise known as a corporate applicant which is been defined under section 5(5) of IBC as  “corporate applicant” means— (a) corporate debtor; or (b) a member or partner of the corporate debtor who is authorised to make an application for the corporate insolvency resolution process under the constitutional document of the corporate debtor; or (c) an individual who is in charge of managing the operations and resources of the corporate debtor; or (d) a person who has the control and supervision over the financial affairs of the corporate debtor;[15]

If the corporate debtor or the corporate applicant furnishes information on a resolution professional to act as interim resolution professional along with the bank account can as to the adjudicating authority for initiating the CIRP and within 14 days the authority must admit or reject the application and the sum total of the whole default must be 1,00,000/- or more.

Section 10: Initiation of corporate insolvency resolution process by corporate applicant.

(1) Where a corporate debtor has committed a default, a corporate applicant thereof may file an application for initiating corporate insolvency resolution process with the Adjudicating Authority.

(2) The application under sub-section (1) shall be filed in such form, containing such particulars and in such manner and accompanied with such fee as may be prescribed.

[(3) The corporate applicant shall, along with the application, furnish—

(a) the information relating to its books of account and such other documents for such period as may be specified;

(b) the information relating to the resolution professional proposed to be appointed as an interim resolution professional; and

(c) the special resolution passed by shareholders of the corporate debtor or the resolution passed by at least three-fourth of the total number of partners of the corporate debtor, as the case may be, approving filing of the application.]

(4) The Adjudicating Authority shall, within a period of fourteen days of the receipt of the application, by an order—

(a) admit the application, if it is complete [and no disciplinary proceeding is pending3 against the proposed resolution professional]; or

(b) reject the application, if it is incomplete[or any disciplinary proceeding is pending3 against the proposed resolution professional]:

Provided that Adjudicating Authority shall, before rejecting an application, give a notice to the applicant to rectify the defects in his application within seven days(i) from the date of receipt of such notice from the Adjudicating Authority.

(5) The corporate insolvency resolution process shall commence from the date of admission of the application under sub-section (4) of this section.

In the case of Phoenix ARC Vs Spade Financial Services[16], it was observed that the IBC provides that any related party of the corporate debtor does not have the right to be part of a committee of creditors . The object of such a provision is to prevent the decisions of the corporate creditor from being sabotaged by related parties of the corporate debtor.

Conclusion

India was a country that adopted the concept of a Socialist economy, but as time passed to increase the economy brought the concept of LPG (liberalization, privatization and globalization ) which eased for starting of independent and corporate establishments in the year 1991.

Therefore, the creation of a corporate entity was easier and in the year 2001 right to compete was also established in this industrialized corporate country, but the main problem was the right to exit from this corporate economy was not provided easily, with the introduction of Insolvency and Bankruptcy Code in the year 2016 it was easier for any corporate personality to liquidate and close down their body.

Therefore the introduction of IBC has played a major role in the Indian economy. Within the period of 6 years from its introduction the code has aimed at easing the process of “right to exist” for a corporate body and which lead to an increase in investments in these private institutions as there is benefit arising out of it and also lead the general public to invest in their corporate bonds.


[1] WRIT PETITION (CIVIL) NO. 99 OF 2018

[2] https://www.indiacode.nic.in/handle/123456789/1775?sam_handle=123456789/1362

[3] https://legislative.gov.in/sites/default/files/A2002-54.pdf

[4] https://www.mca.gov.in/Ministry/pdf/TheInsolvencyandBankruptcyofIndia.pdf

[5] https://ibclaw.in/ibc-aaa-rules-2016/

[6] https://ibclaw.in/ibbi-cirp-regulations/

[7] https://ibclaw.in/ibbi-cirp-regulations/

[8] C.P. (IB) No. 251/KB/2017

[9] https://www.mca.gov.in/Ministry/pdf/TheInsolvencyandBankruptcyofIndia.pdf

[10] https://ibclaw.in/section-8-insolvency-resolution-by-operational-creditor-chapter-ii-corporate-insolvency-resolution-processcirp-part-ii-insolvency-resolution-and-liquidation-for-corporate-persons-the-insolvency-and/

[11] https://ibclaw.in/section-5-definitions-under-part-ii-part-ii-insolvency-resolution-and-liquidation-for-corporate-persons-the-insolvency-and-bankruptcy-code-2016-ibc-sections/

[12] https://ibclaw.in/section-5-definitions-under-part-ii-part-ii-insolvency-resolution-and-liquidation-for-corporate-persons-the-insolvency-and-bankruptcy-code-2016-ibc-sections/

[13] https://ibclaw.in/dispute-and-existence-of-a-dispute/

[14] https://ibclaw.in/ibc-aaa-rules-2016/

[15] https://www.mca.gov.in/Ministry/pdf/TheInsolvencyandBankruptcyofIndia.pdf

[16] Civil Appeal No. 2842 of 2020


Paper submitted by: M.V.Shubhasri (Kristu Jayanti College of Law, Bengaluru).


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