Persons Who May Initiate CIRP under IBC

The Insolvency and Bankruptcy Code, 2016 (IBC) is one of the most significant legislations in the field of corporate and financial law in India. It was enacted to consolidate and amend laws relating to insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner. The Code lays down a clear framework for resolving insolvency in order to promote entrepreneurship, ensure availability of credit, and balance the interests of all stakeholders.

One of the key aspects of the Code is the Corporate Insolvency Resolution Process (CIRP), which applies when a corporate debtor commits a default. Section 6 of the Code specifies the persons who may initiate CIRP against such a debtor. Understanding who can approach the adjudicating authority, and under what conditions, is crucial for both students of law and practitioners in the field.

This article explains in detail the categories of persons entitled to initiate CIRP, the meaning of financial and operational creditors, the position of homebuyers, corporate debtors themselves, corporate and personal guarantors, and related judicial pronouncements.

Legal Framework under Section 6 of IBC

Section 6 of the Code provides:

“Where any corporate debtor commits a default, a financial creditor, an operational creditor or the corporate debtor itself may initiate corporate insolvency resolution process in respect of such corporate debtor in the manner as provided under this Chapter.”

Thus, three categories of persons can initiate CIRP:

1. A financial creditor
2. An operational creditor
3. The corporate debtor itself (through a corporate applicant)

This classification is simple on the face of it, but each category has a specific legal meaning under the Code, which we must understand before moving further.

Understanding Key Definitions

Creditor, Debt and Claim

• Creditor (Section 3(10)): Any person to whom a debt is owed, and includes financial, operational, secured, unsecured creditors and decree-holders.
• Debt (Section 3(11)): A liability or obligation in respect of a claim which is due from any person, including financial debt and operational debt.
• Claim (Section 3(6)): A right to payment, whether reduced to judgment or not, fixed or disputed, secured or unsecured; or a right to remedy for breach of contract which gives rise to such payment.

The Supreme Court in Swiss Ribbons Pvt. Ltd. v. Union of India clarified that a claim becomes a debt only when it is due, and default occurs when the debt is due and payable but not paid.

Corporate Debtor

Under Section 3(8), a corporate debtor means a corporate person who owes a debt. Section 3(7) defines corporate person as a company under the Companies Act, a limited liability partnership (LLP), or any other incorporated entity with limited liability. Financial service providers are excluded from this definition.

Financial Creditors under IBC

A financial creditor is defined in Section 5(7) as any person to whom a financial debt is owed, including persons to whom such debt has been legally assigned or transferred. In simple terms, these are lenders who provide money to the debtor against the promise of repayment with interest.

Financial Debt

Section 5(8) defines financial debt as a debt, along with interest if any, disbursed against the consideration for the time value of money. It includes:

• Money borrowed against interest
• Amounts raised through bonds, notes, debentures, or similar instruments
• Liabilities under finance or capital leases
• Receivables sold or discounted (except on non-recourse basis)
• Forward sale or purchase agreements with commercial effect of borrowing
• Derivative transactions
• Counter-indemnity obligations in respect of guarantees or letters of credit
• Any liability in respect of guarantees or indemnities

The key feature is that the transaction should be against time value of money, meaning compensation for the period for which money is lent.

Homebuyers as Financial Creditors

One of the important developments under the IBC was the inclusion of homebuyers as financial creditors. Earlier, there was confusion whether amounts paid by homebuyers to builders constituted financial debt.

• The Insolvency Law Committee (2018) recommended that money raised from allottees in a real estate project is essentially used for financing the project and should be treated as financial debt.
• This was incorporated through an amendment, adding an explanation to Section 5(8)(f), deeming allottees under a real estate project as financial creditors.
• The Supreme Court in Pioneer Urban Land and Infrastructure Ltd. v. Union of India (2019) upheld this position, confirming that homebuyers are financial creditors.

This change gave homebuyers the right to initiate CIRP against defaulting builders and to be represented in the Committee of Creditors (CoC).

Operational Creditors under IBC

Section 5(20) defines an operational creditor as any person to whom an operational debt is owed. Section 5(21) further explains operational debt as a claim in respect of:

• Provision of goods or services
• Employment
• Dues payable to the Central or State Government or any local authority

Thus, suppliers, employees, and government authorities collecting statutory dues like GST or income tax fall under this category.

Examples and Case Law

• Employees and Trade Unions: In JK Jute Mill Mazdoor Morcha v. Juggilal Kamlapat Jute Mills, the Supreme Court recognised that a trade union can file on behalf of its members as operational creditors.
• Government Dues: Tax authorities can file claims before NCLT for dues pending before commencement of CIRP.
• Rent Arrears: In Sarla Tantia v. Nadia Health Care (P) Ltd., NCLT held that recovery of rent could be considered operational debt since letting out premises amounts to provision of services. However, in Jindal Steel v. DCM International, NCLAT held otherwise, showing divergence of opinion.

Operational creditors play a vital role, though their rights in the Committee of Creditors are limited compared to financial creditors.

Corporate Debtor and Corporate Applicant

The Code also allows the corporate debtor itself to initiate CIRP through a corporate applicant under Section 10. A corporate applicant can be:

• The corporate debtor itself
• A member or partner authorised under constitutional documents
• An individual in charge of management or supervision of financial affairs

This provision allows debt-ridden companies to voluntarily seek resolution before they reach a stage of liquidation.

Corporate and Personal Guarantors

The Code also recognises the role of guarantors in insolvency proceedings.

• Corporate Guarantor [Section 5(5A)]: A corporate person who gives a guarantee for a corporate debtor.
• Personal Guarantor [Section 5(22)]: An individual surety to a corporate debtor.

The liability of guarantors is co-extensive with that of the debtor under the Indian Contract Act, 1872. Creditors can proceed against guarantors as well.

In Dr. Vishnu Kumar Agarwal v. Piramal Enterprises Ltd., NCLAT clarified that while applications can be filed against both debtor and guarantor, once an application is admitted against one, the same creditor cannot seek admission of another application for the same claim against the other.

Financial Service Providers

Section 3(17) defines a financial service provider as a person engaged in business of providing financial services with authorisation from a regulator like RBI, SEBI, IRDAI, or PFRDA. Examples include banks, insurance companies, pension funds, etc.

Such entities are excluded from the definition of corporate persons under Section 3(7). Hence, CIRP cannot be initiated against them under the regular provisions. Special rules may apply in specific cases.

Who is Authorised to File an Application?

• Board of Directors: Under Section 179 of the Companies Act, the Board can authorise representatives to initiate proceedings.
• Authorised Representative: Permitted to file applications under NCLT Rules.
• Power of Attorney Holders: Not permitted, as clarified in Palogix Infrastructure v. ICICI Bank. The IBC is a complete code and requires strict compliance with its provisions.

Classification of Financial and Operational Creditors

A major challenge under IBC has been the different treatment of financial and operational creditors. Critics argued that this violates Article 14 of the Constitution.

However, the Supreme Court in Swiss Ribbons v. Union of India upheld the classification. The Court reasoned that:

• Financial creditors are usually secured, lend large sums, and play a role in assessing viability and restructuring.
• Operational creditors are usually unsecured, supply goods and services, and their claims are more prone to disputes.

Thus, there is a rational basis for treating them differently.

Conclusion

The Corporate Insolvency Resolution Process under the IBC can be initiated by financial creditors, operational creditors, or the corporate debtor itself. Each category is clearly defined and supported by judicial interpretation.

• Financial creditors include banks, financial institutions, debenture holders, and now homebuyers.
• Operational creditors include suppliers, employees, and government authorities.
• Corporate debtors themselves can initiate CIRP through corporate applicants.
• Corporate and personal guarantors can also be proceeded against under certain provisions.

The IBC, through these provisions, ensures a comprehensive and inclusive mechanism for insolvency resolution. The law balances the rights of creditors, protects debtors from arbitrary action, and provides a time-bound resolution process to maintain economic stability. For students and practitioners, understanding who can initiate CIRP is fundamental to mastering the working of the Code.