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Initiation of corporate insolvency resolution process (CIRP) by financial creditor - Section 7 of IB

Section 7 of the IBC stipulates about the initiation of Corporate Insolvency Resolution Process (CIRP) by financial creditor. Let us discuss the process and initiation steps.

First, we need to understand the term “financial creditor”; hence, Sub-Section (7) of Section 5 of the Code states, “financial creditor” 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.

Explanation to Section 5(7):

it means, any person* {the term person has also been defined under section 3(23)} to whom a financial debt (defined under Sec 5(8)) is owed. And also includes a person to whom such debt (i.e. financial debt) has been legally assigned or transferred to (i.e. the debt is or has been legally given/provided or any kind of property/assets which has monetary value is or has been transferred to in the name of such financial creditor).

Example: Mr. A, a proprietor of M/s XYZ Co. (a legal entity), has given Rs. 100 to Mr. B, a proprietor of M/s PQR (a legal entity). Hence, in this case, Mr. A would be creditor since the debt has been given to Mr. B. Mr. A can demand his money back, and even he can sue Mr. B.
Corporate Insolvency Resolution Process
(Explanations with the help of provision)

Who may initiate: Section 6 of the Code says; the following person may initiate:

A financial creditor, an operational creditor or the corporate debtor itself.

Initiation of CIRP by financial creditor:

Section 7 of the Code has enumerated the detailed synopsis of initiation of the said process (CIRP) by financial creditor.

Section 7 (1):

if any default (includes default in financial debt owned) has occurred, a financial creditor either by itself or jointly by other financial creditor or by other person on behalf of financial creditor (as CG notify) may file an application before Adjudicating Authority (AA).

Section 7 (2):

application shall be in such form and manner as may be prescribed.

Section 7 (3):

along with an application, the following information shall be required:

  1. Record of default/evidence of default
  2. Name of resolution professional (proposed to act as interim resolution professional)
  3. Other information, as specified by Board. (Board means IBBI)

Section 7(4):

Within 14 days of application, the AA shall ascertain the default from evidence and pass orders (if order passed without ascertaining, the reason from AA for order shall be required in writing)

Section 7(5): if AA satisfied that:

  1. There is default, application is complete, no disciplinary proceedings pending against resolution professional, it may order and admit such application.
  2. If not above as mentioned in (a), it may reject the application.

Provided, the AA shall give reasonable opportunity before rejecting to the applicant to rectify the defects within 7 days of receipt of notice Section 7(6): such CIRP shall commence from the date of admission of application.

Section 7(7):

The AA shall communicate to the financial creditor and the corporate debtor within 7 days of admission or rejection of such application, as the case may be.

The above article is the personal explanations to Section 7 of the IBC. For any clarifications or feedback, feel free to share your knowledge with the Author. Your feedback is highly appreciated.

About the Author: Adv. Saheb Shaikh, (B. Com, GFMP (Int'l Finance), LL.B, DCL(Cyber Law), Advanced certified in Investment Law (NLU-Kolkata), Capital Market (JBIMS), and SEBI Certified Merchant Banking & Research Analyst.
Share your feedback at [email protected] | 9004736297 | Mumbai.

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