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Procedure to initiate CIRP under IBC, 2016

The Insolvency and Bankruptcy Code, 2016 (hereinafter referred as IBC) (31st Act of the year 2016) was enforced on 28th May, 2016.

A bare perusal of the preamble of the Act, makes it clear that the main objective of the legislature was to enact this unified code:
to consolidate and amend the laws relating to reorganization and insolvency resolution of Corporate Persons, Partnership Firms and individuals in a time bound manner for maximization of value of assets of such person, to promote entrepreneurship and an effective legal frame work for timely resolution of insolvency and bankruptcy would support development of credit markets and encourage entrepreneurship.

To achieve the aforementioned objective, IBC introduced the Corporate Insolvency Resolution Process (hereinafter referred as CIRP).CIRP is a resolution process of a Corporate Person who is unable to make payment of the debt due and payable wherein the Corporate Person is run by a third person (IRP) in such a manner that the Corporate Person is able to pay off its debts as a going concern and is not wound up or killed for not paying off the debts. In an event wherein the resolution of the Corporate Person is not possible by way of CIRP then, a process of liquidation is commenced against the Corporate Person.

Hence, CIRP is not a recovery mechanism to recover debts or borrowed money from the Corporate Debtor. It is specifically mention in the Section 65 of the IBC, 2016 that if a creditor initiating CIRP other than purpose resolution or liquidation process, then it would be considered that such application has been filed with a fraudulent or malicious intention by the Creditor.

The Financial Creditor or Operational Creditor can initiate CIRP against the Corporate Debtor and the Corporate Debtor voluntarily itself can initiate CIRP against himself.[1]CIRP cannot be initiated for not paying of interest on the principal amount.[2] In present, provisions related to initiation of CIRP for Corporate Persons has been enforced, whereas Part III of the IBC which are related to initiation of CIRP for individuals and partnership firms are not enforced.

As per the Section 3 clause 8 of IBC, a person who owes the debt is a Corporate Debtor. At present, CIRP can be initiated against or by the LLPs and Companies. The application to initiate CIRP must be present before the appropriate Adjudicating Authority.

As per the section 5 clause 1 of the IBC, National Company Law Tribunal (hereinafter referred as NCLT) is the appropriate Adjudicating Authority to present the CIRP application. The basic purpose to initiate CIRP is to claim the debt. Debt is the amount which is due and which is to be claimed. In IBC, Debt is classified in financial debt and operational debt. Initially, minimum debt was of Rupees One Lakh to initiate CIRP. But after the amendment of 2020 by the legislature, increases the minimum debt limit of Rupees One Lakh to On Crore[3].

There can be default of part payment or whole debt or installment by the debtor. On receiving the applications, the NCLT passes the order of admit or reject within 14 days from the day of filing of the application. The timeline to complete CIRP is maximum 330 days from the date of admission of application.

Before initiating CIRP there must not be pre-existing dispute initiated in any other forum of tribunal or court. In a judgment, apex court held that pending of proceeding under Section 138/144 NI Act is not consider as a existing dispute under IBC [4]. Dispute in existence includes raising dispute in Arbitral Tribunal or in court of law before receipt of Demand Notice under section 8 of IBC.[5]Pre – existing dispute has been discussed below in this research paper.

CIRP shall execute by the Insolvency Professionals under the supervision of the Adjudicating Authority. Under section 7 of the IBC, Financial Creditor can initiate the CIRP against the Corporate Debtor. Under section 9 of the IBC, Operational Creditor can initiate the CIRP against the Corporate Debtor. Under section 10 of the IBC, Corporate Debtor can voluntarily initiate CIRP against himself. Section 7, 9 and 10 has been described below.

After understanding the basic concept related to initiation of CIRP, the question which comes in mind is that as CIRP is a time bound procedure, therefore question remains that Whether the provisions of Limitation Act would be applicable on procedure of IBC,2016. So, the question was answered by the Apex Court in a case ,that Article 137 of the Limitation Act attract the application filed under section 7 & 9 and Section 433 of the Companies Act, 2013 which makes the provisions of Limitation Act applicable to proceedings or appeals before the NCLT or NCLAT, was applicable from the very inception of IBC. So, the Limitation Act, 1963 is applicable on IBC [6]

Initiation Of CIRP Under Section 7 Of The Code

Under Section 7, the Financial Creditor can initiate CIRP for an unpaid Financial Debt against the Corporate Debtor. There are 2 basic elements to initiate CIRP under section 7: Financial Creditor and Financial Debt.

Financial Creditor
Any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to.[7]In other words, these are those people who have purely financial contract relationship with the entity such as a loan or a debt security.

Financial Debt
A debt along with interest, if any, which is disbursed against the consideration for the time value of money and include certain type of debts provided in clause (a) to (i) of this section.[8]This definition is well descriptive and has exhaustive meaning, as it includes all the other type of debts or borrowing manner prescribed.

The expression of word time value means the price associated with the length of time that an investor must wait until an investment matures or the related income is earned.[9]In the case of Nikhil Metha &Sons. Vs. AMR Infrastructure Ltd[10]., the corporate debtor was raising funds from public at lower rates in comparison of rates of banks even without offering any security on such amount. The NCLAT held that this technique of raising fund fulfills the condition of disbursement against the consideration of time value and money and raising funds from the investors and assured returns are promised to the investors, such amount would fall under the category of financial debt under IBC.

Insolvency Resolution by Financial Creditor
By the bare reading of Section 7 of IBC, it can be understood that a financial creditor either by itself or jointly with other financial creditors can file the application for initiating CIRP in adjudicating authority when the default has been occurred by the corporate debtor.

A guardian of financial creditor, an executor or administrator of an estate of a financial creditor, a trustee and a person duly authorized by the Board of Directors of a Company can also file an application to initiate CIRP on behalf of Financial Creditor.

In the recent amendment, the trustee, agent and class of creditors of the same class mentioned in clause (a) and (b) of sub-section (6A) of section 21,but not less that 100 or not less that 10%, can also initiate CIRP jointly . Allottees under the same real estate project, but not less that 100 or not less that 10%, can also jointly initiate CIRP against Financial Creditor[11].

As per Rule 4 of The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 Financial Creditor can make an application to initiate CIRP under section 7 in Form- 1, accompanied with documents and records required like financial agreement or assignment or like other document related to the application.

The financial creditor shall send a copy of the application filed before NCLT to the Corporate Debtor at its registered office by speed post or registered post or any other authorized courier. According to Rule 10, the applicant after being aware must notify the Adjudicating Authority of any winding- up petition presented against the Corporate Debtor.

That the application under Section 7 must be accompanied with the prescribed fees i.e. Rupees Twenty Five Thousand. As per Rule 8, on request of the applicant to the adjudicating authority can withdrawal the application before its admission.[12]

The Financial Creditor shall furnish the name of the resolution professional proposed to act as an interim resolution professional with the written communication obtain in Form -2, the record of the default recorded with the information utility or such other records or evidence of default and NCLT within 14 days ascertain the existence of a default from the mentioned document. The timeline of 14 days is not mandatory, rather it is directory.[13]

The adjudicating authority must make itself satisfy that the application is proper and complete and default has actually been occurred and there is no punitive proceeding has been pending against the proposed resolution professional. If the adjudicating authority does not get satisfied, then it may reject such application.[14]If the application is not complete then, adjudicating authority shall give the applicant the timeline of 7 days to amend the application. The adjudicating authority must get satisfy with the records of information utility or other evidence made available by the Financial Creditor. That it does not matter that the debt is disputed or not but it must be due.[15]

In a matter, the issue was raised that whether CIRP can be initiated against the subsidiary company if CIRP against holding company is pending. NCLAT held that the CIRP can be initiated against subsidiary company when CIRP is pending against holding company.[16] In a case, NCLAT proposed that not providing record from information utility is not a ground to reject the application[17].

CIRP Initiate Under Section 9 Of IBC

Under section 9, the Operational Creditor can initiate CIRP for an unpaid Operational Debt against the Corporate Debtor. The word Operational means able to function or engage in operation.[18]In simple words, Operational means to engage in some business activity of goods and services.

Operational Creditor
It is a person to whom operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.[19] In simple words, it is a person who provides any services or produce and supply any goods to the (Corporate Debtor) for consideration, but did not receive any consideration from the (Corporate Debtor).In a case, the landlord was claiming as a Operational Creditor. Appellate Court held that as the landlord is rendering services to the tenants by letting premises on rent, so the landlord is also considered as Operational Creditor[20]In a case, Flat Purchaser booked flats and pay the advance payment to the Builder.

Builder assured the Flat Purchaser to give possession till December 2013 and the Builder paid the assured returns till December 2013.Flat Purchaser filed the application to initiate CIRP under Section 9 of IBC. Issue arises that whether the Flat Purchaser can consider as Operational Creditor or not. NCLT held that debt has not arisen out of provision of goods and services. And debt has also not arisen out of employment or statutory dues. So, the debt is not Consider as Operational Debt. So the Flat Purchaser cannot be considered as Operational Creditor.[21]

Additionally, when a person pays advance payment for rendering service, then such person is can also be considered as an Operation Creditor. For instance, A pays advance payment to B, to design A’s new house. If B does not make capable to fulfill its incumbents then A could be consider as an Operational Creditor and acquire all the Right to initiate CIRP against B.

Operational Debt
Claim in respect of the provision of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government or any Local Authority.[22]The definition of Operational Debt includes Four category of debt which arises from goods, services, employment and statutory debts.

The difference between Financial Debt and Operational Debt is that the Operational Debt is a claim of a outstanding amount for goods, services, employment and statutory dues, whereas the Financial Debt is claim of a time value of money and inclusive list mention under section 5 clause 8 of IBC. The basic difference is Operational Debt is claimed by Operational Creditor, whereas the Financial Debt is claimed by Financial Creditor.

That Financial Debt is money which is given as loan to Corporate Debtor and which is to be returned with interest in future by Corporate Debtor, whereas the Operational Debt is money which is to be payed by the Corporate Debtor against rendering of goods and services.[23] If the amount is due from buyer of goods to seller of goods and it is guaranteed by the Guarantee Agreement, then such amount comes under a ambit of Operational Debt [24]

Insolvency Resolution by Operational Creditor
Before initiating CIRP by the Operational Creditor under Section 9 of IBC, on the occurrence of default the Operational Creditor has to send Demand Notice/ Form-3 to the Corporate Debtor for demanding payment of outstanding amount.[25]

Demand Notice must accompanied with all the invoices, emails conversations between Operational Creditor and Corporate Person and any evidences which can be taken on records after initiating CIRP. Demand Notice must be served in proper format mentioned in Form-3 and copy of invoices under Form- 4. Demand Notice can be send to the Corporate Debtor by registered post or speed post, by e-mail to the directors or partners or key managerial persons of the Corporate Persons. Demand Notice must be send to an information utility.[26]

It is the onus of Corporate Debtor to make reply to the Demand Notice served by the Operational Creditor within 10 days of the receipt of the Demand Notice. The purpose to make reply of Demand Notice is to bring in the knowledge of the Operational Creditor regarding the existence of dispute for the same or related subject matter in any other forum of court or tribunal before receipt of the Demand Notice.[27]

And if the Corporate Debtor had make the payment of the Operational Debt, then he must attach the copy of record of encash cheques and record of bank accounts with its reply. Demand Notice can also be served by the Advocate on the behalf of the Operational Creditor.[28]The delivered Demand Notice must be proper and complete with all records; otherwise the petition filed under section 9 can be dismissed.[29]

After the completion of threshold of 10 days from the delivery of the Demand Notice and no reply has been given by the Corporate Debtor on the occurrence of default, the Operational Creditor can file an application to initiate CIRP against the Corporate Debtor under Section 9 of IBC with the prescribed fees i.e. two thousand [30]at the adjudicating authority.

The application must be in Form-5 and must be accompanied by the Demand Notice which was severed, invoices of demanding payment, affidavit under section 9(3)(b) to give effect that no notice has been given by the Corporate Debtor relating to the dispute, copy of a certificate from the financial institution of maintained accounts of the Operational Creditor confirming that no payment has been received by the Corporate Debtor[31], record with information utility if any, and any other evidence in respect of the application.

The Operational Creditor may have an option to propose the interim resolution professional. If the Operational Creditor proposes the interim resolution professional, then he has to obtain the written communication in Form-2 for appointment. The Adjudicating Authority shall admit or reject the application within 14 days of the filing of the application or may provide the 7 days time period to rectify or amend the application. In a case, NCLAT held that the application filed under Section 7 cannot be treated as application under section 9 as the formats of both the application are different.[32]

CIRP Initiate Under Section 10 Of IBC

After understanding the provisions relating to initiate CIRP by the Financial Creditor under Section 7 or Operational Creditor under Section 9 against the Corporate Debtor. Let’s understand the provisions related to initiating CIRP voluntarily by the Corporate Debtor by itself under Section 10.

The Corporate Debtor can initiate CIRP against himself after committing a default. For initiating CIRP, The Corporate Debtor has to make an application in Form-6 with prescribed fees i.e. Rupees Twenty Thousand Only before the Adjudicating Authority. Before initiating CIRP, a special resolution must be passed by the shareholders of the Corporate Debtor. If Corporate Debtor is a Partnership Firm, then resolution must be passed by at least three-fourth of the total number of partners of Corporate Debtor.

The application must be accompanied with the information relating to its books of accounts, information relating to resolution professional proposed to be appointed as an interim resolution professional, the aforementioned resolution passed and any other information. Within 14 days of the receipt of the application, the Adjudicating Authority shall admit or reject the application. If the application is rejected, time period of 7 days must be given by the Adjudicating Authority to rectify or amend the application.

Once the application is admitted, CIRP will initiate immediately. In a case, it was held that time limit prescribed under section 7,9 and 10 is not mandatory, as it is a procedural parts so it is directory in nature.[33]And it was held to be mandatory to obtain approval of shareholders of the Corporate Debtor before approaching u/s 10 of IBC [34]

Persons Not Entitled To Make Application For CIRP

After discussing the persons who can initiate CIRP, it is also important to know that who are not authorized to make application or cannot initiate CIRP.

The persons who are not authorize to make an application to initiate CIRP are a corporate debtor undergoing a CIRP or a corporate debtor having completed CIRP,12 months preceding the date of making of the application or a corporate debtor or a financial creditor who has violated any of the terms of resolution plan which was approved 12 months before the date making of an application or a corporate debtor in respect of whom a liquidation order has been made. [35]

The basic rule for the growth of the Economy of a developing nation is that regulation of money in the market. The main aim for enforcing IBC, 2016 is that to clear the dues and provide the outstanding amount to the Creditor within a specific time period and provide easy rules and regulations relating to the exit of the corporate entity or enterprise from the market. As IBC is an evolving and developing statute, the person must know that who can apply for CIRP and what is the procedure to make application under IBC to adjudicating authority. It is very pertinent to know that application to initiate CIRP should be under a prescribed Form and it must be proper and completed. The filling of the application must be in accordance with the NCLT Rule, 2016.

The new threshold of Rupees One Crore debt to initiate CIRP would take the power of small Operational Creditor or Financial Creditor to initiate CIRP. Corporate Debtor can wisely make defaults of small debts viz. increase the suits of recovery of money in the Indian judiciary.

At last the conclusive statement vis-à-vis to the flat buyers and landowners, the Flat Buyers give advance to the builder for the future possession of the flat, then on the failing of giving possession, the flat buyers would be consider as a Financial Creditors, however, if the landowner is letting it’s property then on failing to get rent from the lessee, the landowner would be considered as a Operational Creditor. And both have a right to initiate CIRP against Corporate Debtor.

[1] Section 6 of Insolvency and Bankruptcy Code,2016
[2] SBF Farma Vs. Gujarat Liqui Pharmacaps Pvt. Ltd., C.A.(AT)(Insolvency) No. 883 of 2019
[3] Section 4 of Insolvency and Bankruptcy Code,2016
[4] Innovative Industries ltd. V. ICICI Bank and Ors., (2018)1 SCC 407
[5] Essar Projects India Ltd. Vs. MCL Global Steel Pvt. Ltd., NCLT Mumbai,C.P. No.20/I&BP/2017
[6] B.K. Educational Services Private Limited vs. Parag Gupta and Associates, AIR 2018 SC 56
[7] Section 5(7) of Insolvency and Bankruptcy Code, 2016
[8] Section 5(8) of Insolvency and Bankruptcy Code, 2016
[9] Black’s law Dictionary,9th edition
[10] Company Appeal (AT)(Insolvency)7 of 2017-21/07/2017
[11]The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2020
[12] The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016
[13] M/s. Surendra Trading Company vs. M/s. Juggilal Kamlapat Jute Mills Company Limited and Others, SC- Civil Appeal No. 8400 of 2017
[14] Innoventive Industries Limited V. ICICI Bank and Anr., C.A.(AT)(Insolvency) No.1 & 2 of 2017
[15] Innoventive Industries Limited V. ICICI Bank and Anr,Civil Appeal Nos.8337-8338 of 2017
[16] Ashok B. Jiwarajka, Director of Alok Infrastructure Ltd. Vs. Axis Bank Ltd., C.A.(AT)(Insolvency) No. 683 of 2018
[17] Neelkanth Township and Construction Pvt. Ltd. Vs. Urban Infrastructure Trusees Ltd., C.A.(AT)(Insolvency) No. 44 of 2017
[18] Black’s law Dictionary,10th edition
[19] Section 5(20) of Insolvency and Bankruptcy Code, 2016
[20] M.Ravindranath Reddy Vs. Mr. G. Kishan& Ors.,C.A.(AT)(Insolvency) No. 331 of 2019
[21] Col. Vinod Awasty V. AMR Infrastructures Ltd., NCLT New Delhi C.P.(IB)-10(PB)/2017
[22] Section 5(21) of Insolvency and Bankruptcy Code, 2016
[23] V.S. Wahi, Treatise on Insolvency and Bankruptcy Code , Bharat Law House Pvt. Limited 2nd Edition 2018
[24] Renish Petrochem FZE V. Ardor Global Private Limited, C.P.(I.B.) No. 33/9/NCLT/AHM/2017
[25] Section 8 of IBC,2016
[26] Rule 5 of The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016
[27] Mobilox Innovations Private Ltd. V. Kirusa Software Pvt. Ltd, AIR 2017 SC 4532
[28] Macquarie Bank Ltd. V. Shilpi Cable Technologies Ltd., AIR 2018 (SC) 498
[29] Neeraj Jain V. Cloudwalker Streaming Technologies Pvt. Ltd. And Anr., C.A.(AT)(Insolvency) No. 1354 of 2019
[30] Schedule, The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016
[31] Section 9(3)(c) of IBC,2016
[32] PEC Ltd. Vs. Sree Ramakrishna Alloys Ltd., C.A.(AT)(Insolvency) No. 225 of 2017
[33] J.K. Jute Mills Company Ltd. Vs. Surendra Trading Company, NCLAT C.A. (AT) No. 09of 2017
[34] Gaja Trustee Company Pvt. Ltd. &Ors. Vs. Haldia Coke and Chemical Private Limited, C.A.(AT)(Insolvency) No. 137 of 2017
[35] Section 11 of IBC
Written By: Mr. Pranav Somani, Law Student,B.A.LL.B(Hons.), 8th Semester, Manipal University Jaipur  

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