Insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 are overseen by the relevant adjudicating authority. The National Company Law Tribunal (NCLT) is the adjudicating authority involved in the insolvency proceedings of companies and Limited Liability Partnerships (LLPs), which are referred to as corporate debtors. To initiate the Corporate Insolvency Resolution Process (CIRP) against a corporate debtor, the NCLT bench having territorial jurisdiction over the debtor’s registered office must be approached. An application for initiating CIRP can be filed with the NCLT by the debtor’s financial creditors, operational creditors, or corporate applicants representing the debtor under Sections 7, 9, or 10 respectively.
Who is a Financial Creditor?
The Insolvency and Bankruptcy Code has distinguished operational creditors from financial creditors by differently defining the two kinds of debts. Section 5(8) of the Code defines financial debt as a debt along with interest, which is disbursed against the consideration for the time value of money. The following debts are included in the definition:
- Money borrowed against interest payments.
- An amount raised by acceptance under an acceptance credit facility or its dematerialized equivalent.
- An amount raised from a note purchase facility or from the issue of bonds, notes, debentures, or other similar financial instruments.
- The liability in respect of a lease or hire purchase agreement that is considered a finance or capital lease according to the relevant accounting standards.
- Receivables that are sold or discounted, except receivables sold on a non-recourse basis.
- An amount raised under any transaction having the effect of a borrowing. This includes amounts raised from allottees of real estate projects.
- A derivative transaction entered into with the goal of seeking protection against or benefit from fluctuation in any rate or price. Only the market value of such transaction will be taken into account to determine its valuation.
- A counter-indemnity obligation in respect of any instrument issued by a bank or other financial institution, including a guarantee, indemnity, bond, or documentary letter of credit.
- The liability in respect of any guarantee or indemnity for the debts referred to in the preceding 8 points.
A financial creditor is any person to whom a financial debt is owed, including a person to whom a financial debt has been legally assigned or transferred. The Report of the Insolvency Laws Committee clarified that even authorized representatives of financial creditors, such as guardians, administrator or executor of estate, or debenture trustee are eligible to initiate CIRP.
In Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd v Axis Bank Ltd, the Hon’ble Supreme Court decided the question of whether a creditor who has been given security by the corporate debtor for a third-party debt can be considered a financial creditor. The Court answered in the negative, holding that for a person to be considered the financial creditor of a corporate debtor, it has to be shown that the debtor owes him a financial debt. While a person having a security interest over the corporate debtor’s assets is definitely owed a debt, it is not a financial debt as defined under Section 5(8) of the Code. Further, the Court reasoned that a third-party having a security interest does not have the stake in the corporate debtor’s growth which the Code envisions for financial creditors. Financial creditors under the Code are supposed to be interested in rehabilitating and reviving a corporate debtor, and not just in realising the value of their security.
In Pioneer Urban Land and Infrastructure Ltd v Union of India, the Supreme Court upheld the constitutional validity of the provision considering allottees under real estate projects to be financial creditors. The Court observed that money raised from allottees forms a major part of the funding of real estate projects, and such projects are often delayed. As the allottees are ultimately going to be living in the apartments under construction, they are directly interested in the future of the companies constructing them, and deserve the right to initiate CIRP.
Applying to the NCLT under Section 7 of the Code
CIRP can be initiated only if the corporate debtor defaults on a debt that meets or exceeds the minimum threshold value prescribed under Section 4 of the Code. The prevailing threshold is a debt of at least 10 million INR.
As per Section 7(1) of the Code, an application for initiating CIRP can be filed individually by a financial creditor, or jointly with other financial creditors, or by a person on behalf of a financial creditor who has been empowered to do so by a notification of the Central Government. In Palogix Infrastructure Pvt Ltd v ICICI Bank Ltd, the learned National Company Law Appellate Tribunal (NCLAT) held that a financial creditor can only act through an authorised representative. Therefore, a general power of attorney holder cannot file an application under Section 7, unless he has been specifically authorised to do so by the financial creditor.
If the financial creditors referred to in clauses a and b of Section 21(6A) wish to initiate CIRP, they can only do so if 100 of them, or 10% of them in the same class (whichever is fewer) file jointly. Similarly, applications by allottees in real estate projects can only be filed jointly by at least 100 allottees of the same project, or 10% of the total allottees of a project, whichever is fewer.
According to Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, where the applicant under Section 7 is the assignee or transferee of a financial debt, the application must be accompanied by a copy of the assignment or transfer agreement and any other documents required to demonstrate that the debt was assigned or transferred to the applicant. The applicant must also dispatch a copy of the application to the registered office of the corporate debtor by post. If multiple financial creditors file an application jointly, they can nominate one creditor to act on their behalf.
Form 1 attached with the Rules prescribes the following particulars to be included in an application under Section 7:
- Particulars of applicant, such as name, date of incorporation, registered office address, etc.
- Particulars of the corporate debtor, such as name, date of incorporation, details of share capital, and registered office address.
- Name, address, email address, and registration number of the insolvency professional proposed as interim resolution professional, if one is proposed.
- Particulars of financial debt, namely, the total amount of debt granted, dates of disbursement, amount claimed to be in default, and the date on which the default occurred.
- Documents and records proving the existence of the financial debt and default, such as copies of a court order adjudicating on the default, latest copy of financial contract under which the debt was granted, record of default available with a credit information company, etc.
Once an application has been received by the NCLT, it must ascertain the existence of the default within 14 days. If the NCLT is satisfied that a default has occurred, the application is complete, and there are no disciplinary proceedings against the proposed interim resolution professional, it must admit the application. If these parameters are not satisfied, the application will be rejected. However, before rejecting the application, the NCLT will notify the applicant about its defects and allow the applicant an opportunity to correct them within 7 days from the receipt of the notice.
Section 7 of the Insolvency and Bankruptcy Code, 2016, empowers financial creditors to initiate CIRP against a corporate debtor. In contrast to operational creditors, a financial creditor’s relationship with the corporate debtor is purely based on a financial contract. The Code along with its accompanying Rules and Regulations provides a detailed procedure for filing an application under Section 7, and a financial creditor must diligently comply with each requirement to ensure the admission of his application.