Initiation of Insolvency Resolution process against Corporate Debtor in Insolvency and Bankruptcy Code, 2016

Introduction

Insolvency resolution process may be initiated when Company defaults on it's financial obligation. Section 6-11 of Insolvency and Bankruptcy Code(Hereinafter referred as IBC) deals with how to start such process against a Company who defaults on loan.

IBC answers details such as who can initiate insolvency resolution process ? What all details needs to be submitted with application for such process ? Who all cannot initiate such process.

We will discuss these things under following headings
  1. Who can initiate corporate insolvency resolution process ?
  2. Initiation by Financial Creditor
  3. Initiation by Operational Creditor
  4. Initiation by Corporate Applicant (Company itself)
  5. Who cannot make application for initiation of insolvency process
Before delving to understand the initiation process, you must be familiar with meaning of Corporate Debtor, Financial Creditor and Operation Creditor.

Who Can Initiate Corporate Insolvency Resolution Process ?

Section 6 of the act provides 3 people can initiate Corporate Insolvency Resolution Process

They are:
  1. Financial Creditor
  2. Operation Creditor
  3. Corporate Applicant. (Company itself says we are unable to pay debt, carry the insolvency resolution process)
Code provides what all details needs to be submitted when each one of the above initiates to Corporate Insolvency Resolution Process(Hereinafter called as CIRP)

Initiation By Financial Creditor

Financial Creditor may file an application by himself or with 3 other financial creditor for CIRP.

Financial Creditor have to submit application to Adjudicating Authority. When CIRP is against the Corporate Person then such adjudicating authority will be NCLT(National Company Law Tribunal)

Such application should contain below details:
  1. Record of default recorded with information utility or any other evidence as may be specified
  2. The name of Interim Resolution Professional
  3. Any other information specified by Board (IBBI)

Such Adjudicating Authority has to ascertain whether Corporate Debtor had defaulted on payment. Adjudicating Authority will take help of information utility(A database where loan details are stored) to ascertain whether debt exists.

Code explains one thing. If there are 6 financial creditors and corporate debtor had defaulted on payment for 2 Creditors. Code says other Creditors who got their payment still can initiate the CIRP against corporate debtor.

When Adjudicating Authority rejects such an application he has to revert back within 7 days to financial creditor.

These all are provisions related to initiation by Financial Creditor.

Initiation by Operational Creditor

Section 8 and 9 together have provision when CIRP can be initiated by Operational Creditor.

Like financial creditor, operational creditor cannot directly submit application to adjudicating authority. He has to do one thing before he files an application for CIRP against Corporate Debtor to Adjudicating Authority. That one thing is provided in section 8.

Here is summary of Section 8
  • Operational Creditor has to send a demand notice to Corporate Debtor along with bill and other detail
  • Corporate Debtor has to reply within 10 days to such notice.
  • Corporate Debtor can do one of the below thing:
    • He can say there is dispute pending related to that particular payment
    • He can say "listen, we already paid the amount and here is the proof" and sent that proof which may include electronic transfer proof
    • He can say "you encashed cheque which was issue" with proof of encashment
    • He can do nothing and may not reply
When Corporate Debtor don't send proof of payment or don't reply withing 10 days, Operational Creditor can move to Adjudicating Authority for CIRP.

Under section 9 Operational Creditor can submit the application. He has to additionally give below details:
Demand notice
Copy of invoice
  1. An affidavit that no notice given by Debtor relating to dispute of the unpaid debt
  2. Statement from bank stating that no payment is received where operational credit have account
  3. If Debt is recorded with information utility, then record from such utility
  4. Any additional proof stating non payment of debt
Adjudicating authority have to admit/reject such application withing 14 days. If there is some defect in application then notice to corporate debtor to rectify the error withing 7 days has to be sent by Adjudicating Authority.

CIRP will being from the date of admission.

Initiation by Corporate Applicant

Corporate entity can themselves initiate CIRP.

Corporate Debtor has to submit the application to Adjudicating Authority(NCLT) for CIRM.

Below details needs to be submitted with application:
  1. Books of account and other document for particular period
  2. Name of Interim Resolution Professional
  3. Special resolution passed by shareholders of Corporate debtor with at least three fourth majority.
After such application Adjudicating Authority has to admit it in 14 days if everything is OK in application. If Adjudicating authority goes for rejection, he has to give notice to applicant to rectify the defects.


Person who cannot make application for CIRP

Section 11 enumerates different kinds of persons who cannot initiate Corporate Insolvency Resolution Process

They are:
  1. a corporate debtor undergoing a corporate insolvency resolution process
  2. a corporate debtor having completed corporate insolvency resolution process twelve months preceding the date of making of the application
  3. a corporate debtor or a financial creditor who has violated any of the terms of resolution plan which was approved twelve months before the date of making of an application under this Chapter
  4. a corporate debtor in respect of whom a liquidation order has been made.
These are very logical. If one proceeding is going on, why have another ? What is the point if there is no business viability and NCLT or some other authority have ordered liquidation?

The explanation also provides that one corporate debtor can initiate the process against other and provisions of this section will not applicable in that case.

Conclusion

IBC provides who all can initiate the Corporate Insolvency Resolution Process. It also provides what all details needs to submitted. Section 11 of the cod provides who all are not entitled to initiate the process.





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